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A lack of common understanding on the scope and implications of the EU Funds Transfer Regulation 2015 (FTR 2015), which will be applicable from June 26, could lead to disruptions to transaction trade flows, warns Deutsche Bank.

The regulation will broaden the required information to accompany any transfer of funds that involve at least one European Union or European Economic Area-based payment service provider (PSP) and is designed to establish better traceability of funds to help combat cases of money laundering and terrorist financing.

The European Supervisory Authorities (ESAs) issued draft guidelines on the revised regulation in April and followed this with a consultation period lasting until the beginning of June. However, the short lead time may mean banks have underestimated the necessary groundwork, argues Deutsche in a recent white paper titled Funds Transfer Regulation 2015: a regional regulation with a global impact.

“Ensuring the safest possible regulatory framework that best equips regulatory authorities and the industry to combat money laundering and terrorist financing relies upon a common understanding and, ideally, consistent application of FTR 2015’s regulatory requirements,” head of regulatory management, institutional cash management at Deutsche, Stefan Fruschki, tells GTR.

“The dialogue of the consultancy phase on the regulatory guidelines should be used to this effect.”

The bank points out that there is significant room for interpretation within FTR 2015, with several aspects of the regulation prompting more questions than answers as it does not set out in detail what PSPs should do to comply.

Some key open issues highlighted include how to decide whether to execute, reject or suspend transactions lacking the required information; how to define a “repeatedly failed” transfer of funds; under what circumstances a name-number check is necessary to verify the accuracy of payee information received by a PSP; and under what circumstances it would be necessary to report non-compliant PSPs to the relevant regulatory authorities.

“While the ESAs’ draft guidelines provide further clarity, they intentionally remain limited in scope and do not aim to achieve maximum harmonisation of PSPs’ approaches to complying with FTR 2015,” says Fruschki.

“While this approach provides PSPs some flexibility to accommodate for different risk scenarios, it also carries some risk. A lack of clarity could harm the regulation’s effectiveness in achieving its principal aim of increasing the industry’s effectiveness in the fight against money laundering and terrorist financing.”

The bank also points out that the lack of clarity will mean differing processes built to accommodate the regulation which could lead to fragmentation in the regulatory landscape. This may not only lead to a negative impact on individual banks, but also on senior managers who are personally liable for the organisation’s controls.

“Even seemingly small ambiguities can have significant impacts on how different banks interpret FTR 2015 and, therefore, how they build their processes around it,” says Christian Westerhaus, head of product and strategy for institutional cash management.

“Furthermore, if the requirements are unclear or open to interpretation, disruptions to payment flows or unintended breaches of the regulation may occur, as well as a fragmentation to the regulatory landscape.”