Opinion of the European Economic and Social Committee on the Proposal for a Regulation of the European Parliament and of the Council on information on the payer accompanying transfers of funds  COM(2005) 343 final — 2005/0138 (COD)
Date: 2006-04-21
Institutions: European Economic and Social Committee
Subjects: ESC opinion, capital transfer, credit transfer, fight against crime, financial institution, financial legislation, organised crime, terrorism

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Official Journal of the European Union

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Opinion of the European Economic and Social Committee on the Proposal for a Regulation of the
European Parliament and of the Council on information on the payer accompanying transfers of
funds

COM(2005) 343 final — 2005/0138 (COD)

(2006/C 185/16)

On 26 September 2005 the Council decided to consult the European Economic and Social Committee,
under Article 262 of the Treaty establishing the European Community, on the abovementioned proposal.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible
for preparing the Committee's work on the subject, adopted its opinion on 23 March 2006. The rappor-
teur was Mr Burani.

At its 426th plenary session, held on 20 and 21 April 2006 (meeting of 21 April), the European Economic
and Social Committee adopted the following opinion by 85 votes to 15 with six abstentions.

1. Introduction

sensible, but the EESC is concerned as to how effective they
will be in practice, at least in the short term.

1.1
The proposal aims to transpose Special Recommenda-
tion VII (SR VII) of the Financial Action Task Force (FATF) into
Community legislation. This Recommendation was issued with
the objective of ‘preventing terrorists and other criminals
from having unfettered access to wire transfers for moving
their funds and for detecting such misuse when it occurs’ (1). It
is part of a series of laws and regulations seeking both to
freeze terrorists' assets (2) and to prevent laundering of the
proceeds of criminal activity (3).

1.2
Essentially, the measures proposed by the Commission
are simple in form but substantial in content and in practical
consequences. The proposal
lays down a requirement for
payment service providers (PSPs) — in practice the financial
institutions which carry out transfers of funds — to record
information on the payer: this information must accompany
the transfer of funds from the payer's PSP to the end reci-
pient (payee)'s PSP. The provision applies to transfers of
funds within the EU and, with a number of exemptions and
derogations, to transfers from and to third countries as well.

The EESC fully agrees that a regulation deriving its legiti-
1.3
macy from Article 95 of the Treaty is necessary; this solution
has, moreover, received the preliminary agreement of
the
Member States and the PSP sector. There is general consensus
that it would be appropriate to adopt a direct implementing
instrument such as a regulation, rather than a directive, which
would be likely to be implemented in different ways when
transposed into national legislation. The measures provided for
in the Commission document are, in general, appropriate and

1.4
Indeed, the EESC feels that the regulation has some
weak points, both in that it provides for considerable individual
assessment by PSPs and because it lays down technical proce-
dures which are too open to evasion by criminals.

2. General points and comments

2.1
The fight against ‘criminal activity’ (as organised crime is
sometimes called in Community language, although it is high
this euphemism were abandoned) was addressed
time that
systematically for the first time — at least in theory — by the
1996 Dublin Council, and an Action plan was adopted by the
1997 Amsterdam Council (4). This comprised a series of
30 detailed, coordinated programmes which were to be
completed by the end of 1998 at the latest; eight years on, the
majority of them have yet to be implemented.

The concept of organised crime has evolved in succes-
2.2
sive stages. In 1998, OLAF (5) (then UCLAF) drew attention to
the large-scale tax evasion affecting Community finances,
attributing it to organised crime. The concept was expanded
after the attacks on the Twin Towers and subsequent attacks, to
focus particularly strongly on terrorism.

The same thought process and trend was followed
2.3
concomitantly by the Financial Action Task Force (FATF) set up
by the G8, which is still the most authoritative body uniting
governments. Created to combat money laundering linked to
organised crime, the FATF's remit has now been extended to

(1) FATF, ‘Revised Interpretative Note to Special Recommendation VII:

Wire Transfer’.

(2) Council Regulations (EC) Nos 2580/2001 and 881/2002.
(3) Directives 91/308/EEC, 2001/97/EC etc.

(4) Action plan to combat organised crime, OJ C 251 of 15.08.1997.
(5) COM(1998) 276 final: Protection of the financial interests of the

Communities - Fight against fraud - Annual report 1997.

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include all forms of terrorism-related financial activity: its
nine Special Recommendations (SR) are particularly important
and the majority of them have been converted into Community
provisions on money laundering and payment systems. The
proposal
in question implements SR VII on ‘wire transfers’
carried out by terrorists ‘and other criminals’.

3. Comments on the text of the proposal

2.4
Introducing the concept that criminal financial activ-
ities — whether related to terrorism or organised crime — are
a global phenomenon and must be combated together would
simplify the language used in the proposal; this is important
not least for the purposes of combating the phenomenon on
the ground. As things stand, at both Community and national
levels, the focus is on either one or the other: the many initia-
tives adopted refer sometimes to ‘organised crime,
including
terrorism’ and sometimes to ‘terrorism and other criminal activ-
ities’. It is not always easy — for the investigating authorities
and still less so for PSPs — to classify illegal financial activities
as belonging to a specific sector, particularly considering that
terrorism has forged close links with organised crime and
vice versa in a number of sectors: arms and drug trafficking,
illegal
immigration, counterfeiting of bank notes, document
forgery and so forth.

2.5 When it comes to combating unlawful financial activities,
therefore, organised crime and terrorism are two sides of the
this fact
same phenomenon. The impression that
is not
always acknowledged is given not
least by the explanatory
memorandum, which repeatedly mentions ‘combating money
laundering and terrorist financing’. Without as yet wishing
to comment on the proposed measures, the EESC believes that
this phrase is misleading. For reasons which will be better
explained in the comments on the individual articles, it should
be made clear that the text deals with organised crime and
terrorism.

criminals

2.6
Furthermore, the FATF itself was originally behind the
splitting of these two concepts: the title of the nine SRs referred
to in point 2.3 is simply Terrorist financing; the title of the
Interpretative Note to the SRs is Special recommendations on
terrorist financing, but the text mentions ‘preventing terrorists
from having unfettered access …’. The
and other
Commission has reproduced this distinction when transposing
the FATF recommendation, and is including the regulation
among the measures for combating terrorism. The EESC
believes that the regulation should be seen as part of the series
of more general measures to combat money laundering and
organised crime. The distinction is not important from a legal
point of view but it is important when it comes to practical
implementation, as the following comments attempt to show.

3.1
Article 2: Scope. The regulation applies to transfers of
funds to or from a PSP established in the Community and to
payees or from payers established in the Community; it also
applies (Article 7) to transfers from the Community to payees
established outside the Community and to transfers to the
Community from third countries (Article 8), with some adjust-
ments.

3.1.1
The regulation does not apply to transfers of funds
which flow from a commercial transaction carried out using a
credit or debit card, provided that a unique identifier,
allowing the transaction to be traced back to the payer,
accompanies all transfers. Emoney (i.e. pre-paid card) transac-
tions are neither explicitly excluded nor explicitly included. The
PSPs will comment on the technical procedures; for its part, the
EESC points out that the process for card transactions is the
reverse of that for payment orders: the payer's PSP (which is
sent a bank statement detailing the transactions made using the
card) is not aware of the payee's activities or of the nature of
the relationship between payer and payee. In the vast majority
it will not only be impossible to distinguish
of cases,
commercial
transac-
tions, but also, often, technically impossible to identify the
payer.

transactions from non-commercial

3.2
Article 5: Information accompanying transfers of
funds. PSPs have to include complete information on payers in
payment orders, after ascertaining and verifying that the
information is complete and reliable. However, for transfers
of funds to payees outside the Community up to an amount of
EUR 1 000, PSPs ‘may’ determine the extent of such verifica-
tion. While this flexibility is sensible and realistic,
it also
permits substantial financial outflows which fall into the cate-
gory of ‘immigrants' remittance’ but only appear to be going
the verification
to the payer's family of origin. Moreover,
normally required for all other orders is problematic in the case
of these kinds of transfers, which are often cash transfers and
are carried out by a large number of private individuals
through different PSPs, the identification of these individuals
being of no particular consequence.

3.2.1
In any case, if orders of less than EUR 1 000 are to be
exempt from monitoring, PSPs will have to put in place sepa-
rate, costly, unnecessary procedures; it would be better for the
text of the article to refer to the anti-money laundering provi-
sions already in force as regards orders made by payers who
are not current-account holders.

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3.3
Article 9: Transfers of funds lacking information on
the payer. Under Article 6, the PSP initiating the transfer has
to provide the payee's PSP with information on the payer.
Where this information is missing or incomplete, the payee's
PSP has to request it from the payer's PSP: moreover, it can
reject the payment, suspend it or perform the transfer under its
own responsibility with due regard for anti-money laundering
provisions. Should the occurrence be repeated, the payee's PSP
has to reject all orders from that PSP or terminate its busi-
ness relations with it. The ‘authorities responsible for
combating money laundering or terrorist financing’ have
to be informed of the decision.

3.3.1
The requirement for one credit institution to suspend
relations with another in the cases specified clearly raises the
issue of proportionality: money transfers usually only account for
a small part of relations between international credit institu-
tions, which include credit lines, services, transactions in securi-
ties etc. for immeasurably higher sums than those involved in
an unlawful — or supposedly unlawful — transfer of funds.
Immediate suspension of relations, as proposed by the Commis-
sion, would cause huge, unjustifiable damage for both PSPs and
their customers.

3.3.2
The use of the term ‘authorities responsible’ raises the
basic issue described in the introduction to this opinion. It
should be borne in mind that the general anti-money laun-
dering rules lay heavy responsibilities — including in terms of
criminal liability — on PSPs and their staff. It is not always
easy to tell, when a transaction is deemed to be ‘suspicious’,
whether it is attributable to ‘common’ crime or terrorism. Each
country has investigating and law enforcement authorities of
various different kinds: criminal police (sometimes divided into
two separate bodies), financial police, customs, secret services.
Where no precise information is given, the PSP will have the
task of identifying the authority it should notify. The regu-
lation therefore requires PSPs to decide on issues which lie
outside their sphere of professional competence.

A provision is therefore needed requiring Member
3.3.3
States to create a single contact point,
responsible for
receiving reports and referring them to the competent investi-
gating bodies (6). Moreover, this measure was already envisaged
in the Council's 1997 Action plan.

Article 10: Risk-based assessment. This article states
3.4
that the payee's PSP is to consider incomplete information on
the payer as cause for suspicion and to be reported to the
responsible authorities. The provision gives the PSP the right to
establish on a case by case basis whether it is a question of a
mistake, an omission or a ‘genuinely’ suspicious case: this may

(6) The need for a single point of contact is not new – nor did the
request originate with the EESC:
it was already included in the
Council's 1997 Action plan, referred to in point 2.1 above, under
which each Member State was to create ‘a single contact point
providing access to all the law enforcement agencies’. Many years
later, this body still does not exist and cooperation between investi-
gating and law enforcement bodies, at both national and Com-
munity levels, is still an issue which has yet to be fully resolved.

prove to be a hard task given that each PSP has to process a
considerable quantity of transactions every day. Moreover, as
regards reporting suspicious cases,
the comments made in
points 3.3.2 and 3.3.3 apply.

3.5
Article 13: Technical limitations. The provisions of
this article relate to transfers from third countries: the payee's
PSP has to keep the information on the payer for at least five
years, irrespective of whether that information is complete or
not. Where there is an intermediary PSP established in the
Community, it is required to report the lack of complete infor-
mation to the end PSP. Here the Committee would merely note
that keeping information for such a long period of time could
be a considerable burden and involve the accumulation of
tonnes of information: this provision can only be justified if it
is genuinely expected to be useful.
It might be advisable to
reflect on this point and only require information to be kept
where sums exceed a specified amount.

3.6
Article 14: Cooperation obligations. PSPs are required
to cooperate with the authorities responsible for combating
money laundering or financial terrorism, by supplying the
data and information in their possession without delay.
the
Those authorities may use the information ‘only for
purposes of preventing, investigating, detecting or prosecuting
money laundering or terrorist financing’.

3.6.1
The EESC fully endorses these provisions. It has just
one further comment to make in response to the demands
from certain quarters which have expressed reservations
the provisions protecting
regarding a potential dilution of
privacy. The greater
the community, which is
interest of
engaged in combating an extremely serious threat to society,
requires,
in some cases, departure from key principles in
order to ensure its protection. The obligation placed on autho-
rities to use the information only for the specified purposes is
in itself a safeguard against any abuse. It should also be borne
in mind that people transferring funds to bodies pursuing
‘genuine’ social or public-spirited ends have nothing to fear:
this does not constitute tax evasion or breach of the law or a
reprehensible action.

From another point of view, it should be asked how
3.6.2
effective these measures are in practical terms. For PSPs, the
general rule of ‘know your customer’ should apply, exempting
them from carrying out checks on and reporting customers
whose
is known and proven. However,
although this rule is quite easy to apply where payees are
concerned, it would be much more difficult and burdensome to
check on payers, particularly where transfers are effected using
the procedures laid down in point 3.1.1 above.

trustworthiness

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3.7
Article 19: Transfers of funds to charitable organisa-
tions within a Member State. In derogation from the provi-
sions of Article 5, Member States may exempt PSPs from the
requirement to comply with the provisions on supplying the
payer's identification details where transfers are made to orga-
nisations carrying out activities for charitable, religious,
cultural, educational, social,
fraternal or environmental
purposes or promoting sustainable development, provided
that:

a) these organisations are subject to reporting to and supervi-
sion by a public authority or to external audit requirements;

b) transfers are limited to a maximum amount of EUR 150 per

transfer;

c) transfers take place exclusively within the Member State.

3.7.1
The Member States which apply the planned exemp-
tion will certainly find it very challenging to keep a record of
relevant organisations and monitor compliance with the rules.
Furthermore, the PSP is supposed to verify, on a case by case
the payer is included on a continually updated
basis,
that
‘whitelist’:
this is undoubtedly a burdensome requirement.
However, the situation varies from country to country: in those
countries where the regulations are inadequate, the condition
referred to in point 3.7a) may prove difficult to respect.

3.7.2
The exemption granted by the proposal is based on
the premise that the social objectives pursued by these organi-
sations are in themselves a guarantee that the funds will not be
misused. This is true of the majority of those organisations, of
well-known organisations and of public disaster appeals, but it
is also a fact that some of the smaller, less-well known bodies
supposedly pursuing social or public-spirited ends are used by
terrorists as a front. In relation to the activities referred to in
the last part of point 3.7, the regulation cannot discriminate on
the basis of religious faith; it is, however, a well-known fact
that NPOs are sometimes an apparently harmless ‘front’ for
financing terrorism whose menacing nature only comes to light
subsequently.
In short, alongside a majority of ‘transparent’
NPOs, there are some others that need to be carefully moni-
tored: the problem is how to pinpoint them.

The proposal also overlooks the possibility that NPOs
3.7.3
might be a front for criminal organisations which are not
necessarily terrorist organisations. The profits from small-scale
drug-dealing, prostitution and racketeering can easily be passed

Brussels, 21 April 2006

In actual fact,

off as donations to NPOs with appealing names whose repre-
sentatives — at least as far as the PSP can tell — are completely
above suspicion.
indirect monitoring systems
for
exist which can bring to light some suspicious cases:
example, frequent payments from the same individuals always
made in cash are characteristic of these kinds of activities.
These methods are well known to criminals, however, who
take suitable precautions by breaking up payments, using a
different PSP each time etc. Thus, frequent payments always
made by the same payers could arouse the suspicion of a payee's
PSP, in particular. However, with the current electronic storage
systems this kind of monitoring could only be performed with
ad hoc, customised programmes, and this is clearly difficult to
implement.

3.7.4
The EESC therefore points out that exemption —
which the regulation leaves PSPs to decide at their own initia-
the information in their possession
tive on the basis of
regarding purpose, monitoring, trustworthiness of representa-
tives etc. — is a weak point in the system. PSPs may be
willing to cooperate but will never be able to do so sufficiently
to curb money laundering and crime financing: first and fore-
most, the authorities themselves must play an active role and
report the names of suspects. To this end, however, the idea
of a central authority as discussed above must become reality.

3.7.5
The EESC has a further point to make to the relevant
authorities. Except in the case of direct notification by PSPs, the
information is kept for five years, in the main so that it can be
referred to by authorities to provide evidence for crimes which have
already been committed. It is therefore, for the most part, used to
provide evidence and not for prevention or control measures. It is
worth asking how, in practice, it will be possible to pick out
individual cases from hundreds of millions of
transactions
which have been recorded over the years.

Lastly, it should be pointed out that the explanatory
3.7.6
memorandum to the regulation does not make any attempt to
set the costs of the system against the potential benefits. Not
all PSPs have adequate facilities to comply with the provisions,
and even those whose facilities are adequate will have addi-
tional burdens and organisational constraints to cope with. The
cost of these will inevitably be passed on to all the users of the
payment systems: this sacrifice is only acceptable if the new
regulation can be shown to bring specific, tangible benefits.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

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APPENDIX

to the opinion of the European Economic and Social Committee

The following amendments, which received at least one quarter of the votes cast, were rejected during the plenary
debate (Rule 54(3) of the RP):

Point 3.7.2

Amend as follows:

‘The exemption granted by the proposal is based on the premise that the social objectives pursued by these organi-
sations are in themselves a guarantee that the funds will not be misused. This is true of the majority of those organi-
sations., of well-known organisations and of public disaster appeals, b But it is also a fact that some of them
smaller, less-well known bodies supposedly pursuing social or public-spirited ends are used by terrorists as a front.
In relation to the activities referred to in the last part of point 3.7, the regulation cannot discriminate on the basis
of religious faith; it is, however, a well-known fact that NPOs are sometimes an apparently harmless “front” for
financing terrorism whose menacing nature only comes to light subsequently. In short, alongside a majority of
“transparent” NPOs, there are some others that need to be carefully monitored: the problem is how to pinpoint
them.’

Reason

To be given orally.

Voting

For: 37

Against: 44

Abstentions: 8

Point 3.7.4

Amend as follows:

‘The EESC therefore points out that Although the provisions relating to exemption — which the regulation leaves
PSPs to decide at their own initiative on the basis of the information in their possession regarding purpose, moni-
toring, trustworthiness of representatives etc. — could be is a weak point in the system, they are warranted by
the role NPOs play in a democratic society. PSPs may be willing to cooperate but will never be able to do so suffi-
ciently to curb money laundering and crime financing: first and foremost, the authorities themselves must play an
active role and report the names of suspects. To this end, however, the idea of a central authority as discussed
above must become reality.’

Reason

The additions provide sufficient explanation for the suggested deletions. There is strong opposition within NGOs to the
rules proposed by the FATF. Furthermore, if the EESC were to express support for these rules it would create major
problems for the Committee's relations with NGOs.

Voting

For: 43

Against: 52

Abstentions: 7