PAYMENT ACCOUNTS AND CUSTODY WITH NON-BANK DIGITAL FINANCIAL INSTITUTIONS
The increasing prevalence of payment institutions, electronic money institutions, and other non-bank digital financial intermediaries has made it possible to open and operate international accounts and payment services through highly streamlined and extensively digitised processes.
These structures are entirely legitimate when operating within the scope of the applicable authorisations and regulatory frameworks. Precisely for this reason, however, in complex financial transactions it is essential to verify the actual nature of the service, the entity receiving the funds, the legal basis upon which it holds them, the safeguarding arrangements applicable to them, and the ultimate destination of the funds.
WHEN A PAYMENT STRUCTURE MAY BECOME A RISK FACTOR
A fraudulent scheme may seek to exploit the perception that an account held with a foreign digital financial intermediary is equivalent to a traditional bank account.
In reality, this is not necessarily the case.
Supervisory authorities clearly distinguish between banks and payment institutions or electronic money institutions. The FCA, for example, specifies that EMIs and APIs may provide services analogous to a payment account, but that client funds are subject to a safeguarding regime distinct from the protection afforded to bank deposits.
For institutions subject to PSD2, Article 10 provides for specific mechanisms to safeguard funds received from users for the execution of payment transactions, including the segregation of such funds from the institution’s other assets or, where applicable, insurance or guarantee arrangements.
CERTAIN RISK PATTERNS TO CONSIDER
- Presenting a payment service as though it were a bank
An entity may use terms such as “bank account,” “custody account,” “client account,” or “secure account,” thereby inducing the client to believe that they benefit from the same protections applicable to a bank deposit.
The verification process must instead begin with the fundamental question:
What is the precise legal nature of the relationship?
- Using the intermediary’s authorisation to create an appearance of credibility
The presence of a regulated intermediary within the payment chain does not automatically establish that all activities conducted by its client are lawful or that every related transaction has been approved by the intermediary.
It is therefore necessary to distinguish between:
regulated intermediary → intermediary’s client → ultimate beneficiary → beneficial owner of the funds.
The intermediary’s authorisation must be verified through official registers. The EBA maintains a central register of payment institutions and electronic money institutions authorised or registered within the EU/EEA.
- Confusing proprietary funds with client funds
One of the most important matters to verify is the effective implementation of safeguarding procedures.
The FCA provides that institutions subject to such obligations must adopt appropriate measures to protect clients’ rights and prevent the relevant funds from being used for their own account.
A documentary review must therefore reconstruct:
who received the funds → into which account → in what capacity → who exercised control over them → how they were segregated → where they were subsequently transferred.
- Using a chain of companies and intermediaries to make reconstruction difficult
A structure comprising multiple companies, holding companies, payment institutions, EMIs, trustees, digital accounts, and wallets does not, in itself, constitute unlawful conduct.
It may, however, render the reconstruction of the financial flows particularly complex.
For this reason, our analysis is not limited to the individual company but, where the available data permit, reconstructs the entire chain:
client → recipient company → payment institution → safeguarding account → subsequent intermediary → beneficiary → potential crypto wallet.
- Using purported custody mechanisms to induce further payments
A particularly sensitive indicator arises where the client is represented as already having their funds held or protected with a foreign intermediary and is subsequently requested to make additional payments in order to:
- increase the level of protection;
- complete KYC procedures;
- pay commissions;
- pay taxes;
- unlock the account;
- obtain the transfer of funds;
- recover sums previously paid.
The mere existence of a request for payment does not establish fraud, but it constitutes a circumstance that may warrant thorough documentary verification.
WHAT CAN BE VERIFIED
Our work may reconstruct, within the limits of information lawfully accessible:
- the identity and legal nature of the intermediaries;
- authorisations and registrations;
- the beneficial owners of the companies;
- contractual relationships;
- the nature of the account used;
- the entity legally holding title to the relationship;
- the stated safeguarding arrangements;
- available banking and financial documentation;
- payment flows;
- the beneficiaries of the transactions;
- the relationships among the various entities involved;
- any crypto transactions and the corresponding wallets;
- the chronology of the transactions;
- correspondence and communications with the intermediaries.
Supervisory authorities have already emphasised that formal compliance with safeguarding obligations must also be verified in practice. In a review conducted by the FCA of 11 non-bank PSPs, the FCA identified, among other matters, situations in which certain operators failed to segregate funds promptly or did not have sufficiently accurate procedures for determining the amount required to be safeguarded. These are findings arising from the FCA’s review of the operators examined, and not a general allegation against payment institutions.
OUR METHODOLOGY
We do not regard the presence of a payment institution or a foreign digital account as evidence of unlawful conduct.
We verify the documentary chain.
Our work consists in transforming fragmented information into an orderly reconstruction:
ENTITY → COMPANY → CONTRACT → INTERMEDIARY → ACCOUNT → TRANSACTION → BENEFICIARY → POTENTIAL WALLET.
Where possible, each step is traced back to its corresponding documentary source.
The objective is not to formulate allegations, but to enable a clear understanding of who received the funds, on what legal basis, who exercised control over them, and what path they followed.
The findings are organised into a technical and documentary dossier intended for the client and, where requested, for the legal and technical professionals appointed by the client.
We do not begin with suspicion.
We begin with verification.
We do not attribute responsibility.
We reconstruct the flows.