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De Nederlandsche Bank (DNB) has recently consulted on best practices for dealing with sub-merchants, an area of payment and e-money institutions business that poses potential money laundering risks.
The central bank launched a consultation on good practices regarding sub-merchants on December 12 last year.
With these good practices, the central bank said that it wanted to offer payment institutions and e-money institutions guidelines for managing risks associated with the direct or indirect provision of services to sub-merchants.
"This is a generic risk that applies across all of Europe with PSD2 or EMD2,” said Arie van den Bergen, owner of law firm Finnick.
“If you are providing payment services but your client has a lot of clients for whom it is executing payment transactions, then you should have a good overview of what is happening with the sub-merchants behind your client,” the Amsterdam-based lawyer explained.
The DNB noted in its consultation, which closed on January 25, that institutions are increasingly establishing agreements through their clients to provide services to sub-merchants.
“The key issue at stake for e-money and payment institutions is that the good practices contain extensive ongoing obligations as regards monitoring of sub-merchants,” said Juliet de Graaf, a partner at Osborne Clarke.
De Graaf told Vixio that these specific obligations generally do not directly follow from statutory law, but instead are based on open legal standards.
“In its Good Practices, DNB provides a far-reaching interpretation of these open standards, which e-money and payment institutions are expected to abide by once the Good Practices become final,” she said.
“Compliance with the Good Practices may entail significant additional effort from a risk and compliance perspective.”
Roderik Vrolijk, a partner at Stibbe, told Vixio that the draft guidance covers what firms should prepare for. “Payment institutions should now assess what the impact would be, as well as assessing whether they meet the expectations expressed by DNB in its draft guidance doc.
“We generally see consultation docs suddenly being published as proper guidance, so now is the time to prepare for the next step, starting with an impact assessment,” he advised.
The contents of the Good Practices follow from a thematic survey conducted by the DNB in 2022 among a number of e-money and payment institutions.
“The purpose of this survey was to gain insight into the integrity risks associated with the provision of services to sub-merchants,” explained de Graaf.
Sub-merchant engagements increase laundering risk
According to the DNB, providing services to sub-merchants involves an increased risk of money laundering and terrorism financing.
“The Good Practices fit in the trend of increased scrutiny by DNB on compliance with anti-money laundering and the combatting of financing of terrorism,” said de Graaf.
She continued that where the DNB originally targeted Dutch banks, it now seems to have extended its focus to the wider payments market.
“The Good Practices confirm that DNB applies a strict approach where it concerns AML/CTF and that DNB regards financial institutions as gatekeepers of the system.”
Vrolijk added that the DNB has conducted a lot of site visits and audits into AML compliance at Dutch payment and e-money institutions.
“This industry is notoriously lacking in this space. I can imagine if a platform pays funds to sub-merchants using their platform, this increases AML risks,” he said.
The lawyer explained that the recently closed consultation is the first step towards further mitigations against platforms being used for money laundering.
“It is good that DNB is taking the initiative here,” he commented. “However, we're still lacking guidance on what the practical reality is for sub-merchants.”
Going forward, Vrolijk said that the market would be served well by the regulator explaining how it sees these sub-merchants and whether and in which cases they need to be subject to AML screening by the payment institution.
"This is something that other regulators should look into, and makes perfect sense,” said van den Bergen. “The consultation intends to bring clarity to the market, as there has been a lot of uncertainty about expectations from DNB."
