The legal framework for e-money operators in Russia was introduced in 2011, when the long-awaited Federal Law No. 161-FZ “On the National Payment System” (“NPS Law”) was finally adopted on June 27, 2011. Along with other major novelties, the NPS Law introduced the concept of “money transfer”, defined “e-money”, clarified the role of “e-money transfer operators” and established basic regulatory requirements to govern this market.
The NPS Law arrived just in time, laying the foundation for a rapidly developing market of cash-free transactions in Russia. In fact, between 2010 and 2018 the number of cash-free transactions in Russia increased by 30 times, from 5.7 to 172 transactions per individual per year. The market is expected to grow, further outpacing Western European countries.
What is e-money?
The NPS Law defines e-money in a way compatible with the European approach:
“E-money is monetary funds provided in advance by one party (funds provider) to another party (obligor) that must record the information on the amount of funds provided by the funds provider without opening a bank account to enable the funds provider to perform is monetary obligations in relation to third parties and in respect of which the funds provider is entitled to send instructions only using electronic means of payment.”
This definition is somewhat similar to the European approach reflected in Article 2 of the E-money Directive 2009/110/EC.
What is a transfer of e-money?
The transfer of e-money falls within a broader category of “money transfer”. There are, however, special rules applicable to the transfer of e-money, different from those applicable to the transfer of money in general.
Who can carry out the transfer of e-money?
The transfer of e-money may only be carried out by credit organizations that include (i) banks and (ii) non-bank credit organizations licensed under the Federal Law No. 395-1 “On Banks and Banking Activity” dated December 2, 1990 (“Banking Law”). There are three types of such non-bank credit organizations, which are considered in more detail below.
What is the legal framework?
There are three main laws applicable to e-money operators:
- Federal Law No. 161-FZ “On the National Payment System” dated June 27, 2011
- Federal Law No. 395-1 “On Banks and Banking Activity” dated December 2, 1990
- Federal Law No. 115-FZ “On Combating Legalisation (Laundering) of Illegally Gained Income and Financing of Terrorism” dated August 7, 2001
In addition to these federal laws, there are a number of regulations adopted by the relevant regulatory bodies.
What are the main regulatory bodies?
The Central Bank of Russia is the main regulator for e-money operators, as well as for almost all other financial market participants. Additionally, the Federal Financial Monitoring Service (Rosfinmonitoring) is responsible for enforcing anti-money laundering and counter-terrorism financing rules that extend to e-money operators. The Federal Antimonopoly Service (“FAS”) enforces anti-monopoly and fair competition rules, including advertising. In the context of financial services, FAS oversees fair advertising of financial products and services.
Types of E-money Operators in Russia
There are three types of e-money transfer operators in Russia (that are not banks):
- payment operators,
- settlement operators,
- and credit-deposit operators.
Since the last type is almost never used in practice, below we highlight the main differences between settlement and payment operators.
As evident from the above, settlement operators are subject to a greater number of mandatory standards, but in exchange are allowed to carry out certain additional operations and issue debit cards for legal entities. If such operations are crucial to one’s business model, one should opt for the settlement operator licence. The number of licenses issued by the Central Bank of Russia indicates that settlement operators are more prevalent.
As stated above, the provision of electronic money services in Russia is a regulated activity that requires local presence and a license. In the international context, the question that often arises is, what exactly does it mean to provide financial services in Russia? Indeed, a company, whether an e-money operator or a digital bank, may well be based abroad but still have some customers from Russia. Does this company fall within the ambit of the Russian law and have to obtain a license in Russia?
Neither the NPS Law nor the Banking Law provide direct guidance on a when a foreign financial institution is deemed to provide regulated services in Russia. The general logic is that merely having a few customers from Russia does not automatically trigger the application of Russian law. Accordingly, the analysis usually boils down to specific facts and circumstances, such as:
- local team or office (especially relevant in the context of a permanent establishment for tax purposes);
- localized web-site and marketing communications in Russian;
- Russian-speaking customer service;
- contextual ads targeting a Russian audience;
- sponsored publications in Russian media outlets;
- website with .ru top-level domain;
- delivery of physical correspondence in Russia (especially relevant when there is a debit card to be delivered to a customer);
- acceptance of rubles as consideration for services;
- delivery of SMS messages to phone numbers with a Russian area code.
While these are only non-deterministic factors that will be analyzed by the regulator in combination, it is often clear from the internal position of a particular financial institution whether the Russian market is in fact targeted or there are only a few Russian customers that have signed in in a random fashion.
It is important to mention that there is no passporting regime in Russia, i.e. having a recognized license in a foreign jurisdiction does not let one carry out similar business in Russia without obtaining a local license.
In terms of liability, a company carrying out a regulated business activity without obtaining a license is subject to administrative liability. Such an illegal activity entails the collection from the company of the entire amount received as a result of this activity, as well as the collection of a fine in the amount of double this amount.
In addition to public liability, Russian courts have demonstrated that the lack of a license may have some unexpected legal consequences for the customers. For example, in one case the court rendered a loan agreement entered between two individuals via WebMoney, a rather popular online payment system in Russia, null and void. Due to the invalidity of the agreement, the court denied the lender the right to recover WebMoney units from the borrower.
If you have any further questions, please feel free to reach out to one of the authors named below. Legal services for FinTech business in Russia is our niche, and we will be happy to assist you.