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###### **COMMISSION OF THE EUROPEAN COMMUNITIES** **Brussels, 01.07.1998** **COM(1998) 395 final** **COMMUNICATION FROM THE COMMISSION** **_to the European Parliament, the Council,_** **_the European Central Bank and the Economic and Social Committee_** **A FRAMEWORK FOR ACTION ON** **COMBATTING** **FRAUD AND COUNTERFEITING OF** **NON-CASH MEANS OF PAYMENT**

**Introduction**

While the potential for economic growth in the Union is unprecedented thanks to the advent of
the Single Market and to the Information Society, organised crime is however increasingly
becoming a threat to society, organising itself across national borders and taking advantage of the
free movement of goods, capital, services and persons. Technological innovations such as
Internet and electronic financial services turn out not only to facilitate legitimate business, but
also to be convenient vehicles either for committing crimes or for transferring the resulting profits
into seemingly licit activities.

To ensure the orderly conduct of economic and social activity to the benefit of users and
providers of goods and services, society requires sound, user-friendly, efficient, and secure
payment mechanisms. A key to promoting the necessary confidence is to sec to it that adequate
guarantees exist that payment instruments may not be used tor or in association with illicit
activities.

The European Council in Dublin, December 1996, underlined its absolute determination to fight
organised crime and stressed the need for a coherent and coordinated approach by the Union.
Turning this resolve into concrete action, the European Council in Amsterdam, June 1997,
endorsed an Action Plan to combat Organised Crime [1], in which, among other things, it calls on
the Council and the Commission to examine and address, by the end of 1998, the issue of fraud
and counterfeiting relating to all non-cash payment instruments, including electronic payment
instruments. [2] This Communication focuses on non-cash payment instruments. The Commission is
separately addressing the issue of falsification and counterfeiting of bank notes and coins in euro.

Purely national frauds are becoming international frauds. Payment card crime, for instance can be
committed anywhere cards are accepted as a means of payment or for money withdrawal. As noncash means of payment can be, as a rule accepted in non face-to-face transactions, they play a
significant role in cross-border transactions, be they under traditional forms or in electronic
commerce. Furthermore, large-scale frauds involve a multiplicity of "specialist" players and are
mostly committed by organised groups of criminals. The sophistication and internationalisation
of criminal behaviour demonstrate the need for a co-ordinated action at European level.

The need to address the problem of criminal activities directed at or involving payment
instruments is gathering further momentum in the light of current and prospective institutional,
economic and technological changes, notably:

1 Action Plan to Combat Organised Crime, adopted by the Council on 28 April 1997, OJ C 251, 97/C 251/01, 15
August 1997.
: The Commission is presently preparing a Green Paper on the fight against counterfeiting and piracy in the
Internal Market, which aims to protect intellectual property rights whilst allowing the proper functioning of

Internal Market.

 - the changeover to the Single Currency which, in particular throughout the transitional
period before introduction of euro bank notes and coins, will be facilitated by the
availability of transparent and secure electronic payment mechanisms;

 - the advent of the Information Society and Electronic Commerce which, as is highlighted in
the Communication on "A European Initiative in Electronic Commerce" [3], require efficient
payment facilities.

A Commission study of 1997 on the forms of fraud occurring in the European Union, underlined
in particular the frequency and considerable amounts involved in payment card fraud. [4] In
December 1996 a conference was funded by the Commission, dealing exclusively with Organised
Payment Card Crime, which further underlined these tendencies as well as the gaps existing in
national legislation. [5 ]

1. The present Communication sets out the Commission's assessment of the problem, and
proposes a framework of measures to promote an adequate _"security environment"_ for
payment instruments and the underlying systems. It consists of two components:

2. Firstly, the Commission presents (in Annex 1) a proposal for a draft Joint Action. The aim of
the Joint Action is to ensure that fraud and counterfeit of non-cash means of payment is
recognised as a criminal offence in all Member States, punishable by effective, proportionate
and dissuasive penalties.

3. Secondly, a further set of actions is presented (in Annex 2) for consideration by all interested
parties. In order to assess clearly what additional measures might be needed in this field, the
Commission invites all interested parties to comment (in writing) to these actions no later than
31 December 1998 to:

The Director-General - DG XV

European Commission

Rue de la Loi 200

B-1049 Brussels

Fax: (+32 2) 295.65.00

E-mail: JOHN.MOGG@DG15.ŒC.RK

Communication to the European Parliament, the Council, the Economic and Social Committee and the
Committee of the Regions, COM(97) 157 of 15 April 1997.
The report from the study   - _Fraud_ _Without_ _Frontiers_ _-_ is published at
[http://www.deloitte.ca/Whatsnew/Headlines/lnternatFraud.htm](http://www.deloitte.ca/Whatsnew/Headlines/lnternatFraud.htm)
The Final report of the project Co-operation to Combat Organised Payment Card Crime, organised by the

Metropolitan Police, England, and the National Police Agency, The Netherlands, describes the research done as
well as the results of the conference.

**1.** **The nature and extent of the problem**

Although non-cash means of payment includes an ever changing set of component systems or
instruments (see section 2.a below) the main statistical evidence about the size of the problem of
fraud and counterfeit is derived from the more senior systems, such as cheques and payment
cards. The global payment cards industry turnover is fast approaching US S 2.000 billion per
year, out of which approximately US $ 3 billion is declared lost each year as a result from card
crime. This may represent only 0,15% of volume, but still considerable amounts are affected, and
in light of the expected growth in issuing of new cards by up to 25 % annually, the amounts are
far from negligible. Approximately 25 % of all payment card losses are incurred by issuers in the
European Union. Although losses have traditionally for the most part occurred domestically,
increasingly they are incurred by card crimes originating abroad.

Measures to combat fraud are mainly taken domestically, which in several cases has led to at least
temporary declines in the occurrences of domestic fraud, while crime shows its adaptability by
increasing proportionally internationally. In addition to the problem of fraud and counterfeit
associated with cheques and payment cards, a potential risk is that of the systemic fraud, i.e.
attacks ("hacking") against the underlying computer networks which may also impact on the
payment instruments and systems. Cross-border card crime is therefore a real issue for the
Member States of the European Union as well as for the payment system industry and for users.

The European Parliament, consulted on a draft joint action aimed at the exchange of information
between the law enforcement agencies and the payment card industry, insisted on the need for'
consistent and comprehensive action when adopting its resolution on 15 May 1998.

Payment services are not provided in a legal vacuum. The aim of the existing Community
regulatory framework is the creation of a common single area, within which capital, people,
goods and services may freely circulate. A brief summary of the constituting elements of such a
framework is provided for in Annex 1.

2. The payment systems and their actors

This section describes non-cash payment instruments and underlying payment systems - their
features - the main participants therein and their respective functions. Given the rapid
development of the sector, the table below is purely indicative. Furthermore, the most innovative
payment instruments may provide holders with the possibility of performing multiple functions.

a) Classification of payment instruments and systems according to their functions

For ease of analysis, payment instruments, with the exception of legal tender (i.e. bank notes and,
to a large extent, coins), may include the following :

 - _pre-paid_ _paper_ instruments (e.g. travellers' cheques, vouchers, bonuses, etc.)

- _stored-value_ _electronic_ instruments (i.e. pre-paid cards and software-based electronic money).

- traditional _paper_ instruments (e.g. cheques),

- _traditional_ _(quasi-)electronic_ instruments (e.g. all types of payment cards, except for pre-paid
cards: credit, debit, deferred debit cards, T&E cards) as well as

- _remote electronic banking_ applications (i.e. home/phone/PC techniques).

**PAYMENT INSTRUMENTS**

**(other than cash)**

**A** **I.** **Pre-paid** **I** **A2. Stored-**
**paper** **value** **electronic**
**Instruments** **Instruments**

i) travellers' i) pre-paid cards
cheques

ii) vouchers ii) softwarebased electronic

money

lii) bonuses

**B** **L** I **B2.** **(quasi-)** 1 **B3. Remote**
**Traditional** **Electronic** **electronic**

**paper** **instruments** **banking**
**Instruments**

i) cheques, bills i) all types of i) home/phone/
of exchange payment cards PC techniques
(except pre
paid cards)
ii) paper and ii) paper and ii) paper and
electronic electronic electronic

credit/debit credit/debit credit/debit

transfer orders transfer orders transfer orders

**b)** **Definition of the actors in a payment system**

**Presently, under a payment scheme, the following recurrent participants (and functions) may**
**almost invariably be identified:**

**•** _**"the**_ _**issuer":**_ **this is typically the (financial) institution which, in the course of its business**
**(pursuant to a contract concluded with the user) makes available to a user an instrument that**
**may be used for making payments** **[6]** **;**

**•** _**"the user":**_ **this is typically a person (natural** **and/or** **legal) who (pursuant to a contract**
**concluded with an issuer) holds** **a** **payment instrument that may be used for payment,**

**•** _**"the**_ _**acceptor":**_ **this is typically the trading or service establishment that accepts, on its**
**behalf or on behalf of** **its** **network, payment of goods and services by holders making use of** **a**
**payment instrument;**

**•** _**"the acquirer":**_ **this is** **typically** **the (financial) institution that collects transaction**
**information from the acceptor and is responsible for the settlement with the latter.**

**Given that all schemes rest on a multiplicity of issuers, users, acceptors and acquirers, it is not**
**uncommon for the scheme to rely on mutually agreed procedures for the clearing (i.e. the**

In the case of electronic money, the issuer of the electronic money, the issuer of the card, and the institution
which makes the card available to the user might be different entities.

transmission, reconciling and confirmation of payment orders) and settlement (i.e. the discharge
of obligations as between the parties through transfer of the amounts due) of transactions. In this
respect, the role of network operators (e.g. frequently, but not exclusively telecom operators) as
carriers of financial information, although not one of direct participation in a payment system,
needs to be borne in mind.

**3.** **Information Society** **and the** **advent** **of** **Electronic Commerce**

The global Information revolution, and its most striking examples Internet and the growth of
electronic commerce, is already transforming the way in which business and people interact. It
has the potential to become the key stimulus for the world's economy into the next century. It
appears to have become an important business tool, also affecting every day life. The Internet has
therefore the potential of striking initial and transactional costs down to a fraction of the more
traditional ways of transacting. This could be particularly true of the financial services industry
and, especially, of systems and instruments for effecting payments.

Perhaps more important in the present context is to understand if, and when so how, crime may
exploit information technology. The question to be answered is whether the Information Society
and, in particular E-commerce, with the consequential enhanced use of information
communication systems they bring, are giving rise to new threats or barely accelerating
traditional patterns [7] .

In the context of its work on the Information Society and Electronic Commerce, the Commission
has already launched a number of initiatives, aiming in particular at establishing a clear
framework for its further development, so as to stimulate investments in electronic commerce
services with ensuing benefits for EU in terms of growth, competitiveness and employment. [ s ]

Urgent progress and successful implementation of these initiatives will no doubt contribute to the
establishment of an enhanced security environment, thus ultimately also benefit payment systems
and instruments.

**7** A study on computer-related criminal activities (tfoe COMCRIME study) has been commissioned by DG XIII
and was recently finalised by Prof. Sieber, Univ. Wilrzburg, and Prof. Kaspersen, Free Univ. of Amsterdam.
[http://www2.echo.lu/legal/en/comcrime/sieber.html](http://www2.echo.lu/legal/en/comcrime/sieber.html)
These initiatives include: the Communication on An European Initiative in Electronic Commerce
|C0M(97)I57 final of 15.04.1997]; the proposal for a European Parliament and Council Directive
|COM(97)356 final of 09.07.1997 (97/0198 (COD)] on the Legal Protection of Services based on, or consisting
of, Conditional Access; the Communication from the Commission to the European Parliament, the CounciJ, the
Economic and Social Committee and the Committee of the Regions [COM(97) 503 final of 1 October 1997] on
Ensuring Security and Trust in Electronic Communication: towards a European Framework for Digital
Signatures and Encryption; the proposal for a European Parliament and Council Directive [COM(98)297 final
of 13.05.1998] on a common framework for electronic; the Communication on Globalisation and the
Information Society   - The Need for Strengthened Co-ordination" [COM(98)50 final]; the proposed Action
Plan to promote the safe use of the Internet O.J. C 48 of 13.02.1998., which focuses at increasing confidence
in the networks by a number of action lines and is therefore part of activities to further electronic commerce.

**4.** **Criminal law**

a) substantive law - types of criminal offences

Criminal legislation in relation to payment instruments is generally based in all Member States on
the concept of "forgery" and "counterfeiting". However, these terms do not have the same
meaning in all Member States' criminal law. In general, the two elements of these behaviour are
the act of making a false instrument or forging a genuine instrument and the fraudulent intent of
using it. Some legal systems include other requirements such as the existence of a "substantial
effect".

All Member States' criminal legislation have criminalised the counterfeiting of banknotes and
coins. As regards traditional paper instruments (i.e. cheques), the divergence between legislation
in the Member States is more significant. In relation to payment methods such as payment cards,
the difference is even more important. In some countries, to commit the offence, the offender
must actually use the means of payment and sometimes even a proof of intent is required. The
mere possession of a stolen or counterfeited payment card or the theft of a payment card are not
considered as offences in all Member States. Difficulties increase when criminals make, use and
possess counterfeited payment cards rather than misuse lost or stolen cards. Most Member States
have no laws expressly relating to payment card crime and rely on existing legislation drafted for
more classical deceptions using documents which is not fully adapted to technological
innovations.

Computer and information technology abuse interacts with fraud related to payments, where the
fraudsters utilise an electronic payment system, or indeed whenever the payment transaction is
processed electronically. Criminal misuse of computers to defraud the beneficiary of a payment,
the payment card industry, or the financial institution is not always covered by existing
legislation. Unauthorised access is not criminalised everywhere. Manipulation of data in order to
illicitly effect a transfer of funds is not necessarily included in the concept of swindling where
this requires deceit or exploitation of a mistaken belief, which could not easily apply in
computerised communications.

Criminal organisations exploit such differences and operate from the least protected market.
Those differences in Member States' legal systems pose considerable difficulties in the
investigation and prosecution of fraud across national boundaries.

A first conclusion to be drawn is therefore that in an attempt to deal with a Pan-European
problem, one should avoid making these established terms the departure point, and instead
focusing on _the behaviour_ giving rise to the problem.

**A second conclusion is that any** _**instrument-based**_ _**or**_ _**instrument dependent**_ _**classification**_ **should**
be abandoned, in favour of more durable and flexible categories. Indeed, criminal activity is not,
a-priori and in itself, instrument-specific. Much rather, criminal offences may be :

(i) directed at the payment instrument itself, and at the security features that enable, restrict
and/or protect access to use of the payment instrument,

(ii) directed at the payment transaction itself, including the system for ordering, collection,
processing, clearing and settlement thereof, and/or

(iii) related to the means for preparing and carrying on the criminal activity, including the
(elaboration of the) device-making equipment.

As a consequence, it is proposed to describe the types of behaviour which should be combated,
avoiding the use of established offences while focusing on the target of the offender. This
classification should be "intent-related" and "instrument-neutral", so as to avoid too precise a
codification of offences, which could be subverted by technology or service innovation and
which could lead to divergent interpretations of the offences.

Finally, it is useful to highlight that a behaviour-related approach has already been implemented and appears to have been largely successful - in the United States, where older criminal
legislation for consumer protection related to credit cards combined with newer legislation
targeting most types of manipulations with _access devices,_ covers all non paper-based payment
methods, focusing mainly on remote access products.

b) procedural law

In order for any court to be permitted to pass judgement over the behaviour of a person, the court
must be satisfied that it has jurisdiction or right to rule over that person.

In criminal law, the criteria for jurisdiction is normally that the criminal act has taken place on the
territory of the State where the court is located, although in some Member States and for some
offences the nationality of the offender will be a determining element regardless of where the
offence was committed. For most crimes against non-cash means of payment, and particularly
systems based upon telecommunications infrastructures, a transaction may cross one or more
jurisdictions on its way between the originator (the culprit) and the target (the victim), or vice
versa. Depending on how criminal law is constructed in the states involved, jurisdiction can
prevail in the sending as well as in the receiving slate simultaneously. The opposite may also be
true, that none of the States will have jurisdiction, any proposal on approximation of substantive
criminal law provisions should therefore be followed by a discussion on the question of
jurisdiction, and any discussion on mutual assistance must be preceded by such a discussion.

Cooperation between judicial authorities in criminal matters is mainly effected by providing
mutual legal assistance and through extradition arrangements.

In the former case, a Member State that wishes to prosecute for offences but needing evidence
from another Member State, can request and receive such evidence from the state concerned. The

arrangements for doing so are mainly based upon bilateral agreements between States and the
1959 European Convention on Mutual Assistance and its protocol. Member States are at present
working on a draft European Union Convention to supplement the provisions of the 1959
Convention insofar as they apply to the Member States of the European Union.

The future Convention will seek to improve and make more efficient the applicable procedures.
The Action Plan endorsed by the European Council in Amsterdam, in its Recommendation 16,
refers to the importance of this work for efficient judicial cooperation in the fight against
organized crime.

Extradition arrangements are also in place whereby a Member State can have a person charged
with a serious offence or convicted of such an offence returned from another Member State for

prosecution or to serve his/her sentence in the Member State concerned. The main instrument that
provides arrangements for such cooperation is the 1957 European Convention on Extradition and
its protocols. In order to supplement and facilitate the application of this Convention, Member
States adopted in 1995 an EU Convention on Simplified Extradition Procedures which provides
for a simplified procedure for persons who consent to extradition. The 1996 EU Convention
relating to Extradition further improves the conditions applying to extradition between Member
States by i.e. making a broader range of offences extraditable by decreasing the threshold of
sentence necessary for an offence to be extraditable.

5 International aspects

To ensure that approaches envisaged at the worldwide level is coherent and compatible with that
of the EU, it is important that all parties (authorities, industry and users' groups) seek to coordinate their initiatives in the relevant international fora and groups, establishing wherever
possible global agreements. For instance, following the Halifax Summit, the G-8 set up a Senior
Experts Group on Transnational Organised Crime, the so called "Lyon Group". Among its
activities, it has discussed the launching of joint projects to investigate and combat particular
forms of organised crime. Fraud to payment cards and to other access devices received particular
attention in this context. Currently, the Commission is participating in the discussions of all these
for a with an objective to avoid unnecessary duplication of efforts and facilitate coordination.

Furthermore, a working group under the Council of Europe (the PC-CY or "Cybercrime"
working group) is currently preparing a Draft Convention on Computer-related crimes, in which
an important feature is a list distinguishing traditional offences that can be committed in a
computer environment (e.g. "swindling"), from new offences, which are intrinsically computerrelated (e.g. "hacking").

Apart from ongoing information exchange activities with Countries of Central and Eastern
Europe and PHARE-fmanced projects, it should be noted that the Title VI Programs GROTIUS
and OÎSIN have a potential for financing individual projects directed at improving cross-border
cooperation through enhanced knowledge, training and competence of the relevant groups of

practitioners in Member States, and that these Programs are open also to participants from the
candidate countries.

Finally, in the context of the pre-aceession strategy and Accession Partnerships, consideration is
being given to develop programs to take account of policy towards combating organized crime.
This could include, where appropriate, the problem of fraud and counterfeit of non-cash payment
systems.

**6.** **Towards a Union Policy: sharing responsibilities**

**In** the light of the sections above, the Commission believes that the answer to the problem lies in
a common approach, rather than on isolated, partial initiatives. Moreover, the fundamental
element of such an answer is that it calls for a sharing of responsibilities amongst all (directly or
indirectly) interested parties, within a hierarchy of responsibilities.

_First of all,_ instruments and the underlying systems and features allowing for their use, must be
technically suitable as is necessary to reduce the potential scope for criminal abuse. This is by far
the "conditio sine qua non" and the first step for an effective response to crime. It must be a
primary responsibility of the industry as a whole (and participating financial institutions
individually) to strive towards ever more secure payment applications, as it is to clearly disclose
to users the actual level of security associated with the different payment product;: they oOer.
Tliis responsibility needs to be extended to encompass network operators, on whom it rests lo
ensure the secure exchange of financial information.

However, there is no doubt that technical security on its own will only help in so far as, and !o the
extent that, it succeeds _in_ raising the protective threshold. It is not and should no- be viewed as
the conclusive solution. A" actors concerned and authorities must also pky their part in
promoting and implementing the appropriate framework that will lead ;

to provide incentives for early detection measures (prevention), and

to establish a safety net designed at sanctioning offenses where these have occurred
(sanctions).

_Secondly,_ crime is in no way a geographically constrained phenomenon, even _\CÏH_ SO in tb: Ugb
of the present prospective information revolution. To enhance the eiTectiveniuss of _awy_ -.u^ba,
there is a need wherever possible io ensure consistency of approach at internatiouâ [1] bvd This is
particularly true of organised crime, which has time and time again demonstrated îhtvuas^ v?-.h
which it can conveniently migrate towards and operate from safer havens.

Joint Action on Fraud and Counterfeiting of Non-Cash Means of Payment

In order to meet the challenge posed by the threats of crime in the form of fraud and counterfeit
of non-cash means of payment, the Commission is proposing a draft Joint Action. Its aim is to
ensure that fraud involving all forms of non-cash means of payment is recognised as a criminal
offence and punishable by effective, proportionate and dissuasive sanctions in all EU Member
States, and that appropriate mechanisms of co-operation are put in place in order to prosecute
these offences efficiently. This is without prejudice to the faculty for Member States to
incriminate additional forms of e.g. computer crime, like the mere unauthorised access to an
information technology-based payment system.

The Joint Action deliberately avoids the use of strictly defined qualifications under existing
criminal law because they do not cover the same elements everywhere. The approach taken
instead is to describe the various behaviour which should be criminal offences throughout the
Union in a way which does not limit the Joint Action's application to particular types of non-cash
payment instruments. In order to do so, the list of Article 2 is drawn up on the basis of the direct
aim pursued by the offender. It looks at the immediate target of the fraudster: whether the attack
is directed at the payment instrument or at the making of payment instruments, or whether it is
directed at one or more payment transactions, or at the system itself for ordering, collecting,
processing, clearing, and settling the payment transactions.

Therefore, the form of a joint action was preferred: it indicates the result to be achieved while
leaving to the national authorities the choice of method. The proposed Joint Action has of course
been drafted on the basis of the Maastricht Treaty. It will have to be adapted to the new
legislative framework and will take the form of a Framework Decision, when the Amsterdam
Treaty comes into effect. [9] Under the existing treaty, Article 3 paras 6 and 7 and Article 6, which
deal with judicial cooperation, are not formally part of the Commission's initiative. They are
submitted for consideration by the Commission in order to complete the text. Finally, the
proposal has to be seen in the context of other instruments already adopted or still in the course of
discussion like the joint action criminalising the participation in a criminal organisation' [0], the
Joint Action establishing the European Judicial Network" and the draft convention on mutual
assistance. [12 ]

**Additional Actions**

This means in particular that Art. 35 of the consolidated version of the Treaty on European Union will apply,
which provides that the Court of Justice shall have jurisdiction to give preliminary rulings on the validity and
interpretation of Framework Decisions, subject to declarations made by the Member States. It also provides for
the possibility of submission of statements of case or written observations to the Court and gives the Court
jurisdiction to review the legality of Framework Decisions and to rule on disputes between Member States on

the interpretation of Framework Decisions where such disputes cannot be settled by the Council within 6
months of having been referred to it by one of its Members.

Draft Joint Action adopted by the Council on the basis of Article K.3 of the Treaty on European Union on
making it a criminal offence to participate in a criminal organization in the Member States of the European
Union, (not published)
Proposal for a Joint Action to create a European Judicial Network (not published)
Draft Convention on Mutual Assistance in Criminal Matters between the Member States of the European
Union (not published).

11

Furthermore, a set of actions are set out in Annex 2. All interested parties are invited to consider
these actions, with a view to taking the necessary measures for their effective implementation.
Furthermore, in order to assess clearly what additional measures, including the legislative ones,
might need to be taken in this field, the Commission intends to stimulate a wide-ranging debate
with all interested parties and encourage them to respond to the issues raised in this
Communication. Comments (in writing) to these actions are requested no later than 31 December
1998.

**12**

**Annex 1**

### **JOINT ACTION** **ON COMBATTING** **FRAUD AND COUNTERFEITING** **OF NON-CASH MEANS OF PAYMENT**

**1 3**

EXPLANATORY **MEMORANDUM**

Commentary of **the** articles

**Article 1**

Article 1 contains definitions of terms used in the Joint Action. These definitions are without

prejudice to more specific definitions in the Member States.

1. Paragraphs î and 2 contain core definitions for the Joint Action. Paragraph Î defines
_"(non-cash) payment_ _instrument_ as described under point 1 before, i.e. including all payment
instruments with the exception of bank notes and coins.

2. Paragraph 2 defines _"'payment_ _transaction"_ as any transaction for obtaining of money
or value, making or receiving of payment in respect of goods, services and any other thing of
value and/or the issuing of an order involving transfer of funds, through a payment
instrument.

3. The definitions include software and are linked to Article 2 (k) which lists prohibited
activities related to device-making equipment.

4. The definition of _"legal_ _person"_ is taken from the Second Protocol to the Convention
on the protection of the European Communities' financial interests' .

5. _"money_ _laundering"_ is defined as in the Council Directive 9Î/308/EEC of
10 June 1991 on the prevention of the use of the financial system for the purpose of money
laundering

6. The term _"national_ is to be understood in accordance with declarations made by
Member States to Article 6(1) (b) of the European Convention on Extradition of 13 December
1957. The Extradition Convention will apply to serious cases under this Joint Action as
referred to in Article 3.3.a.

**Article** 2

Article 2 describes the behaviour which the joint action proposes should be incriminated in ail
Member States, if it is not yet the case, and made subject to the provisions set out in Articles
3,4, 5 and 6. The behaviour listed in Art. 2 do not cover mere breaches of contractual
obligations.

a) typically corresponds to the theft of cheques or cards;

b) covers, e.g. the creation of completely false cards, as well as the forging of existing

ones;

**OJNoC221,** **19.7.1997 p.** **11**

**--?.**

c) corresponds to the selling, transmitting, etc., of payment instruments, false or falsified,
as well as of genuine instruments, but without authorisation of the legitimate holder;

d) covers the knowing possession of a payment instruments falling under (a) or (b)

e) targets the actual use of a payment instrument falling under (a) or (b);

f) deals with the case where a merchant or a service provider knowingly accept a payment
made under the circumstances described under (e);

g) addresses cases where for instance genuine card identification data are used without the
authorisation of the legitimate holder to make a payment by phone;

h) covers the case where completely false data are used for the same purpose; it is not to be
understood as prohibiting pseudonyms as identification by the legitimate holder;

i) concerns the situation where, for instance, the information circulated within the
processing system are intentionally modified so as to direct the order to the benefit of an
account, other than the legitimate beneficiary of the order;

j) deals with the case where identification data are transmitted to a person who is not
entitled to that information and would or could use them to obtain value or pecuniary
advantage;

k) relates to the means for preparing or carrying on one of the criminal behaviours
described before;

1) covers the case for instance of possession of specially designed holograms or papers for
printing cheques;

m) extends incrimination to anyone who would assist or instigate any of the behaviours
previously described or who knowingly benefits therefrom.

**Article 3**

1. This article requires Member States to review their existing law and practice with a
view to ensuring that the measures set out in paragraphs 1 to 7 are achieved.

2. Paragraph 1 provides that the list of behaviour set out in Article 2 should be classified
as criminal offences.

3. Paragraph 2 provides thai legal persons should be liable for the offences envisaged by
paragraphs 1 and 5, committed for their benefit by any person, acting either individually or as
a part of the organ of the legal person in accordance with the modalities of national law. This
text is modeled on Article 3 of the Second protocol to the Convention on the protection of the
European Communities' financial interests but it has been modified so that it does not have the
requirement that the person committing the offence should have a leading position in the
organisation and does not include liability arising out of lack of supervision or control.

_**/IS**_

4. Paîii^i-ïïpfc " puts an onus on Member States to provide ibr appropriate punishment of
offence:. Insofar «. noterai persons are concerned, the provisions are modeled on provisions
contained in _'iix^_ Converuicn on the protection of the European Communities' financial
interests, the Pro;o-:oî to ihsri. Convention and the Convention on the fight against corruption
involving ofticiais of the European Communities or officials of the Member States of the EU.
Penalties must be effective, proportionate and dissuasive. [2 ]

In complying with this ruling, the Member States have some discretion in determining the
nature and severity of th*î penalties which may be provided for. These _nted_ not always
necessarily involve deprivation of liberty. Fines might be imposed in addition or as an
alternative to imprisonment.

The article does, however, require Member States to provide for penalties involving
deprivation of liberty, which can give rise to extradition, in the most serious cases. It will be
for the Member States to decide what criteria determine the seriousness of an offence in the

light of their respective legal traditions.

As far as legal persons are concerned, in some jurisdictions the concept of criminal liability of
legal persons does not exist. This fact is recognised in Article 4 of the Second Protocol to the
Convention on the protection of the European Communities' financial interests and that
Article is the model used for this provision but sanctions more appropriate foi offences
involving Community and national officials have not been included in this text. The
requirement is for effective, proportionate and dissuasive sanctions, the minimum obligation
is to impose criminal or non-criminal fines.

5. As not all Member States have yet ratified the WO European Convention on
Laundering, Search, Seizure and Confiscation of the proceeds from crime, paragraph» 4
requires Member States to take the necessary measures to make possible the seizure and
confiscation or removal of the instruments and proceeds of the offences envisaged by
paragraph 1 and money laundering or property the value of which corresponds to sisch
proceeds. Instruments, proceeds or other property seized or confiscated should be dealt with in
accordance with national law.

6. The money laundering provisions of the 1990 European Convention is applied to
predicate offences in accordance with declarations made by parties to mat Convention. The
EC Directive is limited to proceeds derived from drug trafficking offences at present although
the Directive may in future be extended to all serious crime. Paragraph 5 establishes money
laundering related to the proceeds of the offences envisaged by this joint action as a criminal
offence. Money-laundering is defined in Article 1 in accordance with Council Directive
91/308/EECof 10 June 1991.

7. The international nature of fraud to non-cash means of payment means that fo combat
it effectively rules on jurisdiction and on extradition _need_ to be clear and to be as progressive
as national legal systems will allow to guard against persons evading prosecution. For that
reason the provisions in this paragraph are modelled on provisions used for forms of crime

The expression is taken over from a judgement of the Court of Justice of the European Communities (ctse
68/88, Judgement of 21.9.1989, ECR.2965) expressed as follows: (the Members States) "must ensure In
particular that infringements of Community law are penalised under conditions, both procedural ?uid
substantive, which are analogous to those applicable to infringements of national law of a similar nature
and importance and which, in any event, make the penalty effective, proportionate and dissuasive."

_**s1 c**_

with particular international dimensions. The models used are the jurisdiction provisions of
the Convention on the protection of the European Communities' financial interests, the
Protocol to that Convention and the Convention on the fight against Corruption involving
officials of the Communities or officials of Member States of the European Union.

8. Paragraph 6 establishes a series of criteria conferring jurisdiction to prosecute cases
involving the offences covered by the Joint Action on national enforcement and judicial
authorities.

A Member State shall establish its jurisdiction in two situations:

- where the offence is committed in whole or in part in its territory, irrespective of the status
or the nationality of the person involved (territoriality principle)

- where the offender is a national (active personality principle). The criteria of their status
means that jurisdiction can be established regardless of the _lex locus delicti._ It is up to
Member States to prosecute for offences committed abroad. This is particularly important
for Member States which do not extradite their own nationals.

However, as not all Member States' legal traditions recognise extraterritorial jurisdiction,
Member States may, subject to the obligation under paragraph 7, limit their jurisdictions to
the first of these two situations. In addition if they do not do so they can still make the
jurisdiction rule in the second situation subject to specific situations or conditions.

9. Paragraph 7 takes account of the fact that some Member States do not extradite their
nationals and seeks to ensure that persons alleged to have committed fraud to non-cash means
of payment do not evade prosecution because extradition is refused in principle on nationality
grounds.

A Member State which does not extradite its own nationals must take the necessary measures
to establish its jurisdiction over the offences concerned when committed by its own nationals
outside its territory. The offences may have been committed in another Member State or in a
third country. In such circumstances the requested Member State must submit the case to its
legal authorities for the purpose of prosecution. The provision is not intended to affect
national rules regarding criminal proceedings. The requesting Member State must transmit the
files, information and exhibits relating to the offence to the Member State which is to
prosecute the offence. The requesting Member State shall be informed of the prosecution
initiated and of its outcome.

**Article 4**

The purpose of Article 4 is to provide for co-operation between public and private bodies and
bodies involved in the control of payment systems and the authorities responsible for
investigation and punishment of the offences envisaged by the Joint Action. Each Member
State must take the necessary measures, while respecting its own internal law, to ensure that
the bodies concerned advise the relevant authorities where there is reasonable ground for
suspecting that an offence has been committed as well as providing all reasonable information
and, ii" appropriate take part as experts iu the procedures. This article is modeled on the

**^**

provisions of the Joint Action concerning action to combat trafficking in human beings and
sexual exploitation of children [3] .

**Article 5**

The purpose of this provision is to clarify that each Member State must ensure that the
obligations as they arise from Directive 95/46/EC on the protection of individuals with regard
to the processing of personal data and on the free movement of such data are also met in
relation to the processing of personal data provided for in this Joint Action. The possibility of
exchange of personal data arises in particular in Article 4. The proposed wording is made
pending a forthcoming general discussion of the issue of data protection in Title VI matters.

**Article 6**

1. The purpose of this Article is to augment instruments on international co-operation to
which Member States are a party and which will apply to this Joint Action.

International co-operation between judicial authorities in criminal matters is mainly effected
by providing mutual legal assistance and through extradition arrangements.

Mutual Assistance arrangements are contained in a number of bi-lateral and multilateral
agreements, notably the 1959 European Convention on Mutual Assistance and its 1978
Protocol, the 1990 Convention on the Schengen Agreement and the Benelux Treaty. EU
Member States are at present working on a draft European Convention and a Protocol to
supplement the provisions of the 1959 European Convention on Mutual Assistance and its
Protocol.

Extradition arrangements are provided in the 1957 European Convention on Extradition and
its protocols as well as in the Schengen Convention and the Benelux Treaty. Member States
adopted in 1995 a EU Convention on Simplified Extradition Procedures which provides for a
simplified procedure for persons who consent to extradition. A Convention signed in 1996
relating to Extradition further improves the conditions applying to extradition between
Member States. Both these instruments will enter into force following completion of the
national ratification procedures.

Other EU instruments agreed, or planned to deal with organised crime will impact on the fight
against fraud to non-cash means of payment. Examples are the Joint Action on the
establishment of a Judicial Network to facilitate judicial co-operation between Member States
and the Joint Action making it a criminal offence to participate in a criminal organisation.

2. Paragraph 1 requires Member States to afford each other the widest measure of mutual
assistance in respect of investigation, prosecution and carrying out the punishment imposed,
relating to offences provided for in this Joint Action.

3. When a positive conflict of jurisdiction occurs, paragraph 2 establishes that Member
States shall consult one another with a view to co-ordinating their action to prosecute
effectively.

OJ No. 63, 4.3.97, p. 2

4. Paragraph 3 puts an onus on Member States to ensure that information concerning the
offences envisaged by the Joint Action, as well as information on persons convicted of such
offences and information useful for investigation and prosecutions is organised in such a way
that it is accessible for effective use and exchange with other Member States. This provision is
modeled on a similar provision in the Joint Action concerning action to combat trafficking in
human beings and sexual exploitation of children [4] .

**Article** 7

This is a standard article which refers to the follow-up and commitment for the
implementation of this Joint Action. It establishes that the Council will assess on the basis of a
report made by the Commission on the fulfillment by Member States of their obligations by
the end of 2000.

4 OJ No. 63,4.3.97, p. 2

#### **_11_**

**JOINT ACTION**

**adopted by the Council**

**on the basis of Article K. 3 of** **the** **Treaty on European Union**

**on fraud and counterfeiting of non-cash means of payment**

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on European Union, and in particular Article K.3 (2) (b) thereof,

Having regard to the report of the High-Level Group on Organised Crime, approved by the
Amsterdam European Council on 16 and 17 June 1997, and in particular Recommendation N°
18 of the Action Plan;

Considering that fraud and counterfeiting of non-cash means of payment often operate on an
international scale;

Considering other instruments agreed by the Council such as the Joint Action establishing the
European Judicial Network and the Joint Action on making it a criminal offence to participate
in a criminal organisation in the Member States of the European Union will also assist in the
fight against fraud of non-cash means of payment;

Recognising the importance of the work developed by various international organisations (i.e.
the Council of Europe, the G8, the OECD, Interpol and the UN);

Whereas the Council considers that the seriousness and development of certain forms of fraud
regarding non-cash means of payment require comprehensive solutions including both
repressive measures and preventive strategies based on a sharing of responsibilities amongst
the payment system industry, the individual users and the authorities;

Whereas the Commission submitted a Communication entitled "A framework for action

combating fraud and counterfeit of non-cash means of payment" which advocates a Union
Policy covering both preventive and repressive aspects of the problem;

Whereas this Joint Action is one element of such comprehensive approach;

Whereas in order to achieve approximation of legislation incriminating fraud and
counterfeiting of non-cash means of payment, a clear legal instrument is needed;

HAS ADOPTED THIS JOINT ACTION:

Article 1                  - Définitions

For the purposes of this Joint Action, and without prejudice to more specific definitions in the
Member States' legislation,

_1._ _"(non-cash)_ _payment instrument"_ shall mean an instrument with the exception of legal
tender (i.e. bank notes and coins) enabling, alone or in conjunction with another
(payment) instrument, the legitimate holder/payer, to obtain money or value, to make or
receive payments in respect of goods, services or any other thing of value, to issue an
order or message requesting or otherwise authorising the transfer of funds (in the form of
a monetary claim on a party) to the order of a payee;

_2._ _''payment_ _transaction"_ shall mean obtaining of money or value, making or receiving of
payments in respect of goods, services or any other thing of value, and/or the issuing of
an order or message requesting or otherwise authorising the transfer of funds (in the form
of a monetary claim on a party) to the order of a payee, through a payment instrument;

_3._ _"device-making equipment "_ shall mean any equipment (including software) designed or
adapted for the access, manufacture or alteration of any, or part of any, payment
instrument or payment transaction and shall include equipment designed or adapted to
change or alter any information or data carried on or in any payment instrument or
payment transaction;

_4._ _"legalperson "_ shall mean any entity having such status under the applicable law, except
for States or other public bodies in the exercise of State authority and for public
international organisations;

_5._ _"money laundering"_ shall mean the conduct as defined in the third indent of Article 1 of
Council Directive 91/308/EEC of 10 June 1991 on the prevention of the use of the
financial system for the purpose of money laundering.

_6._ _"national"_ of a Member State shall be construed in accordance with any declaration
made by that State under Article 6(1) (b) of the European Convention on Extradition of
13 December 1957.

**t-7**

**Article 2 - Description of behaviour**

In order to combat fraud and counterfeit of non-cash payment instruments and payment
transactions, each Member State undertakes to review their relevant national laws concerning
the measures set out in Articles 3, 4, 5 and 6 relating to the following types of behaviour:

a) misappropriation of a payment instrument;

b) counterfeiting or falsification of a payment instrument;

c) knowingly handling, unauthorised by the holder, of a payment instrument;

d) knowingly possessing a misappropriated, counterfeited or falsified payment instrument;

e) knowingly using a misappropriated, counterfeited or falsified payment instrument;

f) knowingly accepting a payment made under the circumstances covered by the previous
indent;

g) knowingly unauthorised use of identification data for initiating or processing a payment
transaction;

h) knowingly using fictitious identification data for initiating or processing a payment
transaction;

i) manipulation of relevant data including account information, or other identification data,
for initiating or processing a payment transaction;

j) unauthorised transmission of identification data for initiating or processing a payment
transaction;

k) unauthorised making, handling, possession or use of device making equipment for the
purpose of:

    - manufacturing or altering any payment instrument or part thereof;

    - initiating or processing payment transaction, or

    - changing or altering any information or data carried on, or in, any payment
instrument or transaction;

1) knowingly unauthorised possession of an element or part of a payment instrument;

m)involvement as accessory or instigator in, or knowingly obtaining of value or pecuniary
advantage derived from any of the behaviours described above involving a criminal
intention.

**10**

_**<l\**_

**Article 3 - Measures to be taken at national level**

Each Member State shall review existing law and practice with a view to providing that:

1. The types of behaviour set out in Article 2 are classified as criminal offences.

2. Legal persons can be held liable for the offences provided for in paragraphs 1 and 5
committed for their benefit by any person, acting either individually or as part of an organ
of the legal person in accordance with modalities to be defined in the national law of the
Member State.

3. The penalties for these offences and for intentional participation in or attempt to commit
them should:

a) insofar as natural persons are concerned, be effective, proportionate and dissuasive
criminal sanctions including, at least in serious cases, custodial penalties involving
deprivation of liberty which can give rise to extradition;

b) insofar as legal persons are concerned, be effective, proportionate and dissuasive
sanctions which shall include criminal or non-criminal fines.

4. The necessary measures are taken to make possible the seizure and without prejudice to
the rights of bona fide third parties, the confiscation or removal of the instruments and
proceeds of the offences provided for in paragraph 1 and 5, for property the value of
which corresponds to such proceeds. Any instruments, proceeds or other property seized
or confiscated shall be dealt with in accordance with the national law of Member States.

5. Money laundering related to the proceeds of the offences provided for in paragraph 1 is
established as a criminal offence.

6. It establishes its jurisdiction over the offences provided for in paragraphs 1 and 5 where:

a) the offence is committed in whole or in part within its territory;

b) the offender is one of its nationals.

Subject to the provisions of paragraph 7, any Member State may limit the application of
its jurisdiction to the rules laid down in paragraph 6.a. A Member State which does not
apply such a limitation may nevertheless apply its jurisdiction to the rules laid down in
paragraph 6.b only in specific cases or conditions.

7. Where a Member State does not extradite its nationals it should establish its jurisdiction
over the offences provided for in paragraphs 1 and 5 when committed by its own
nationals outside its territory.

**?_1**

Each Member State shall, when one of its nationals is alleged to have committed in
another Member State an offence established in accordance with paragraphs 1 and 5 and
it does not extradite that person to that other Member State solely on the grounds of his
nationality, submit the case to its competent authorities for the purpose of prosecution if
appropriate. In order to enable prosecution to take place, the files, information and
exhibits relating to the offence shall be transmitted in accordance with the procedures laid
down in Article 6 of the European Convention on Extradition of 13 December 1957. The
requesting Member State shall be informed of the prosecution initiated and of its

outcome.

Article 4 - Co-operation from public and private services or bodies

Each Member State shall take the necessary measures to ensure that the public and private
services and bodies involved in managing, monitoring and overseeing the payment systems,
while respecting the internal law of the Member State, will co-operate with the authorities
responsible for investigation and punishment of the offenses established by this Joint Action.
In particular they should:

- advise those authorities on their own initiative, where there is reasonable ground for
considering that one of these offences have been committed;

- provide those authorities with all useful information either on request or on their own
initiative;

if appropriate, take part in the procedures as experts.

**Article 5 - Data Protection**

Concerning the processing of personal data, this Joint Action shall be implemented so as to
ensure a level of protection equivalent to the protection foreseen in the European Parliament
and Council Directive 95/46/EC on the protection of individuals with regard to the processing
of personal data and on the free movement of such data. Data should he used only for the
purposes for which it has been transmitted.

**12**

##### **2//**

**Article** 6 - **Co-operation between Member States**

1. In accordance with applicable conventions, multilateral or bilateral agreements or
arrangements Member States shall afford each other the widest measure of mutual
assistance in respect of proceedings relating to offences provides for in this Joint Action.

2. Where several Member States have jurisdiction in respect of offences envisaged by this
Joint Action, these States shall consult one another with a view to co-ordinating their
action in order to prosecute effectively.

3. Each Member State shall ensure that information concerning offences envisaged by this
Joint Action as well as persons convicted of such offences and information which could be
useful for investigations and prosecutions of such offences is organised in such a way that
it is readily accessible and can be effectively used and exchanged with other Member
States, subject to national law governing secrecy of proceedings.

**Article 7 - Commitment and follow-up**

1. Each Member State shall bring forward appropriate proposals to implement this Joint
Action for consideration by the competent authorities with a view to their adoption.

2. The Council will assess, on the basis of a report made by the Commission, the fulfilment by
Member States of their obligations under this Joint Action, by the end of 2000.

3. This Joint Action shall be published in the Official Journal.

4. It shall enter into force on the date of its publication.

**13**

**-2<>**

**Annex 2**

_**Actions to prevent**_ _**fraudfmm**_ _**occurring**_

a) The _payment system_ _industry,_ _as a_ _whole,_ _including_ _network_ _operators,_ are invited to

1 ) enhance the security intrinsic to the payment product on offer, the systems for the
processing of transactions originated thereby, including the carrier network
system,

2) upgrade the security of tools allowing for conditional & discriminatory access to
the use of their payment products,

3) set up structures for exchange of information and learn from experience whilst
also ensuring a high level of confidentiality and protecting the fundamental rights
and freedoms of natural persons, and in particular their right to privacy.

Furthermore, the _payment system industry_ is invited to

4) set up training programs primarily destined for financial institutions' own staff, as
well as the development of the necessary capabilities for systematic reporting of
criminal activities to enforcement agencies,

5) promote educational material directed at users of payment products (principally
retailers and holders).

The Commission considers that the need for an early detection of criminal offences
should in particular be taken into account by the industry when designing the payment
instrument and the underlying systems (under 1 and 2). and declaring the (potential)
fraud to the structures designed to this purpose (under 3).

Furthermore, to ensure a harmonious and pro-competitive development _o(_ the market
for payment services, the Commission is of the opinion that attention should be paid
to ensuring that actions under 1) and 2) do not lead to an unwarranted hindrance _oi'_
competition and of the development of the Information Society as a whole, notably
through practices amounting to restrictions on access to a system or on freedom to
cross-border services, as well as by way of exclusivity arrangements.

b) _Individual_ _issuers as well as individual users_ _(retailers_ _and_ _holders)_ are invited to

promote a reasonable and fair apportionment of responsibilities & liabilities between
the various parties to a payment system (i.e. between issuer/holder; between
acquirer/retailer), which favors:

_Z6_

compliance with terms and conditions governing issue, use and acceptance of a
payment instrument,

the earliest possible notification procedure.

The Commission thinks that as a general policy goal, it must be a priority to ensure
that individual users do not suffer as a consequence of crime occurring in respect of
the use of a payment instrument and payment systems, unless it can be proven that
they have taken part in the criminal activity. Moreover, in view of the technological
aspects which are under the control of the participating (financial) institutions, the
burden of proof should not be put on the holder.

Nevertheless, users should be informed concerning the security measures they have to
respect, and they should assume, as citizens, a civic duty to participate actively against
fraud, notably by the earliest possible notification of the anomalies they note, in
particular in the information they receive subsequent to a transaction.

c) _Authorities_ are invited to

coordinate information gathering and awareness raising initiatives, which may
include industry. [5 ]

assist the industry, individual issuers and users in their efforts towards the
achievement of a security environment. At EU level this will involve
promoting the establishment across the Union of a supportive regulatory and
non-regulatory framework. The Commission has already taken a number of
initiatives to this effect.

_At the Union level_

The Commission stresses that as the existing Community regulatory framework is
essentially aimed at creating a Single Market within which financial services, and in
particular payment services, may freely circulate.

Furthermore, EC legislation in this field is mainly devoted to giving effective
application to the Treaty provisions. This has been achieved by way of coordinating
the provisions relating to the taking-up and pursuit _o{_ the business _o\'_ financial
institutions. These provisions have been supported by a number of specific provisions
harmonizing the basic rules of prudential supervision.

The UK recently proposed a Joint Action, for the establishment of a network of contact points in the
Member States, to improve exchange of information in relation to credit card fraud. The Interpol Genera!
Assembly in October 1997 adopted a proposal to establish a universal classification system for "bad'* credit
cards, which in reality is a clearing house function for the Interpol Secretariat to collect information, with
the assistance of the credit card industry, and disseminate it through the contact lines with national police
forced already existing with Interpol. The PC-YC of the Council of Europe has received a Belgian expert
proposal for the establishment of contact points in relation to cyber-crime in general.

**o** **? )**

_A_ number ôf spc^flc _i_ „o?;imission initiatives are aimed at an appropriate regulatory
framework in the area covered by this Communication.

In this context, the Commission is currently working on a draft proposal which aims to
ensure the financial integrity of issuers of electronic money and thereby foster
consumers' confidence in this new means of payment.

Furthermore, in the specific context of the Information Society and Electronic
Commerce, the Commission has already recently adopted a number of measures
including the proposal for a directive on the legal protection of services based on. or
consisting of, conditional access and the proposal for a directive on electronic
signatures. In addition, in the field of secure payment systems for electronic
commerce, the Commission has co-funded several industry-wide R&D initiatives
under various information and telecommunications technology programs [6] .

The Commission has already recently issued a Recommendation [7] concerning
transactions by electronic payment instruments and in particular the relationship
between issuer and holder, thereby setting out the minimum transparency,
responsibility, liability, and redress requirements. The Commission has undertaken to
monitor its implementation until the end of 1998. If implementation is not found to be
satisfactory, the Commission will propose a Directive in this domain.

Furthermore, the Commission has announced that it also intends to modernise and update an earlier 1987 Recommendation [1]  - with a view to establishing a clear framework
for the relationship between acquirers and acceptors in respect of electronic payment
instruments. In this context, the Commission may take into consideration the
possibility of applying particular conditions to the collection of payment cards so as to
take into account the absence or repetition of fraud. This would contribute to reducing
the risk factor of the payment instrument and the underlying system.

E.g. project AC026 SEMPER - Secure Electronic Marketplace for Europe.
Communication from the Commission to the European Parliament, the Council, the European Monetary
Institutes and the Economic and Social Committee: "Boosting customers' confidence in electronic means of
payment in the Single Market"; COM(97) 353 final of 09.07.1997; O.J. L 208 of 02.08.1997, p. 52.

Commission Recommendation 87/598/EEC of 8 December 1987 on a European Code of Conduct relating
to electronic payment (relations between financial institutions, traders and service establishments, and
consumers), O.J. N' L 365 of 24 December 1987, page 72.

**16**

_**'7.7**_

**Annex 3**

**The corresponding Community regulatory framework**

The present annex briefly summarizes the key elements of Community law making up the
regulatory framework within which financial, and in particular payment services, are offered,
mediated and used.

The primary source of law is the EC Treaty. Firstly, as an indispensable precondition for the
integration of domestic financial markets and, thereby, a Single Market for financial services,
articles 73b to 73g of the EC Treaty introduce the regime of free movement of capital and
payments within the Community and in respect of third countries. Secondly, articles 52
(freedom of establishment) and 59 (freedom to provide services) of the Treaty are
cornerstones of the Single Market edifice for financial services in that they enable firms
###### respectively to set up (and be authorized) in one Member State, under the supervision oï^ that

Member State's authorities, as well as to freely provide services throughout the Community
under the single authorization of the Member State of establishment.

The secondary source of law in the field of financial services is embodied in the layer of
Community legislation devoted to giving effective application to the Treaty provisions
recalled.

This has first and foremost been achieved by way of coordinating the provisions relating to
the taking-up and pursuit of the business of financial institutions, notably those of credit
institutions, investment firms and insurance undertakings. These provisions have been
accompanied and supported by a number of specific provisions harmonizing the basic rules of
prudential supervision.

Amongst the directives in the field of financial services is a Council Directive on the
prevention of the use of the financial system for the purpose of money laundering [g] . Based on
the recognition that money laundering is often carried out in an international context, so that
the criminal origin of the funds and its proceeds may be better disguised, the directive sets the
basis for international co-ordination of a non-penal nature, placing a number of requirements
on Member States: notably, a requirement to prohibit money laundering, requirements on
credit and financial institutions to identify their customers and to record transactions
exceeding certain amounts, requirements on institutions to examine and report any
transactions which they regard as likely to be related to money laundering, and a requirement
that authorities responsible for combating this phenomenon co-operate with credit and
financial institutions and their supervisory authorities.

Council Directive of 10 June 1991; OJ L 166/77 of 28.6.91.

17

l < v

Although the financial services directives are targeted primarily at the financial service sector,
they are also concerned with the rights and interests of consumers. They contain certain
provisions that safeguard consumers' rights to correct and complete information, protect their
legal interest and provide access to means of redress.

Recently, pressure has been building up to reinforce the concept that the single market for
financial services is not just for business. In May 1996 the Commission decided to issue a
Green Paper on _Financial services: meeting consumers' expectations_ to have a
comprehensive debate on consumer policy in financial services. On 26 June 1997, the
Commission adopted a follow-up Communication on _Financial services: enhancing_
_consumer_ _confidence_ _[10]_ _._ The Communication announces a series of forthcoming initiatives,
some of which have already been launched (e.g. an extension of the recommendation on new
means of payment) or are in the process of being launched, including a future proposal on
distance contracts for financial services.

COM(97)309 final of 26.6.1997.

18

**3o**

#### ISSN 0254-1475

## COM(98) 395 final

# **DOCUMENTS**

#### EN 09 10 Catalogue number : CB-CO-98-432-EN-C ISBN 92-78-37888-7

**Office for Official Publications of the European Communities**

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