Virtual IBANs

Virtual IBANs (vIBANs) offer payment streamlining but pose AML/CFT risks due to opacity, potentially obscuring the flow of funds. The upcoming 6th Anti-Money Laundering Directive (6AMLD), taking effect in 2027, will introduce KYC requirements for vIBAN users and linked accounts, necessitating enhanced due diligence and transaction monitoring for financial institutions. This will require firms to invest in robust compliance systems. Regulators are already addressing vIBAN transparency through ongoing dialogue and guidance development to ensure responsible use.
Feb 14

Navigating Transparency and Compliance

I recently had the privilege of (co)presenting at the FECacademy event, hosted by the Financieel Expertise Centrum (FEC) here in the Netherlands.

This event, organized in close collaboration with the FIOD's Trends4FI initiative, brought together over 700 professionals from the public and private sectors to discuss critical issues surrounding financial crime and compliance.

The FECacademy serves as a vital platform for knowledge sharing and collaboration, strengthening the integrity of the Dutch financial sector. It disseminates expertise on key financial crime topics, including AML/CFT, fraud prevention, and cybersecurity, and contributes to international efforts to combat financial crime.

At this particular FECacademy, we explored the intricacies of virtual IBANs and their role in the evolving financial landscape. Virtual IBANs have gained significant traction, particularly within the Banking-as-a-Service (BaaS) sector, due to their ability to streamline payment processes and facilitate innovative financial solutions. However, the "virtual" nature of these IBANs has also raised concerns regarding transparency and the potential for misuse in money laundering and terrorist financing.

Understanding Virtual IBANs

Before we delve into the regulatory implications, let's first clarify what virtual IBANs are and how they function:

  • What they are: A vIBAN is essentially a "virtual" bank account number that is not directly linked to a traditional bank account. It acts as an alias or reference number, routing payments to an underlying master account.
  • What they are not: vIBANs are not independent bank accounts in their own right. They don't hold funds directly.
  • How they are used: vIBANs are often used by businesses to streamline payment processing, reconcile transactions, and offer more flexible payment options to their customers. They are particularly popular in the fintech space, especially with BaaS providers.
  • Why fintechs offer them: vIBANs allow fintechs to offer "white-label" banking solutions to their customers without needing to establish their own banking infrastructure. This enables them to provide innovative financial services quickly and cost-effectively.

The Risks of Virtual IBANs

While vIBANs offer numerous benefits, they also pose certain risks, particularly in the context of AML/CFT:

Opacity: The "virtual" nature of vIBANs can make it challenging to identify the ultimate beneficiary of a transaction, potentially hindering efforts to trace funds and detect suspicious activity.
Anonymity: vIBANs can be used to mask the identity of the payer or payee, increasing the risk of money laundering and terrorist financing.
Complexity: The multi-layered structure of vIBANs, with payments routed through various intermediaries, can create complexities in transaction monitoring and due diligence processes.

A New Era of Transparency and Compliance

The good news is that with the implementation of the new Anti-Money Laundering Regulation (AMLR) in 2027, virtual IBANs are finally gaining regulatory recognition. This means increased transparency and clearer guidelines for financial institutions (FIs) leveraging this technology.

The AMLR introduces specific KYC requirements for vIBANs, addressing the concerns around identifying the ultimate beneficiary of transactions. The regulation mandates that FIs must:

  • Identify and verify the identity of the individual or legal entity using the vIBAN.
  • Identify the associated bank or payment account linked to the vIBAN.
  • Ensure that information about the vIBAN user can be obtained quickly from the issuing institution.

Why This Matters

These changes are significant because they will necessitate more robust AML/CFT measures for FIs using vIBANs, including:

  • Enhanced due diligence on vIBAN users
  • More effective sanctions screening
  • Tighter transaction monitoring

Bridging the Gap Until 2027

While the AMLR comes into effect in 2027, regulators are already taking steps to address the risks associated with vIBANs. The BaFin, in its "Risk in Focus 2025" report, highlighted the challenges vIBANs pose to money laundering prevention. Similarly, the Central Bank of Ireland has announced that details of vIBANs will be recorded in national Bank Account Registers to aid law enforcement agencies in tracing funds.

Navigating the vIBAN Landscape

It's crucial for FIs to proactively assess the impact of these upcoming changes and adapt their compliance frameworks accordingly. This includes:

  • Reviewing and updating KYC procedures for vIBAN users
  • Strengthening transaction monitoring systems
  • Ensuring compliance with data sharing requirements

The Future of Virtual IBANs 

The AMLR marks a significant step towards greater transparency and accountability in the use of virtual IBANs. By implementing robust KYC and transaction monitoring measures, FIs can harness the benefits of vIBANs while mitigating the associated AML/CFT risks.

Stay Informed 

Join us next week for another edition of Compliance Insight, where we'll continue to explore the latest developments in the world of financial crime compliance.
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