Regulatory risks for companies outside the financial sector

Part 1: Money Remittance Business

Within this publication series, we present typical cases, in which companies outside the financial sector can be confronted with regulatory issues. This article covers the rules applicable to the so-called "money remittance business", which can lead to licence requirements with regard to any third party money transfer.

In business transactions, it can be practical for a debtor to not directly transfer an owed amount of money to the creditor (e.g. by bank transfers), but to have a third party involved for such purpose.

In many cases, such a third party is "closer to the customer" or already has the infrastructure, which is required to forward monies without much effort, in place. In some cases, it can also make sense to formally interpose a third party, for example in order to reduce the number of invoices addressed to a specific debtor/customer.

From a supervisory point of view, however, these constellations run the risk to be qualified as money remittance business within the meaning of the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz, "ZAG").


Rules of money remittance business

The term "money remittance business" is defined in Section 1 sentence 2 no. 6 ZAG. In brief terms, the rather complex definition can be boiled down to the statement that, as a rule, any interposition or involvement of a third party for the purposes of a transfer of an amount of money from a debtor (payer) to a creditor (payee) is subject to authorization.

The definition is meant to serve as a catch-all clause to cover constellations which otherwise would not be subject to the ZAG – and, therefore, shall avoid or close gaps in payment services supervision law.

In determining whether certain activities or services are to be qualified as constituting "money remittance business", the law does not look at who the third party was involved by (the payer or payee), what the chronological order of payments is, which payment method is used, or whether the third party formally enters into the position of the creditor/debtor of the underlying contract.

With this in mind, many everyday business cases can bring along at least a risk of involving services which are to be qualified as money remittance business under the ZAG – with all consequences associated therewith.


Focus of the supervisory authorities

The German Federal Financial Supervisory Authority ("BaFin") has declared that fighting illegal money remittance business and fighting money laundering and terrorist financing within the context of money remittance business are in the focus of supervision in the year 2020.

This underlines the particular importance that the supervisory authorities attaches to money remittance business. The level of supervision in this area is expected to further increase in the coming years.


Typical cases

In the recent past, there have been several cases in which money remittance business was the issue of debate and the basis for supervisory measures taken by the BaFin.

One frequently encountered case is the contractual "bundling" of service relationships with one service provider. This is done to allow the customer to pay for many different services with only one single payment. In such cases, for example, one creditor may issue invoices for services rendered by other creditors (in his own name or in the name of another), and the customer only makes one payment in the aggregate amount. Wherever any such "one-stop shopping" model exists, the requirements of money remittance business could possibly be met.

In this context, BaFin has, for example, investigated full-service offering of leasing providers. The question of whether and for which services leasing providers require an (additional) licence under the ZAG is currently still under discussion.

A particular need to bundle payment flows can exist within groups of companies. In group constellations, it can often make perfect economic sense to have only one group company to process payments in relation to customers, business partners and banks. Such constellations can, under certain circumstances, benefit from the "group privilege" under the ZAG. However, BaFin interprets the group privilege provisions in a very restrictive manner. In practice, it will therefore be paramount to ensure that the requirements for an applicability of the group privilege, as agreed upon by and between BaFin and various business associations, will be met.

Finally, there are constellations with an elevated risk of abuse. This can for example be the case, where German current accounts are used to transfer funds from Germany to other countries, for example with the aim of having those funds used for participating in transactions involving crypto currencies or securities. The same applies to clearing and trust systems, such as Hawala systems, which, by their very nature, are particularly susceptible to money laundering and terrorist financing, especially due to the lack of transparency inherent to these systems.

In the recent past, BaFin and the law enforcement authorities have increasingly intervened in the latter two cases. Therefore, not only in these constellations, companies should apply special caution when transferring money on behalf of their customers and keep an eye on a possible licensing requirement for their activities.


Severe consequences

If and to the extent that services which are to be qualified as money remittance business are provided commercially, or on a scale that requires a commercially equipped business operation, a licence from the competent supervisory authorities is required.

The provision of money remittance business without the relevant licence has severe consequences. These consequences range from interventions by the authorities, the imposition of sanctions on the basis of the underlying criminal and administrative penalty provisions, to personal (civil) liability of the involved persons – and, additionally, can certainly lead to a significant loss of reputation.

It is therefore recommended to assess the risk of transfer of funds qualifying as money remittance business, no matter how economically reasonable the structure of the transaction may be, in order to determine whether the services envisaged or already carried out give rise to a licensing requirement and/or whether such a requirement can be avoided if necessary. Only in this way, legal compliance can be ensured.


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