Gift Cards In Trouble As EU Negotiates AML Regulation

September 12, 2023
Trade associations representing electronic money issuers, distributors and retailers have called on EU institutions to abstain from introducing mandatory customer identification for low-value prepaid cards.

Trade associations representing electronic money issuers, distributors and retailers have called on EU institutions to abstain from introducing mandatory customer identification for low-value prepaid cards.

The proposals have been put forward by the European Parliament and the Council of the European Union, as part of the incoming Anti-Money Laundering Regulation (AMLR).

Currently, the EU AML rules allow low-value prepaid products to be sold and used without customer identification, provided there is a proven low risk of money laundering and terrorist financing. 

This is set to change, however, as the exemption does not feature in the European Commission's proposal for the new AMLR, which is currently being negotiated by the EU’s institutions. 

According to a new lobbying push, the exemption has played a significant role in driving innovation in the e-money sector, as it enables uncomplicated access to vouchers and gift cards and protects personal data.

Furthermore, the trade associations say that it has been instrumental in fostering financial inclusion, providing access to electronic money services for a broad range of users, particularly underbanked or underserved people. 

“The possible disappearance of these gift cards or vouchers will have a major, negative impact on local economies' consumer choice and the value chain of such products,” they said.

The trade associations opposing the EU’s plans include the European Payment Institutions Federation (EPIF) and the Electronic Money Association (EMA). 

An overreaction

It appears that the exemption was removed over concerns that prepaid gift cards could be used for money laundering and terrorist financing purposes. 

There is some evidence for this. For example, in June, federal prosecutors in the US accused an 18-year-old Massachusetts resident of sending gift cards worth a total of $1,670 to someone he thought was a supporter of the Islamic State group.

A 2017 report from the United Nations Office on Drugs and Crime meanwhile warned that prepaid cards were increasingly being used for criminal purposes in Indonesia. 

But the trade associations feel that the commission’s plans are nonetheless misguided. 

"The commission is trying to solve a problem, but this is like using a cannon to shoot a mosquito,” said Atze Faas, payments advisor at EuroCommerce. 

Faas told Vixio that the proposed changes go too far, as these gift cards are often low value and low risk. 

“A criminal would need a lot of gift cards to get to any significant amount,” he said. “This will hit the average joe on the street who is trying to do good to his friends or family.

“Now, they will have to give up their name, address and more. It could spell the end for gift cards."

Nickolas Reinhardt, head of the EPIF secretariat, said the proposal is "not necessary and disproportionate". 

"There is a very low risk of such products being misused for illicit purposes. The regulatory regime governing the issuance of these products is already very strict and issuers comply with various statutory requirements,” he said.

"Today’s spending and loading limits are extremely low, with a limit of €50 for online transactions and €150 for offline transactions, and the issuers of such products carry out sophisticated measures to prevent any misuse.”

GDPR problems

Without the exemption, retailers selling such gift cards would be obliged to store customers’ personal information in a way that is compliant with the EU’s General Data Protection Regulation (GDPR). 

"We have spoken to members and they have been unenthusiastic about selling gift cards, should this go through,” said Alexis Waravka, head of digital and competitiveness at Independent Retail Europe. 

He explained to Vixio that retailers will need to perform customer due diligence and be very thorough at the point of sale. 

“This will mean asking for information such as name, address, tax numbers, which is a huge task, not to mention storing this information in a GDPR compliant way. Most consumers will feel very strange about this."

For many points of sale, the trade associations argue that this would be hard to implement and could drive up costs disproportionately. 

“If the buyer of an e-money gift card would have to provide identification details, such as at the supermarket checkout, such products will no longer be used by citizens and will vanish from the supermarket shelf,” said Waravka. 

Merchants will not want the additional burden either, Faas added. 

"If a consumer did want to get a gift card after these rules have been implemented, how would merchants store their details in a GDPR-compliant way?” he said. “Want an Amazon gift card? Get your passport out.

"Adding this requirement means at least five minutes more at the till."

Is it too late?

The debate over prepaid vouchers and gift cards has been ongoing in the EU for some time now.

The trade associations have tried before to get the exemption reinstated, considering that the commission first unveiled its AML proposals in the summer of 2021. 

However, it appears that the commission has not been persuaded. 

"The difficulty is that the commission doesn't want to address this exemption, so it is very uncertain at the moment,” said Waravka. 

He continued that the associations are trying to convince the Parliament and the Council, and have had some success with MEPs.

"The commission has said that because this is a regulation, no exemptions or exclusions should be included, but that doesn't fly as there are plenty of regulations that have exemptions,” said Faas. 

It is now expected that the new Anti-Money Laundering Authority (AMLA) will get a priority to put in place an exemption through its regulatory technical standards.

But that does not bode well for the payments ecosystem. 

“We’re then talking three or four years down the line,” said Faas. “They don’t even have a location for AMLA yet. What would happen in the years in between?"

Otherwise, Faas did say that the Irish government has been more receptive. 

"The Irish have understood and are lobbying in the Council to ensure that the exemption is kept,” he said. 

“However, I am unsure how much traction has been made."

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