ePayments Blocking: Facts and Conclusions

News and Analysis

On February 11th, the UK’s FCA has blocked the operation of ePayments due to the company’s failure to comply with AML requirements. Pursuant to the regulator’s request, ePayments froze nearly a million customer accounts. 

In this feature, we take a look at why regulators block financial services and how to avoid getting your money in trouble.

What Is Money Laundering?

There is clean and dirty money. If an artist sells his or her painting at an auction, this money is clean which can be proven by the receipt from the auction house. If an official takes a bribe, it’s dirty money and their legality cannot be proven.

To make their money clean, criminals launder it using fictitious companies, mixing money flows, or mirror transactions. Every year, nearly $2 billion of dirty money are legalized. In order to tackle this problem, the G7 nations established the FATF (Financial Action Task Force).

The FATF develops the anti-money laundering rules (AML). Financial regulators then make it mandatory for local companies to comply with AML rules. The most substantial part of AML is due diligence for suspicious companies and KYC (Know Your Customer).

Why KYC?

Financial companies request your ID to confirm your identity. They have to make sure that they deal with an actual person rather than a fictitious thing created to launder money. Still, if the user tries to launder money using the company’s services, it will inform law enforcement. Regulators can punish companies for KYC negligence. 

On the other hand, KYC is important for customers. Such companies work with legal counterparties, rarely find themselves blocked, and are legally bound to fulfill their obligations before their clients. 

What Payment Systems Have to Do With It

Electronic payment systems (EPS) are like banks working with electronic money. They have to comply with AML rules, and their customers have to undergo KYC procedures.

EPS offer their own prepaid cards. In order to have the right to do so, they have to do the following.

  • Get a license from the destination country’s regulator.
  • Obtain permission from an international payment system like Visa or Mastercard to issue cards.
  • Make sure the cards are sent only to verified users.

Why EPS Cards Can Be Blocked

Some EPS have cryptocurrency wallets that can top up the card. Such systems have to comply with the requirements for KYC procedures for cryptocurrency wallet owners and adhere to the card issuance rules.

Some payment systems violated those requirements and found themselves blocked.

  • In 2018, VISA ceased servicing Wavecrest, BitPay, and Bitwala. They were allowed to issue payroll cards but instead, they were issuing debit ones.
  • In 2018 again, the FSA of Japan blocked the accounts of online exchanges Eternal Link and FSHO due to KYC policy violations. 
  • The possible reason for ePayments’ blocking is that their users could accept and send up to $2,500 without verification, which is prohibited in the new AML directive.

How to Choose Payment System Without Account Freezing Risks

Here’s how you can make sure that your EPS complies with AML regulations.

  • Know their place of incorporation. European regulators are more strict than in offshore jurisdictions. Since 2001, the FCA has blocked 5,221 payment companies. For those reasons, Europe-based payment systems are more preferable.
  • Check their license in the country of incorporation. Find the payment system’s license on the regulator’s official website and see what it is legally allowed to do. For example, if it offers bank cards without the regulator’s permission, chances are the regulator will suspend its operation.
  • Check their license in your country. An EPS needs permissions from the countries it delivers its cards to. It either requires a separate license from each jurisdiction or a contract with an international payment system. Make sure the company in question works with the payment systems of your country.
  • See how strict is their KYC policy. A law-abiding payment system will ask you to undergo verification straight away. If you can accept payments without verification, chances are the regulator will suspend the company’s operation.
  • Carefully read terms and conditions. In most cases, people tend to agree to the rules without reading them. Still, there may be something surprising like the right to freeze the account without explanation.

How to Avoid Problems With EPS Account

An EPS may legally block your account. Here’s how you can minimize the chances of that happening.

  • Adhere to the terms of use. An EPS may forget to mention it does not service certain kinds of businesses but write about that in terms and conditions. Don’t violate the rules.
  • Use your real name. KYC is inevitable, so keep your funny pseudonym for a better cause.
  • Don’t use a VPN. Payment systems don’t hate VPN but if the output’s IP address does not coincide with your country’s IP, the system will likely see it as attempted theft and automatically suspend your account. Make sure you switch off VPN when working with an EPS.

Final Takeaways

Money-laundering is a very bad thing that helps criminals legalize their profits from corruption or human trafficking. For that reason, KYC is one of the inevitable measures when you deal with fiat payments. Even though it may not be in line with Bitcoin’s original philosophy, a strict KYC policy still signifies a law-abiding company, which minimizes your risks. 

The sad case of ePayments is a good example of why you should check everything before signing up for a payment service.

Written by Pavlo Skoroplyas

Translated and edited by Jenny Aysgarth

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