Checkliste § 25i Abs. 2 KWG | Checklist section 25i para. 2 KWG | PayTechLaw

KYC and the distribution of e-money: Do I have to or not? Section 25i para. 2 German Banking Act (KWG)

The German legislator transposed the requirements of the 4th EU Anti-Money Laundering Directive (AMLD 4) into German law on 23 June 2017. At that time, many market participants (including ourselves) were full of hope. The parties concerned wanted practical rules and, above all, more clarity. A good year later, many have become disillusioned. This certainly applies to the desired clarity regarding the distribution of e-money products (such as prepaid credit cards). Many merchants still do not know under what conditions they are allowed to sell e-money (in German) without having to identify their customers. But particularly in this aspect, legal certainty would be very important because an obligation to identify customers at the point of sale would effectively mean the end of the distribution of many e-money products. Hardly any customer would be prepared, for example, to identify themselves at the supermarket checkout with an identity card in order to buy a prepaid credit card for 25 euros. PayTechLaw sympathises with those affected and aims to provide a little more clarity with this post and the interpretation of Section 25i para. 2 KWG.

What we know and what we don’t know

We know that persons who distribute e-money (distribution outlets) are generally obliged to identify their customers. In addition, the distributors must determine whether the customer is a so-called politically exposed person (PEP-check). But we also know that hardly any distribution outlet would be in a position to fulfil these obligations at the point of sale. The customer at the point of sale would most likely not accept this. And also the customers standing in line behind them would not accept this. It is therefore of paramount importance for the distribution outlets that there is an exception to the principle set out above.

The identification as well as the PEP-check are not necessary if the conditions set out in Section 25i para. 2 KWG are met. In other words, a distributor can, in principle, sell e-money like any other commodity if the conditions for the exception are met. That sounds pretty good, doesn’t it? So all you would have to do as a distributor would be to read this Section 25i para. 2 KWG and you would know exactly when you would have to identify a customer and when not. In theory, this is correct.

In practice, however, it is often unfortunately not quite clear whether the conditions for the exception are met. One reason for this is that we have a fairly new law on which there have not yet been any court decisions. Additionally, the legislator has not made much of an effort to phrase the law clearly on this point. The German financial supervisory authority BaFin is also not of any great help to us: In its current draft of the interpretation and application notes regarding the Anti-Money Laundering Act, BaFin only repeats the equally unclear legislative explanatory memorandum. Clarification of any open issues? Not at all!

How we see it – the PayTechLaw view of Section 25i para. 2 KWG

We also do not know how the courts will decide one day. But we do have an opinion on how we can interpret the prerequisites for the exception. And we are happy to share this opinion with you. Let us take a detailed look at Section 25i para. 2 KWG. In the table below, we have provided the text of the law in the left-hand column. In the right-hand column you will find an explanation of how we interpret the individual passages:

Legal text PayTechLaw interpretation
In the cases listed in paragraph 1 and notwithstanding Section 14 of the Anti-Money Laundering Act, credit institutions do not need to comply with their duties stipulated in Section 10 para. 1 numbers 1 to 4 of the Anti-Money Laundering Act, if By phrasing it like this, the legislator tells us that e-money may be distributed without identifying the customer if the following conditions are met. This exception applies not only to credit institutions, but also to distribution outlets. This can be concluded from the reference to Section 25i para. 2 KWG in Section 10 para. 7 sentence 2 of the German Anti-Money Laundering Act (GwG).
1.   the payment instrument cannot be recharged or if a rechargeable payment instrument can only be used domestically and if the payment transactions it can be used for are capped at EUR 100 per month, It is our interpretation that two requirements result from this wording:

– If e-money is rechargeable, then it may only be used in Germany. This means in particular that prepaid credit cards are excluded from the exception if they can be used on the internet.

– You can pay a maximum of EUR 100 per month with e-money. In addition, we believe that you can only buy e-money for a maximum of EUR 100 per month.

In our opinion, the phrase “payment instrument” refers to the product variant used by the customer. If, for example, there is a prepaid credit card available in two product variants (with and without identification), then it is necessary to check whether the above requirements are met for the product variant without identification. This also applies if the payment medium (e.g. a plastic card) is not exchanged when the product variant is changed.

2.   the electronically stored amount does not exceed EUR 100, This means that for each e-money product distributed without identification, the maximum credit balance at any time may not exceed EUR 100. For non-rechargeable products, this means that the nominal value of the e-money product may not exceed 100 euros.
3.   the payment instrument is exclusively used for the purchase of goods and services, This requirement means that the e-money product must not be used for P2P payments or ATM withdrawals. There are people who also believe that the e-money product may not be used to buy vouchers or other e-money because vouchers and e-money are not goods or services. We think this is incorrect because the concept of what constitutes goods and services is very broad under the current definition under European law.
4.   the payment instrument cannot be acquired or recharged with anonymous e-money, This means that e-money distributed without identification must not be paid for with anonymous e-money. If technically possible, this should be achieved by means of a technical solution (e.g. an electronic block of sales). We believe, however, that it is also sufficient if this condition is ensured operationally (e.g. by appropriate training of the checkout staff and regular spot checks). Only if an operational solution does not work do we consider it necessary to switch to a technical solution.
5.   the credit institution sufficiently monitors the transactions or the business relationship in order to enable the discovery of unusual or suspicious transactions, and It follows from this requirement that appropriate monitoring must be carried out in order to be able to identify suspicious transactions. In our opinion, this monitoring must done by the issuer of the respective e-money product, as distributors are not involved in the processing of payments with the e-money product. Distributors should ensure that the issuer actually performs such monitoring.
6.   the redemption of the e-money against the issue of cash is excluded, unless the redemption of the e-money relates to a value of EUR 20 or less. This requirement is self-explanatory. In practice, this requirement is usually unproblematic because the redemption against the issue of cash is often practically excluded due to the fact that the issuer does not have branches in which the customer could receive cash.
For the threshold of sentence 1 it is immaterial whether the e-money holder acquires the e-money through one process or various processes, provided there is evidence to suggest that they are linked. It can be deduced from this wording that the EUR 100 limit applies cumulatively, i.e. the purchase of several e-money products must be added together to calculate if the cap of EUR 100 has been reached. If, for example, a customer buys an e-money product for EUR 100 and then decides after payment at the checkout to buy another e-money product for EUR 100, the cap of EUR 100 would be exceeded, so that the customer would have to be identified because of the purchase of the second product. In our opinion, this accumulation should only take place if there is a link between the transactions which is obvious to the cashier. From our point of view, monitoring (e.g. noting down and comparing the name of each customer) is not necessary.

 

For all those not so fond of reading, we have compiled a “checklist Section 25i para. 2 KWG” regarding this topic.

Is there a disclaimer?

Of course. We are lawyers. ? In all seriousness: Everything written in this entry is correct, because it reflects our opinion. And opinions are not right or wrong, but rather justified or unjustified. We, of course, do not know whether you or BaFin or the courts also share our opinion.

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