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![]() - Consultation auprès des Canadiens et des Canadiennes - Présentation de First Data Loan Company en réponse à la consultation du ministère des Finances Canada sur l'amélioration du régime canadien de lutte contre le blanchiment des capitaux et le financement des activités terroristes : Dans le cadre des consultations, les personnes intéressées peuvent faire des observations sur ce site dans les deux langues officielles ou dans la langue officielle de leur choix. Les observations affichées sur le site de Finances Canada le sont dans la (ou les) langue (s) dans laquelle (lesquelles) elles ont été reçues. Box 25, Commerce Court West July 11, 2005 VIA E-MAIL Ms. L. Hemmings Nicolas M.R. Burbidge, Esq. Yvon Carriere, Esq. Ms. Dianne Lafleur Re: Federal Review of the AML Legislation – First Data Loan Company, Canada – Merchant Acquiring Services We refer to the discussions which we have had with Lynn and Nick regarding First Data Loan Company, Canada (the "FDC Loan Company") and its affiliates with respect to the Canadian anti-money laundering ("AML") legislation. Since the date of those discussions, the Federal Government has released its Consultation Paper entitled "Enhancing Canada’s Anti-Money Laundering and Anti-Terrorist Regime". Please accept this letter as a submission on behalf of the FDC Loan Company in response to the Consultation Paper. The financial activity which we wish to discuss is the merchant acquiring business, generally, and the merchant acquiring business as carried on in Canada by the FDC Loan Company, specifically. We understand from our discussions with you that Canada’s AML rules are predicated on the risk associated with the particular activity. This principle is confirmed in the Consultation Paper, which recognizes that "certain types of financial products present limited risks of being used for criminal purposes". We believe that, from an AML standpoint, the merchant acquiring business poses little risk; moreover, the merchant acquiring business carried on in Canada by the FDC Loan Company poses even less of a risk. Furthermore, although the AML risks may be insignificant in connection with the merchant acquiring business, we believe that those risks are more adequately managed by the extensive fraud and other operational controls which the FDC Loan Company has in place in connection with the merchant acquiring business. Many Canadian merchants, including start-up businesses and businesses with small amounts of capital, have been able to obtain merchant acquiring services from the FDC Loan Company. Often, the merchant agreements are entered into in a remote environment rather than in a face-to-face setting. If AML procedures requiring "face-to-face" identification were to be imposed on the merchant acquiring business carried on by the FDC Loan Company, many small Canadian merchants would bear the brunt of these requirements, with the result that there would be fewer merchants able to obtain merchant acquiring services. In connection with the merchant acquiring business carried on by the FDC Loan Company, the settlement funds of the merchant are "locked in" and the FDC Loan Company does only one thing with those settlement funds, and that is to transfer them to the account of the merchant with a Canadian financial institution. Since the Canadian financial institution will have undertaken its own thorough AML procedures before accepting the merchant as a customer, the merchant will already have passed the AML test and there is no value, from an AML standpoint, in having the FDC Loan Company subject the merchant to similar AML procedures. The Consultation Paper recognizes that face-to-face confirmation is not always possible and, when it is not possible, that customer identification measures should be adopted so that non-face-to-face transactions "can be conducted with the same confidence and surety as when a customer is physically present". Specifically, the Consultation Paper recommends that procedures be put in place which "would ensure that customer identification (in connection with non-face-to-face transactions) be as reliable as in face-to-face situations. In the circumstances, therefore, we submit that the AML objectives would be thoroughly satisfied in connection with the merchant acquiring business carried on by the FDC Loan Company if the policies were revised so that the cheque clearing exemption currently in the legislation were expanded to provide that the customer identification requirement could be met by having funds of the merchant wired to, and accepted by, a Canadian financial institution at the time that settlement funds were first forwarded to the merchant following the signing of the merchant acquiring agreement. We will now elaborate on the reasoning behind this submission. Detailed Comments1. The FDC Loan Company is an affiliate of First Data Merchant Services Corporation ("FDMS"). FDMS is a subsidiary of First Data Corporation ("FDC"), and is the world’s leading provider of merchant processing services with over 19.8 billion transactions processed in 2004. As a leader in electronic commerce and payment services, FDC serves approximately 4.1 million merchant locations, 1,400 card issuers and millions of consumers.2. FDMS provides merchant processing services to acquiring banks, and also participates in various joint venture acquiring alliances with financial institutions. The FDC Loan Company receives merchant processing services from FDMS. FDMS also processes payments for approximately 130,000 Internet merchants. Processing services include:
3. Although the Canadian banks have carried on a merchant acquiring business in connection with their credit card business for many years, the nature of the business was not well understood in Canada until entities such as FDC began carrying on business in Canada. The fact that FDC established the FDC Loan Company, whose primary business is merchant acquiring, gave Canadian regulators, such as OSFI and CDIC, an opportunity to better understand the nature of this business. The FDC Loan Company has been in a constant dialogue with OSFI regarding the merchant acquiring business. In this regard, I am enclosing a copy of a presentation which FDC prepared for OSFI on April 21, 2005. Commencing at page 4, the presentation gives an excellent explanation of the merchant acquiring business and the role which the FDC Loan Company plays in that business. 4. You will note from the presentation that the essence of the merchant acquiring business is the facilitation of the ability of credit and debit cardholders to make purchases at a merchant location using their cards and to subsequently settle these transactions with the issuers of the cards and to then fund the merchant.5. For the purposes of our discussions regarding the merchant acquiring business and the AML issues that relate to that business, let me set out two examples which focus on the role which an acquiring entity, such as the FDC Loan Company, plays in connection with a credit card or a debit card transaction:
6. an AML standpoint is that the settlement funds which the FDL Loan Company is holding for the Merchant are "locked" funds which can be disbursed by one, and only one, method: through the transfer of those funds to the account which the Merchant has with the Current Account Financial Institution. Although the settlement funds may be disbursed by the Merchant out of its account with the Current Account Financial Institution, that is an ordinary course transaction for the purposes of the AML legislation and the Current Account Financial Institution will presumably have undertaken the required "know-your-customer" procedures (the "KYC" procedures") when it opened the account for the Merchant. 7. The role of a merchant acquirer, such as the FDC Loan Company, in connection with the debit card transaction is similar to its role in connection with a credit card transaction:
"Although criminals can use a number of methods to launder money or finance terrorist activities, certain types of financial products present limited risks of being used for criminal purposes. The Government, and FATF Recommendation 5, recognize that it may not be necessary to impose client identification and record-keeping requirements in these situations." FATF Recommendation 5 "...Financial institutions should apply each of the CDD [client due diligence] measures [under Recommendation 5]..., but may determine the extent of such measures on a risk sensitive basis depending on the type of customer, business relationship or transaction. The measures that are taken should be consistent with any guidelines issued by competent authorities. For higher risk categories, financial institutions should perform enhanced due diligence. In certain circumstances, where there are low risks, countries may decide that financial institutions can apply reduced or simplified measures...." In our view, the risks associated with merchant acquiring transactions, particularly those transactions involving the FDC Loan Company, are minimal and do not warrant extensive regulatory oversight. 10. The FDMS Credit Risk Management Group focuses on fraud and risk management related to merchant acquiring. The primary focus of these activities is on potential merchant fraud and credit risk, although cardholder fraud is also a concern from a credit standpoint. These services are performed by FDMS on behalf of the FDC Loan Company and include:
12. Potential merchant money-laundering and/or fraud can be detected through the initial diligence procedures and the ongoing monitoring procedures outlined above. Credit underwriting procedures help to verify the identity of the merchant and its principals, and to ensure the legitimacy of its business and practices. Through the underwriting process, FDMS also develops a profile of what the merchant transaction activity should be in terms of the expected annual credit card volume and the expected average sale amount. FDMS can then detect suspicious activity based on parameters and rules which identify variances from the expected sales volume or average sale as well as parameters and rules which identify multiple sales from the same source, recurring dollar amounts, and excessive credits. Once suspicious activity is detected, further investigative steps are performed to determine the nature of the transactions in terms of suspicious activity. 13. FDMS also performs extensive due diligence on behalf of the FDC Loan Company, including reviewing its existing credit policy and compliance with that policy; as well as reviewing its existing credit and fraud management processes and documentation, a detailed portfolio review and a complete analysis of historical losses. 14. The entry into the Canadian merchant acquiring marketplace of entities such as the FDC Loan Company has been of significant benefit to Canadian businesses of all sizes, including small businesses. Due to its extensive system of credit analysis, the FDC Loan Company is able to offer merchant acquiring services to many small, family-owned Canadian businesses which were previously not able to obtain merchant acquiring services. 15. Many of these small Canadian businesses are located in remote areas of Canada and/or conduct their business online. 16. with the larger merchants to whom it is providing merchant acquiring services, it is often impractical for the FDC Loan Company to have face-to-face meetings with some of the smaller merchants or those in a remote location and to obtain "in person identification" as a condition of offering merchant acquiring services to these merchants. 17. The Consultation Paper recognizes the importance of non-face-to-face transactions and the impracticality of requiring in-person customer identification measures in connection with all non-face-to-face situations: "New technologies and business models are continually being developed by the financial sector in order to respond to demands for faster, more flexible client service. These services include non-face-to-face transactions (NFFTs)-transactions and account openings where the customer cannot be physically present at any stage in the process. These transactions, which may occur over the Internet or other interactive computer services, or over the telephone or other electronic data transmissions, are increasingly anonymous, creating a money laundering and terrorist financing risk. To the extent possible, financial institutions and intermediaries should meet their customers in person and ascertain their identity by referring to a government-issued identity document. However, when this is not possible, customer identification measures should ensure that NFFTs can be conducted with the same confidence and surety as when a customer is physically present. The FATF and the Basel Committee paper Customer Due Diligence for Banks echo these concerns. FATF Recommendation 8 "Financial institutions should pay special attention to any money laundering threats that may arise from new or developing technologies that might favour anonymity, and take measures, if needed, to prevent their use in money laundering schemes. In particular, financial institutions should have policies and procedures in place to address any specific risks associated with non-face to face business relationships or transactions." FATF Recommendation 9 "Countries may permit financial institutions to rely on intermediaries or other third parties to perform...the CDD process or to introduce business....Where such reliance is permitted, the ultimate responsibility for customer identification and verification remains with the financial institution relying on the third party...." Basel Committee paper Customer Due Diligence for Banks "In accepting business from non-face-to-face customers: 18. Proposal 1.9 in the Consultation Paper contemplates that reporting entities could establish appropriate non-face-to-face client identification requirements:
20. Fortunately for the Canadian merchants who require acquiring services but who cannot easily meet face-to-face with representatives of the FDC Loan Company, the method by which the FDC Loan Company carries on business incorporates an AML procedure which is the functional equivalent of the cheque clearing procedure. 21. As indicated above, the FDC Loan Company transfers all settlement funds owing to a merchant to the merchant’s current account with a Canadian financial institution. This procedure is clearly the functional equivalent of the cleared cheque procedure. The transfer to the Canadian financial institution will only be successful if the merchant has in fact an account with the Canadian financial institution. If the merchant has an account with the Canadian financial institution, it should be on the basis that the merchant passed the AML verification procedures which are imposed upon the Canadian financial institution when opening the account. The arrangement of only transferring settlement funds to an account of the merchant with a Canadian financial institution will ensure that the settlement funds never escape the AML "net" required by the Canadian legislation. Submission22. Proposal 1.9 of the Consultation Paper suggests certain measures to confirm customer identification non-face-to-face transactions. We suggest that one "measure" that should be adopted pursuant to Proposal 1.9 would be that the customer identification requirements could be met through the funds transfer method outlined above.23. In providing for this procedure, it is important that the AML legislation specifically recognize that the confirmation that the merchant has an account with a Canadian financial institution will only occur after the merchant and the FDC Loan Company have entered into a merchant acquiring relationship and not at the time the parties enter into the merchant acquiring arrangement. In other words, it will only be at the moment that the FDC Loan Company attempts to transfer funds to the merchant that the FDC Loan Company will be able to confirm that the merchant has an account with another Canadian financial institution. 24. In light of the importance of this timing issue to our submission, let me provide an example of the sequence we are proposing: Step 1 Merchant and the FDC Loan Company enter into a merchant acquiring arrangement; Step 2 Merchant undertakes a transaction whereby customers pay by way of a MasterCard or a debit card. Step 3 FDC Loan Company obtains the settlement funds from MasterCard and Interac and forwards those funds to the account which the merchant has with another Canadian financial institution. 26. If the payment system returns the funds that the FDC Loan Company attempted to transfer to the merchant, the reason would be that the merchant does not in fact have the account with a Canadian financial institution. 27. Allowing the verification to occur subsequent to the establishment of the merchant arrangement does not pose any AML risks because the AML risks are associated with the settlement funds and, by definition, the settlement funds will never be received by the merchant unless the merchant has in fact established an account with a Canadian financial institution. 28. Accordingly, we believe that our proposal deals thoroughly with the AML risks with which you are concerned and it also has the attractive advantage of allowing merchant acquiring services to be provided to merchants for whom it is not practical to meet in a face-to-face environment with representatives of the FDC Loan Company. Representatives of the FDC Loan Company and I would be pleased to meet with you to elaborate on this submission at your convenience. Yours very truly, John W. Teolis JWT/hjm Encl. c: First Data AML Group |
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