Exchange transactions from one euro denomination to another

Answer:

Yes, given the risk-based approach as required by the Wwft, we consider it necessary for institutions providing currency exchange transactions (exchange institutions) to establish and verify the identity of their customers for transactions that involve the exchange of a cash euro amount from one denomination to another. This is because cash exchange transactions entail a heightened risk of money laundering, even more so when euro banknotes are exchanged from one denomination to another, both from small to large denominations and vice versa. This is why we consider it necessary for exchange institutions to establish and verify the identity of their customers who wish to exchange euro banknotes from one denomination to another. Such a transaction entails such a high risk of money laundering that establishing and verifying a customer's identity as meant in Section 3(2), under a, of the Wft is warranted. Transactions in which customers exchange coins for banknotes, banknotes for coins, or coins for other coins have a lower inherent risk, and these Q&As do not apply.

Notes:
Pursuant to the Wwft, customer due diligence is required for a one-off transaction if the amount involves equals or exceeds EUR 15,000, and for two or more related transactions whose combined amount equals or exceeds EUR 15,000. The wording of the Wwft, the Explanatory Memorandum to the Wwft and the AMLD4 suggests that a risk-based approach must be used. This means that if there is a heightened risk of criminal activities, customer due diligence must also be performed for one-off transactions involving lower amounts.

Transactions of EUR 10,000 or more, in which cash is exchanged from one currency or denomination to another, must always be reported without delay to the Financial Intelligence Unit (FIU-NL). Adequate notifications can be made to FIU-NL only if the customer's identify has first been established and verified.

Substantiation

Exchanging small denominations to large denominations and vice versa entails a heightened risk of facilitating money laundering. National banks in the euro area have no longer issued any new EUR 500 banknotes since January 2019 responding to concerns that the denomination could foster illegal activities. Criminals use large denominations in such activities as drug trafficking, which often involve large amounts of cash. Although EUR 500 banknotes are legal tender, they can hardly be used in lawful economic transactions. The same applies to EUR 200 and EUR 100 banknotes, which are refused at most points of sale. This has increased the risk of exchange transactions involving large denominations being used to fund or pay for criminal activities.

An exchange institution is a financial enterprise that performs several cash transactions on a daily basis. It enters into short-term relationships with customers, many of whom are anonymous and are not resident in the Netherlands. In addition, cash is often delivered uncounted. Cash is not visible to authorities and is therefore anonymous. This means that exchange transactions entail a heightened risk of being used in money laundering and terrorist financing.

In view of the above, we consider it necessary that a customer's identity is established and verified for all cash exchange transactions from one euro denomination to another.

Subjective indicators that are relevant for exchange institutions

Directive (EU) 2015/849 contains a non-exhaustive list of factors that indicate potentially high-risk customers. Based on the list, firms that perform many cash transactions are considered to have a high inherent risk.

The Dutch Financial Intelligence Unit (FIU-NL) has published the following subjective money laundering indicators for exchange institutions:

• Money is repeatedly exchanged from small denominations to large denominations
• There is no legal economic explanation for exchanging a euro amount into a foreign currency amount
• Large amounts in foreign currencies, divided into small denominations, are exchanged to euros
• There is no legal economic explanation for the currencies exchanged and the frequency of the exchange transactions
• Several exchange transactions are effected at different exchange offices/banks or at different branches of those exchange offices/banks
• Money is delivered uncounted
• The suspected person refuses to explain the origin of the money
• There is an apparent intention to circumvent the notification limit
• Past studies have shown that the exchange of pounds sterling and Scottish pounds in small denominations outside the United Kingdom is often linked to drug trafficking.

The Financial Action Task Force (FATF) also provides subjective indicators of what it considers to be high risks for exchange institutions. These are

1. non-resident customers,
2. business that are cash-intensive en
3. anonymous transactions (which may include cash).

Risks we have observed in the market

We found repeated instances, as part of our investigation in early 2019, in which customers had decided not to proceed with a planned transaction once they were asked to present an identity document. Counter staff at the exchange institutions we investigated said they expected customers to try at another exchange institution or at a later time without having to present an identify document. With several exchange institutions located in a small geographical area, especially in Amsterdam, customers can simply keep trying. It is important to be able to establish a customer's identity, because if no identity document is presented, FIU-NL cannot be adequately be notified of a proposed unusual transaction.

Disclaimer

Q&As provide insight into our supervisory practice through the interpretation of regulatory requirements. Institutions can comply with laws and regulations by other means. In doing so, they must be able to demonstrate and substantiate that they comply with the laws or regulations. We would like to refer you to DNB’s explanatory guide on policy statements for more information about the status of our most common policy statements.

Relevant laws and regulations

• Section 3(5), under b, of the Wwft
  Parliamentary Papers of the House of Representatives 2017/18, 34808, 3, p. 3 (Explanatory Memorandum)
• Article 13(3) in conjunction with Annex I to the AMLD4 ((EU) 2015/849)
• Article 18(3) in conjunction with Annex III to the AMLD4
• Paragraph 1(e) of Annex III to the AMLD4
• The FATF Recommendations 2012 (updated June 2019), p. 62-63