Payment Processors and the AML Standards They Must Comply With

Payment processors are pivotal in the contemporary financial landscape, facilitating secure and reliable transactions between enterprises and clientele globally. Like various other financial services, payment processors are susceptible to the illicit activity of money laundering (ML), which has caught the attention of regulatory bodies.

In the previous year, the German regulatory authority, BaFin, temporarily suspended accepting new customers by Unzer E-Com, a payment processor, citing inadequate measures to address the risks associated with money laundering (ML) and terrorist financing (TF).

To mitigate the risk of regulatory penalties and uphold client trust, payment processors must comprehensively understand the necessary measures to be implemented in combating money laundering (ML) and other illicit activities. The comprehension of both local and global anti-money laundering (AML) requirements, which may exhibit variances across different jurisdictions, is imperative.

Continue reading to explore how payment processors can effectively manage various aspects related to anti-fraud measures and regulatory compliance.

The Operation of a Payment Processor That a Third Party Provides

A third-party payment processor, a payment gateway, oversees the bankcard transaction process to facilitate seamless online transactions between buyers and sellers.

Payment processors function by acquiring bank card information, subsequently subjecting it to a thorough verification process in conjunction with the respective financial institution to ascertain authorization. The payment processor will notify the user’s financial institution upon receiving approval, thereby approving the funds transfer to the merchant’s designated account.

Third-party payment processors, such as PayPal, Stripe, and Square, are commonly utilized in various industries.

Comparison of Merchant Account Providers and Third-Party Processors

In contrast to payment processors, which function as intermediaries, merchant account providers extend dedicated accounts to businesses for payment processing. Versions of this nature are commonly established through acquiring banks or financial institutions.

Both third-party processors and merchant account providers offer distinct advantages, which vary based on the specific requirements of a given business.

Third-party processors provide a streamlined and convenient solution, offering pre-established infrastructure and user-friendly functionality. In contrast, merchant account providers afford merchants greater autonomy and flexibility, allowing for enhanced control and tailored customization capabilities. It is imperative for businesses to thoroughly assess their specific requirements, transaction volume, compliance obligations, and desired level of power before making a well-informed decision regarding the most suitable solution.

Checklist for a Third-Party Processing of Payments

Before selecting a third-party payment processor, it is imperative to ascertain whether it provides the following features:

A diverse range of payment options is available. The optimal payment processors provide a diverse array of payment options to cater to customers’ varying requirements effectively. The available payment options encompass credit and debit cards, digital wallets like Apple Pay, bank transfers, and alternative payment methods like cryptocurrencies.

• Security. Ensuring secure transactions is of utmost importance for any payment processor. The processor should possess comprehensive security measures, including encryption protocols, fraud detection systems, and internal testing procedures.
• The scope of influence extends worldwide. For merchants with an international customer base, their chosen payment processor must possess the necessary infrastructure to accommodate multiple currencies and facilitate global payment functionalities.
• The provision of dependable customer support services. Responsive and professional customer support is imperative for merchants to address any issues or inquiries about transactions efficiently.
• Anti-Money Laundering (AML) compliance. The concept of security is intricately linked with the imperative of adhering to anti-money laundering (AML) compliance measures. In specific jurisdictions, it should be noted that third-party payment processors may currently lack the obligation to adhere to anti-money laundering (AML) regulations. A prudent and conscientious processor would invariably implement anti-money laundering (AML) measures, considering the inherent susceptibility of processors to money laundering and other illicit financial activities.
• Effortless assimilation and solutions optimized for seamless mobile compatibility. The seamless integration of payment processors with a merchant’s website and a user-friendly interface is paramount. The requirements above encompass comprehensive documentation, a well-defined application programming interface (API), versatile plugins, and robust developer assistance. In light of the expanding landscape of mobile e-commerce, payment processors must provide mobile-centric solutions that cater to the needs of this platform. This includes providing a portable software development kit (SDK) that facilitates seamless integration into mobile applications.
• The pricing structure is characterized by its transparency. Payment processors must adhere to the principle of transparency in their pricing structures, ensuring the provision of clear and comprehensive fee schedules.
• Reporting and analytics. A payment processor of high reliability should offer comprehensive reporting tools and valuable insights. The provided features encompass comprehensive transaction reports, advanced analytics capabilities, and up-to-the-minute data for monitoring and evaluating sales performance, customer behavior, and payment patterns.

Compliance With AML Regulations Is Required of Payment Processors

Payment processing regulations exhibit variability based on the jurisdiction in question.

In the European Union, third-party processors are classified as AML-regulated entities. Thus, they must adhere to the Anti-Money Laundering Directives (AMLD) and the Payment Services Directive (PSD2).

In the United States, it is generally observed that the Bank Secrecy Act (BSA) does not impose a mandatory requirement on payment gateways to adhere to anti-money laundering (AML) regulations.

According to the Federal Financial Institutions Examination Council, it has been observed that payment processors may present heightened risks related to money laundering and fraud, particularly in cases where they lack a robust mechanism for verifying the identities and business practices of their merchant clients. The potential for increased risks arises when the processor fails to conduct thorough due diligence on the merchants to whom they facilitate payment origination.

With the increasing global stringency of Anti-Money Laundering (AML) regulations, it is anticipated that payment processors will be compelled to adhere fully to AML legislation across various jurisdictions. Organizations that fail to adhere to anti-money laundering (AML) and due diligence obligations are subject to multiple consequences, including financial penalties, harm to their reputation, and the potential loss of clientele.

Hence, it is strongly advised that payment processors adhere to foundational anti-money laundering (AML) regulations, irrespective of their current non-mandatory status. The following items are encompassed within this category:

• Implementing Customer Due Diligence (CDD) procedures, encompassing Sanctions Screening, is of utmost importance in ensuring compliance with regulatory requirements
• The task at hand involves the appointment of an individual to assume the role of a money-laundering compliance officer (MLCO)
• Ongoing review of internal practices
• Transaction Monitoring.
• Employee training

By ensuring strict adherence to Anti-Money Laundering (AML) regulations, payment processors play a crucial role in upholding the financial system’s integrity and mitigating the risks associated with financial crime. The adherence to Anti-Money Laundering (AML) requirements fosters a sense of trust among merchants, buyers, and regulatory bodies, thereby showcasing a steadfast dedication to upholding responsible financial protocols.