Mobile Money in Jamaica

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This research paper will focus on the risks associated with mobile money services in Jamaica and the existing regulations and legislation that monitor the financial sector. By investigating previous research, my aim is to study mobile money implemented in other jurisdictions and examine the risk factors faced by those countries. In doing so, determine if any legal precedence relating to mobile money has been established that would be beneficial to Jamaica as it implements this new financial service. Additionally, this paper will examine Jamaica’s legal system to determine if the current regulations and legislation as it relates to the financial sector are adequate to manage the risks that will be faced by the financial institutions, mobile money providers and consumers.

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Summer Research Paper

Student

: Frances Poole

2

Abstract
This research paper will focus on the risks associated with mobile money services in Jamaica and the existin re ulations and le islation that monitor the financial sector! "y investi atin previous research# my aim is to study mobile money implemented in other $urisdictions and examine the risk factors faced by those countries! %n doin so# determine if any le al precedence relatin to mobile money has been established that would be beneficial to Jamaica as it implements this new financial service! Additionally# this paper will examine Jamaica&s le al system to determine if the current re ulations and le islation as it relates to the financial sector are ade'uate to mana e the risks that will be faced by the financial institutions# mobile money providers and consumers!

Frances Poole

Summer Research Paper

ID# 0904687

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Acknowled ements % would like to acknowled e the followin persons: Philip Armstron support! )iss Patricia Jackson# my sponsor for her valuable uidance and entle persuasion keepin me focused on the purpose of the paper! ,dmundo Jene- ( )ana in *irector# J,TS +td!.Jamaica ,lectronic Transaction Systems/ for his willin ness to share his ma nitude of knowled e on the sub$ect matter! Adrian 0eys 1 2onsultant to Tanscel +td! for his assistance! Tony Poole 1 my husband for his critical eye# patience and unyieldin support! uidance and encoura in ( )ana in *irector of Sa icor "ank Jamaica +td!# for his

assistance in helpin me to decide on the topic for this paper and for his continued

3 % thank you all

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Frances Poole

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ID# 0904687

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Table of 2ontents 24APT,R %
1.1 1.2 1.3 1." 1.$ 1.' 1.* 1.+ Abstract 55555555555555555555555555!! Background to Jamaica’s Financial Sector..……………………………………. Introduction to the Scope o the !aper……………………………………………. #hesis Statement……………………………………………………………………… %esearch &uestions………………………………………………………………….. %esearch (ethodolog)…………………………………………..…………………. !urpose o the Stud)………………………………………………………………… !ro,ect !roposal……………………………………………………………………..

Pa e
6 7 8 8 9 9 9 9

24APT,R %% 2.1 -iterature %e.ie/…………………………………………………………………….. :

24APT,R %%% 3.1 3.2 3.3 #he %apid 0ro/th o (obile (one) in A rica…………………………………….. #he %isks 12perienced in A rica and other Jurisdictions..……………………….. %egulations in A rica and other Jurisdictions…………………………………….. ;< ;= ;8

24APT,R %>
4.1

Indenti )ing 3e) %isks in Jamaica………………………………………………….. 4ontrolling (obile (one) %isks....……………………..…………………………..

6; 6=

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24APT,R > $.1 Jamaican -egislation and %egulations………………………………………………. 67

24APT,R >%
Frances Poole Summer Research Paper ID# 0904687

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'.1

4onclusion and %ecommendations………………………………………………….

?; ?6 ?=

APP,@*%2,S 555555555555555555555555555!! R,F,R,@2,S555555555555555555555555555!

24APT,R ; ;!; "ack round of Jamaica&s Financial Sector

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There are three main entities that re ulate the financial industry in Jamaica! These are the "ank of Jamaica# the Financial Services 2ommission and the Financial %nvesti ation *epartment throu h the )inistry of Finance! The supervisory authority and responsibility of these institutions are established by the virtue of a number of Primary and Secondary +e islative Acts of Parliament that provide the le al policy parameters for the licensin and supervision of financial institutions! The "ank of Jamaica ."AJ/ re ulates deposit takin entities such as commercial banks# merchant banks and buildin societies throu h the "ankin Act .;::6# amended 6BB6/# the Financial %nstitutions Act# .;::6# amended 6BB6/ and the "uildin Societies Act .;:7=# amended 6BB6/! 2ambios and remittance companies# which are in the cate ory of money service businesses# are re ulated by the "ank of Jamaica throu h the "ank of Jamaica Act! 2redit Cnions are re ulated by the 2o(operative Society Act! @on(deposit takin institutions such as insurance companies# securities dealers and unit trusts are re ulated by the Financial Services 2ommission .FS2/!The FS2 oversees these entities by administerin a number of statutes and accompanyin re ulations! The relevant statutes are the FS2 Act# the Pension Act# the Securities Act# the Cnit Trusts Act and the %nsurance Act!;

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%ntroduction

)obile money is a payment service operated under financial re ulation and performed from a mobile device such as a phone# a smart phone or a palmtop computer# .P*A/ for point of sale transactions! %t can also be used for financial transactions undertaken usin a mobile phone
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See Appendix D;

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a ainst a bank account accessible from that phone! )obile )oney Transfers provide the ability to move store of value from one account to anotherE this enables domestic remittances as well as international remittance usin a mobile device! 2urrently in Jamaica a person can receive phone credit for their cellular phone electronically from a point of sale or from another phone! This is technically a mobile payment which has been in operation in Jamaica for a number of years now! 2onse'uently many persons are actually usin a mode of mobile money in order to utilise their cellular phones! That bein said# with the new thrust of the mode service bein implemented it will provide an avenue to widen the scope of its utility! The mana in of the risk of mobile money may prove challen in for the financial institutions and customers and all those involved# especially the risk of fraud! The financial sector is re ulated inter alia by the "ankin Act# the Financial %nstitutions Act and the "uildin Societies Act! These will form the basis of the research to examine and compare the re ulations of other $urisdictions to determinin their effectiveness!

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Thesis Statement

)obile money is an electronic retail payment service accessed via mobile phones which is about to be introduced to Jamaica! %t is ar ued that this method of payment may potentially propel the country into an unprecedented mode of commerce that may prove hi hly beneficial to vendors# consumers# service providers and financial institutions alike! ;!< Research Fuestions

;/ Ghat are the risks that )obile )oney imposesH 6/ %s Jamaica ade'uately prepared to implement and introduce mobile money into its financial system and what le al monitorin systems are in place to safe uard usersH ;!= Research )ethodolo y
Summer Research Paper ID# 0904687

Frances Poole

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%n meetin the ob$ectives of this paper# % intend to examine and compare the policies and procedures adopted by users in other countries such as Gestern 0enya# the Cnited States# 4aiti# and 2olumbia and evaluate the existin le islation and proposed re ulations in Jamaica as it relates to electronic retail payment services with a view to the le al preparedness to combat theft and money launderin ! ;!7 Purpose of Research

This research paper is submitted in partial fulfilment for the "achelor of +aws de ree at the Cniversity of Technolo y# Jamaica! ;!8 Pro$ect Proposal

The purpose of this paper is to determine whether Jamaica has the necessary le islation and uidelines sufficient to launch mobile money services into the financial sector!

24APT,R %%

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+iterature Review

The introduction of mobile money to Jamaica is likely to create enthusiasm in the financial sector similar to that of cellular phones in the communication industry in the ;::B&s! The product is likely to create new opportunities for emer in entrepreneurs# retailers# vendors# banks# service providers and consumers alike!

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The relevance of this review is to provide an overview of the type of material that will be used to present the perspectives of persons in the field of mobile money as well as those in the field of academia# for my research paper and to set in motion the symposium on mobile money in Jamaica! %t has been predicted that mobile money services will find a ready market in Jamaica because of the scarcity of user(friendly financial services on the island! A survey conducted by *r *awn ,lliott found that only a fraction of the Jamaican population has access to financial services# which limits their participation in the economy! 6 Trancel +imited has developed the technolo y for the *evelopment "ank of Jamaica&s .*"J/# commercial pilot! The pilot will test loan disbursements over mobile networks over the next year or two! The pilot has been named )? and will focus on the microfinance sector! Transcel +imited&s 2hief ,xecutive Afficer# 4u o *aley said that financial transactions are ;BB times cheaper usin mobile money durin his presentation at the *"J mobile money launch in February 6B;?! 4is company is positionin itself to be a ma$or service provider as well as mana e the micro accounts!? I%n terms of our core transaction framework# it is a web services inte ration network which is specifically desi ned to connect very 'uickly to networks!J< The company will provide the platform for the @ational 2ommercial "ank# .@2"/ where the bank will hold *"J funds in a trust account which will provide approved microfinance institutions with funds for on(lendin ! @2" in this instant will act as "ank of Jamaica&s certifyin a ent! Another Jamaican company# Advanced %nte rated Systems .A%S/ and a Cnited States payments leader )A"lbucks# are also set to roll out a mobile money platform in Jamaica# with plans to expand to the 2aribbean within the next twelve months!

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Avia 2ollinder# "usiness Griter hhtp:KK o($amaica!com Trevorn# )obile )oney Just Steps away in Jamaica# @iceFmRadio!com# February 6B# 6B;?
Trevorn# )obile )oney Just Steps away in Jamaica# @iceFmRadio!com# February 6B# 6B;?

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A%S is Jamaica&s leadin transaction processin provider and currently handles payments for healthcare medical claims# point of sale transactions for banks# technolo y solutions for retail establishments and hotels# as well as other e(commerce businesses!= The articles % have read discuss each of the company&s readiness to provide the technical platform re'uired to commence transactin via mobile money# but A%S claims to be the first to provide the service in Jamaica! The deputy overnor of the "ank of Jamaica ."AJ/# +ivin ston )orrison in addressin a roup of entrepreneurs about re ulatin mobile remittances# was faced with the statement that I+ocal online start(ups want the "ank of Jamaica to move with alacrity and implement mobile money in Jamaica# ar uin that weak re ulations and heavy bureaucracy have continued to hinder the viability of their business!J Ane participant declared to )r! )orrisonE Iwhilst you spoke % transferred funds usin Paypal!J 4is comments were in reference to transactions made throu h the lobal e(commerce business which allows payments and money transfers to be made throu h the internet!7 Gith the implementation of new technolo y and the widenin of the threshold of users of financial services# it is necessary to look at fraudulent issues that may arise and how the le al system in Jamaica plans to prevent these issues! *"J&s pilot pro ramme should potentially provide the necessary data to determinin the lacuna in Jamaica&s re ulatory frame work! ,lly Akutoyi&s article posted on Tweeter# 8 claimed that top mobile money service providers .in Africa/ su est that mobile money leads to outsourcin development of key financial systems without lookin at the inherent risks responsible for increased fraud cases! 9 As mobile payments# are still in their infancy# the true extent of the fraud issues has yet to be defined! 4owever# due to the content it is envisa ed that these services will be extremely attractive to fraudsters and those seekin to launder money!

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www!aisebnet!com Steven Jackson# Start5ups /ant mobile mone) no/# The Jamaica Lleaner# )ay 9# 6B;? ,lly Akutoyi # (obile mone) a high risk or raud in A ricia6 April ;:# 6B;6 Steven Jackson# Start5ups /ant mobile mone) no/# The Jamaica Lleaner# )ay 9# 6B;?

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%n re ards to money transfers# the individual applies cash to their mobile payment account and transfers money to an individual# an a ent or a bank# domestically or overseas! This provides opportunities for movin money ained# either by launderin or in con$unction with a down payments into scamKfraud# e! ! an a ent makin additional commission by breakin

several transactions!: This article explains in summary the services that the company @eural Technolo ies provides and ives a synopsis of the features of its monitorin domains! 2ommercial *irector for @eural Technolo ies# +uke Taylor# said: IGe have learnt a lot about mana in fraud and risk in mobile payments from our work with one of the leadin African telecoms operators! Ge have expanded this knowled e to include all the various services and technolo ies associated with mobile payments and are happy to share what we have learnt with other telecoms operators lookin to roll out mobile paymentsJ!;B Additionally# Transcel +imited has partnered with Alaric# a fraud prevention and payments company! The aim is to minimise the risk of fraud while deliverin mobile financial services predominately to the unbanked in Jamaica! The article ;; cited# however does not provide any insi ht on how they intend to limit fraudulent activity! @early 8B percent of mobile phones in the Cnited States of America are not password protected# accordin to Sophos# a mobile security vendor! Parents allow children to play with their phones without considerin that they may download some bit of malware# says Shirley %nscoe# a senior analyst at Aite Lroup: IThey don&t reali-e the risk they may entail iven the data stored on their mobile device!J;6 "ased on this article it is evident that users of mobile money are faced with the dan er of bein a victim of fraudulent activity! %n preparation for the official implementation of mobile money# the "ank of Jamaica has developed re ulations for providers of electronic retail payment services# ;? which provide the operatin parameters of which they are sub$ected to! The uidelines are issued in accordance
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@eural Technolo ies# (obile !a)ment Fraud# www!neuralt!com @eural Technolo ies# 7o/ to (anage Fraud in (obile !a)ments# www!neuralt!com 0itty *ann# Alaric and #ranscel target Jamaica’s unbanked# February 67# 6B;? Al a 0harif# "usiness Geek# Actober B<# 6B;6 Luideines for ,lectronic Retail Payment Services

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with the provision of the Payment 2learin and Settlement Act 6B;B under which the "ank holds responsibility for oversi ht of the @ational Payment System! The Proceeds of 2rime Act .PA2A/ 6BB8 and the Proceeds of 2rime .)oney +aunderin Prevention/ Re ulations# 6BB8# provide anti money launderin obli ations! PA2A represents an all crimes approach to dealin with )oney +aunderin and the proceeds of crime! The Act comprises seven parts! Affences are defined in section :6! The Act states that an offence can be committed whether or not a transaction takes place! The Suspicious Transactions Report# ;< makes it an obli ation for a person to make a re'uired disclosure when there is knowled e or belief that another person has en a ed in a transaction that could constitute money launderin ! Furthermore# there exists in Jamaica other le islation that frames the le al network to monitor and re ulate the payment services industry! The issue is whether PA2A or other re ulations have the safe uards necessary for the country to embark on this new method of bankin ! This research paper# usin articles both academic and le al will examine fraud relatin to mobile money in other $urisdictions and determine whether Jamaica&s existin le islation are ade'uate in today&s climate of prevalent technical fraud! re ulations and

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PA2A S! :<

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24APT,R %%% ?!; The Rapid Lrowth of )obile )oney in Africa and other Jurisdictions rowin information and communication

)obile money has been hailed as the fastest

technolo y .%2T/ in Africa! %n 0enya# money transfer companies have virtually disappeared as remittance services have now been replaced by the mobile money system called )(Pesa! Accordin to #he 1conomist# in post(election violence in 6BB9 the )(Pesa system was used to transfer money to people trapped in @airobiMs slums by the violence! )any 0enyans be an to see the system as a safe haven for their cash than 0enyaMs traditional banks! Thanks to the success of )(Pesa# Safaricom is thrivin ! %ts annual results# released earlier this month# revealed pre(tax profit had climbed to 6=!= billion shillin s in its year to end(march# off the back of ;7 per cent rowth in total revenue!;= There are over =BB million mobile phone subscribers that are estimated to be active in Africa with Safaricom with over ;< million active users usin its mobile money platform!;7

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Richard 4u hes# #hird 8orld -eads First in (obile Banking# The Sydney )ornin 4erald# )ay 6:# 6B;? )obile Africa Report 6B;;

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Aver ?7!8= percent of the 0enyan population# hold )(Pesa accounts# his fi ure does not include mobile money users on the other networks! The funds transferred by )(Pesa are e'ual to 6= percent of the country&s ross domestic product .L*P/ showin mobile money&s extensive rowth hence re'uirin measure to curb the risin fraud cases! The A"SA "ank in South Africa# was the first South African bank to launch cellular phone bankin # it was the first bank in the re ion to reach one million internet bankin customers and the first to offer remittances to unbanked customers via N2ashSend&!;8 %n 0enya# )ada ascar# Tan-ania and C anda# the number of mobile money accounts bein opened is hi her than the number of bank accounts# which clearly indicates the rapid rowth of mobile money in those countries! Ghile in some countries# the re ulations do not permit non(banks to provide mobile money services! As a result# the mobile network operators .)@A&s/ are forced to form partnerships with the banks and are then forced to comply with the bank&s standard re ulatory policies! After the devastatin earth'uake in 6B;B# the "ill and )elinda Lates FoundationKCSA%*

funded 4aiti )obile )oney %nitiative .4))%/ led to the launch of mobile money services in that country! The service is widespread due the limited bankin facilities and necessary

infrastructure due to the earth'uake! There are two service providers namely *i icel( Scotiabank with TchoTcho )obile and >oila(Cnibank with T(2ash! "oth of these services are desi ned as bank(led partnerships whereas Scotiabank and Cnibank hold fiduciary responsibility for the service and are responsible for the approval of a ents and for re ulatory compliance!
The initial services offered were limited however over time they have evolved to include

services such as bill payments! As a result re ulations have been adapted to accommodate the new services and consumer protection re'uirements!
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The Risks ,xperienced in Africa
Summer Research Paper ID# 0904687

Aia-e )itha# Amarante 2onsultin # Jamaica 9 4ountr) :iagnostic and %ecommendations .July :# 6BB:/

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The African mobile bankin market set to row to O66 billion by 6B;=# as pro$ected by Juniper Research# as suchE re ulatory bodies# overnments and service providers should e'ually improve their monitorin defrauded! Speakin at the ,ast Africa 2ommercial conference held in @airobi# 4awas Larba )atta# Airtel Africa&s Lroup Revenue Assurance and Fraud )ana er# said mobile money is takin money from experienced and well paid economists and trustin it into the hands of inexperienced# low( paid techies and customer service assistants! Accordin to )atta# mobile money has also exposed customers to the dan ers of fraudsters who have since come up with innovative ways of cheatin them to access their money! Recent cases have seen fraudsters spoofin
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activities# as well as educate their customers on ways to avoid becomin

S)S to appear as ori inatin from the mobile

providers# banks# or other financial institutions to cheat mobile money subscribers of their funds! %n July 6B;;# statistics from Safaricom ;: show that 7= percent of phone related fraud cases ori inate from prisons! The possible solution to this# )atta says# is enforcin N0now Pour 2ustomer& .0P2/ and anti( money launderin ensures includin takin down customer details includin passport photos# copy of identification documents like a @ational %*# passport# or driver&s licence on re istration to ensure easy trackin and identification of fraudsters in case reports are submitted!6B The introduction of new technolo y makes it possible to monitor customers# subscribers# a ents and internal systems and procedures! 2omprehensive mana ement reports in con$unction with 0P2 functions can monitor all account activity# such as# account openin # closure and chan es to accounts to identify suspicious activity! Transaction monitorin can analyse transactions and provide a profile for every customer and a ent! "ehavioural profiles combined with account information is used to identify specific transaction patterns that are intended to avoid the creation of certain records and reports# this is referred to as Nsmurfin &E transactions that are inconsistent

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The creation of an email messa e with a for ed sender address used to mislead the recipient of the ori in of the messa e +eadin mobile network operator in 0enya ,lly Akutoyi# )obile )oney a hi h risk for fraud in Africa

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with the uni'ue behaviour of the customer or a entE the movement of money to or from hi h risk eo raphical areas and the identification of dormant accounts and accounts that are reactivated! A recent survey hi hli hted there are more than three billion mobile phones a ainst one billion bank accounts lobally! This position therefore presents a tremendous opportunity for 2SPs to incorporate )obile )oney services into their product portfolio ran in fromE )(2ommerce# )( Payments# )(Remittances and )("ankin ! So what will be the implications for effective risk mana ement to meet the challen es for deliverin secure and revenue protected )( ServicesH6; Some of the answers to these 'uestions will depend onE how the services are offered# the demo raphics of the tar et market and the risk appetite of the individual 2SPs and their Partners! The types of risks and what will ultimately be re'uired to respond to these new business challen es must be vi orously examined before product launch to understand the potential levels of exposure!66 At a forum in @airobi&s Safari Park 4otel in April 6B;6# it was established that since the introduction of mobile money# fraud cases where increasin at an alarmin rate! Luardian Analytics# a Silicon >alley company# has developed software for banks that analy-es a consumer&s past transaction behaviourE whether they made small or lar e purchases and how often# to determine if their phone has been hi$acked! There are also security tools that can determine a mobile user&s location and verify that she is usin her usual wireless device! PayPal has identified more than ;#BBB variables that can help the company determine the authenticity of a transaction# says )ichael "arrett# its chief information security officer! @itesh Saxena# an assistant professor of computer science at the Cniversity of Alabama in "irmin ham# C!S!A!# has taken the notion of contextual security a step further! %n a research paper# he proposes havin a user&s phone and a store&s scanner each record the audio of back round noises durin a mobile(payment transaction! The two recordin s would then be matched up on some distant server! IThe ood thin about the phones is# they have all the computin power# the sensors# and you can use them#J Saxena says! IThe oal is to prevent so( called relay attacks# in which a criminal scans a credit card with a phone and then passes the card
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)obile )oney Services ( Telecoms Risk )ana ement: A PrQsidium "usiness 2onsultancy Ghite Paper# February 6B;6 Richard 4u hes# #hird 8orld -eads First in (obile Banking# The Sydney )ornin 4erald# )ay 6:# 6B;?

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number wirelessly to an accomplice overseas# who uses it to make purchases with his mobile device!J

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Re ulations in Africa and other Jurisdictions

The 2entral "anks in Africa are actively licensin "anks and other non financial or ani-ations to offer mobile financial services for basic bankin services# payments# money transfers and other financial services usin third party a ency networks! 4owever# )(Payment services in 0enya were initially bein offered without the proper

re ulatory framework in place! An audit was recommended for )(Pesa by the Finance )inister and in January 6BB:# the audit committee provided clearance to )(Pesa and confirmed that transactions were executed in a safe and secure way!6? A re ulation pro$ect is bein developed to better control payments and money transfers! %t will not necessarily cover electronic payments# but will expand the scope of the 2ommunications 2ommission to new and innovative services!6< )obile money users risk losin cash sent to unintended recipients if proposed re ulations by the 2entral "ank of 0enya .2"0/ barrin reversal of payments are passed into law! The re ulation is an effort to curb a loophole used by dishonest people to stop payments for oods or services they have received! 2"0 has also made it mandatory for payment service providers to ensure that amounts bein transferred on their platform are credited to the payee&s payment account by the end of the third business day after the receipt of instruction from the payer!6= )any $urisdictions have implemented re ulations to miti ate fraud which include the placin of funds in re ulated entities who invest in specified instruments! 67 As it relates to money launderin # 0enya&s Proceeds of 2rime and Anti )oney +aunderin Act was passed and went into effect in July 6B;B! The Act# however# does not specifically address
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Aia-e )itha# Financial Services thou h )obile *evicesE Jamaica 1 2ountry *ia nostic and Recommendations .July :# 6BB:/ ,lly Akutoyi# )obile )oney a hi h risk for fraud in Africa Leor e @ i i# (obile (one) ;sers %isk -osses under <e/ %ules# "usiness *aily# .April ;7# 6B;?/ See Appendix D 6# Simone di 2astri# (obile (one)= 1nabling %egulator) Solutions >February 6B;?/

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mobile money! Also in 6B;B# the 2"0 issued ILuidelines on A ent "ankin J! These uidelines were later extended to include non(bank entities such as )icro Finance %nstitutions and Savin s and 2redit 2o(Aperatives! 2onsumer protection uidelines for the telecommunications sector were also issued in 6B;BE these uidelines included mobile money services! %n 6B;;# the 2"0 issued a draft Retail Transfer Re ulation! This is intended to be the main re ulatory uideline for the mobile money sector! The @ational Payments System "ill was also submitted in 6B;;# which will become the le al framework under which the new re ulations will be overned! The "ill covers all electronic payments systems# includin RTLS# online and mobile money payment services! The main purpose of the bill is to provide consumer protection in the event a mobile money or online service provider becomes insolvent! The @ational Payments System "ill of 0enya states= ?.;/ A person proposin to transact the business of a payment service provider shall# before commencin such business# apply to the "ank for authori-ation!& .6/ An application under this section shall be made in the prescribed form and shall be forwarded to the "ank to ether with the prescribed fee! .?/ %n considerin an application for authori-ation# the "ank may re'uire to be satisfied as to the financial condition and history of the applicant# the character of its mana ement# the ade'uacy of its capital structure and the convenience and needs of the area to be served and the public interest which will be served by rantin of the authorisation!&68 The "ill addresses provisions on the desi nation of payment systems and payment instruments# provisions relatin to operators# re ulation and supervision! %t states the powers and functions of the 2entral "ank and the re'uired uidelines for mobile money providers! The bill also includes uidelines for the settlement of disputes and misleadin advertisements!

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S!;? .;/

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2lause ;6 of the )emorandum of Ab$ects and Reasons69 prohibits any person# other than an authorised payment service provider# from conductin provider! )(Pesa# as a branchless bankin product# in order to meet the minimum financial re ulations of 0enya# borrowed concepts from the card industry initiatives such as the Payment 2ard %ndustry Security Standards 2ouncil! These practices included end(to(end encryption# with all confidential data bein held within the only secure stora e on the mobile handset# .the S%)/ at the )(Pesa servers# a security focus on business processes# etc!6: Gith the already established national identification scheme in 0enya# )(Pesa is able to use the scheme to uni'uely identify users and thereby meet the 0P2 re ulations! Also with efficient reportin and mana ement tools the company is able to report on every aspect of every transaction! %n 2olumbia# policymakers and re ulators have been facin the challen e to reconcile a safe development of branchless bankin operations with increased levels of financial access! The authorities are committed to developin the use of mobile phone and card based branchless bankin modules to increase access to finance in the entire country! "anca de las Aportunidades is the main public promoter of branchless bankin thou h retail a ents# and was one of the main sponsors of the a ency re ulatory framework that was desi ned!?B 2olumbia cannot be classified a pioneer in mobile money services but they are puttin plans in place to offer the service on a lar e scale! These measures include a new a ent model for branchless bankin for micro finance institutions! This will complement the role of the traditional bankin sector as the overnment has enabled financial institutions to contract a ents to provide certain financial services on their behalf! %n 4aiti there is no specific le islation that overns electronic payments! 4owever# the 2entral "ank Luidelines for )obile "ankin have provided the framework for the development of these the business of a payment service

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@ational Payments System "ill# 6B;;# )emorandum of Ab$ects and Reasons Paul )akin# Re ulatory %ssues around "ranchless "ankin *aniel )auricio Alarcon +o-ano# A @ew A ent )odel for "ranchless "ankin in 2olumbia

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services! The country&s ma$or issue is the balancin of controls and consumer protection with re ulatory chan es that enable further development of mobile money! ?;

24APT,R %> <!; %ndentifyin 0ey Risks in Jamaica

IThe consumer will need to be increasin ly aware of the risks associated to usin a mobile phone for payments# realisin that now the real value of the phone increases as it uses these enriched services and becomes a more valuable commodity to fraudsters and hackers!J?6 The bank of Jamaica# want to re ulate the activity locally in order to ensure that the up to one million unbanked Jamaicans are somewhat formalised and served by banks rather than proxy start(ups!J?? IThere are some who say ?= to 7= per cent of the population is unbanked# yet penetration for the mobile phones is at over ;BB per cent# so there are opportunities there! 4owever# the unbanked can only be served by the banks!J?< The type of risks that are likely to manifest themselves as the consumer base rows may be evolutions of existin risk types! Therefore# it will re'uire applyin old techni'ues to new products and services in the mobile money market to miti ate these risks! There are four elements that mobile money providers use to mana e risk# they are follows: a/ determine risk appetite# b/ identify risks# c/ establish controls and d/ monitor effectiveness! These risks include and are not limited to the followin : overnanceE money launderin E fraud# and transactional risk!

31 32 33
34

*alber # 7aiti (obile (one)E A(Point(%n(Time 2ase Study )obile )oney Services ( Telecoms Risk )ana ement: A PrQsidium "usiness 2onsultancy Ghite Paper# February 6B;6 Steven Jackson# The Jamaica Lleaner# )ay 9# 6B;? +ivin ston )orrison# deputy overnor of the "ank of Jamaica

Frances Poole

Summer Research Paper

ID# 0904687

21

%t is likely that fraudulent activities by criminal elements will surface here in Jamaica when widespread mobile money is introduced! %t is# therefore# essential that the necessary re ulations are in place to combat such criminal activity and le islation to prosecute the offenders! 2onse'uently# attentive monitorin will be an essential aspect of mana in fraud! Prior to the launch of any mobile money service# the implementation of monitorin Governance
The Ar ani-ation for ,conomic 2o(operation and *evelopment .A,2*/ ?= defines corporate

systems# efficient

controls and key personnel will play a crucial role in the operations of the company!

overnance as involvin Ia set of relationships between a company&s mana ement# its board# its shareholders and other stakeholders! 2orporate overnance also provides the structure throu h which the ob$ectives of the company are set and the means of attainin those ob$ectives and monitorin performance are determined! Lood corporate overnance should provide proper incentives for the board and mana ement to pursue ob$ectives that are in the interests of the company and shareholders and should facilitate effective monitorin !J ?7 %t is essential that the or anisations that intend to provide mobile money services be overned by and monitored by the authorities to prevent any illicit practices that may surface! Strict uidelines provide the necessary framework for the establishin of the company&s policies and procedures to ensure compliance to the established re ulations! Money Laundering )oney launderin is the process of takin the proceeds of criminal activity and passin it throu h the le al system! )obile money may be viewed by some as a new and easy method of launderin money! Persons may determine that the 0P2 re ulations may not be strictly adhered to due to the nature of the product and as such attempt to set up fictitious accounts to conduct unlawful transactions!

35

The Ar ani-ation for ,conomic *evelopment .A,2*/ is an international or ani-ation formed to provide a forum for overnments to compare and exchan e policy experiences# identify ood practices and promote decisions and recommendations! 36 "AJ ( Standard of "est Practice for ,ffective 2orporate Lovernance of *eposit(Takin ,ntities

Frances Poole

Summer Research Paper

ID# 0904687

22

The 0P2 and 2ustomer *ue *ili ence .2**/ re'uirements have been modified for accounts with limits not exceedin O;BB#BBB!BB!?8

Fraud Fraud is the act of criminal deception of others for personal or finance ain! %t can come in various forms either internal or external! As it relates to mobile money# fraud can be committed by internal staff# a ents# customers and merchants! %nternal fraud can be committed where a customer enters wron details durin a transaction and the funds et temporarily stored in a suspense account! The funds are then stolen by employees of the service provider or financial institution! A typical example of external fraud is where a person receives an unexplained sum of money! 4e then receives a messa e advisin him that the money was sent in error! 4e subse'uently receives a call from someone claimin to be a member of staff who offers to help to return the cash! The unaware customer ives away all the necessary details to the caller who is not e'uipped to transfer the customer&s entire money to a fictitious account! Licensing The rantin of a license is to ive the re'uired permission to carry out a particular act or service! %n this instance# it is the authorisation for a company to operate a mobile money business# to employ a ents or to become an approved merchant! There can be risks involved if the rantin of licenses is not done in accordance with established uidelines and licenses are issued to companies who do not meet the re'uired criteria and are therefore in breach of the re ulations! Innovation
37

"AJ Luidelines for ,lectronic Retail Payment Services

Frances Poole

Summer Research Paper

ID# 0904687

23

Gith the introduction of mobile money# there lies the risk that the system be manipulated for unauthorised practices! There may be various innovative ways to breach the re ulations but one such practice could be that of off lendin ! This is where the service provider uses custodian funds to offer loans to customers with the aim of maximisin profits! Third Parties Third parties such as the mobile phone providers present another avenue for fraudulent activity! The operations of these providers are outside the control of the mobile money operators and could lead to Nvishin &or Nsmishin &# which is the use of phone calls or short messa e service .S)S/ to arner sensitive customer information! This information is then used to defraud the customer by clonin accounts! Transactional Risks Transactional risks include the splittin and layerin of transfers usually by a ents with the help of internal staff members! +ayerin is where an a ent is asked to transfer a sum of money from one customer to another! The a ent# in doin so# sends the transaction throu h numerous a ents before it reaches the beneficiary! This results in the provider havin to pay commissions to multiple a ents! Similarly# the splittin of transfer works in very much the same way! A customer can re'uest an a ent to send money to another customer! The a ent splits the transaction between several a ents who each send a piece of the transaction to the customer who then all claim commission for the one transaction! A service provider could lose a considerable amount of money as a result of such fraudulent activities! Technology Risk %n today&s hi hly technical society it is essential that the providers of )obile )oney are sub$ected to strict uidelines and re ulations# internal policies and conscientious monitorin by the authorities! The dan er of fraud be ins with the technical platform that drives the product! This technolo y is constantly evolvin and will re'uire continuous overnance!
Frances Poole Summer Research Paper ID# 0904687

24

Cnscrupulous persons can manipulate any system to divert funds# duplicate funds and reverse payments etc! which could prove disastrous to the service provider&s reputation as well as all other users of the system! Reputation Risk A company relies heavily on its reputation to maintain its position in the market place! There are various factors that could dama e the reputation of a company that can result in loss of client base and ultimately loss of income! A company has to ensure that its products are safe# competitive# innovative and reliable! A company that has fre'uent incidents of fraud will cause the customers to move their business to another service provider! %n order to miti ate the problem of reputation risk# a company should always to strive to hear and understand the concerns of its customers# shareholders and employees! 2onstructive feedback is a vital means of keepin abreast of industry expectations!

<!6

2ontrollin )obile )oney Risks

There are two types of controls for mobile money servicesE these are preventative controls and detective controls! Preventative controls reduce the occurrence of fraudulent activity# while detective controls monitor and report activities that have already taken place!?9 As discussed previously# there are companies such as @eural Technolo ies# who are e'uipped to mana e and monitor risks and fraud on behalf of mobile money service providers and other stakeholders!

38

See Appendix ? +ara Lilman and )ichael Joyce# )ana in the Risk of Fraud in )obile )oney

Frances Poole

Summer Research Paper

ID# 0904687

25

24APT,R > =!; Jamaican +e islation and Re ulations

The Jamaican financial system is re ulated by a encies under specific le islation! Financial re ulations provide the framework for mana in the country&s financial sector! These re ulations apply to all financial institutions# its officers and all persons actin on its behalf! The re ulations are desi ned to accomplish inter alia the followin : a/ provide information to investors so that they are able to determine how safe potential investments areE b/ improve control over monetary policy# such as the control of money supply throu h reserve re'uirements! Afficers and employees have a responsibility for takin reasonable action to provide for the security of the assets under their control# and for ensurin that the use of these resources is le al and properly authorised! There are stron penalties for non(compliance to the re ulations which include fines and even imprisonment for serious offences! Fraudulent activities related to mobile money are intended to be curtailed by the re ulations implemented by the "ank of Jamaica .the "ank/# via the Luidelines for ,lectronic Retail Payment Services 6B;? .Luidelines/ and Payment System Aversi ht Policy .6B;6/! The uidelines provide the framework re'uired to support the development of the payment services sector and overn the oversi ht of the payments# clearin and securities systems! The uidelines are issued in accordance with the provisions of the Payment 2learin and Settlement Act .6B;B/! The "ankin Act This Act re ulates the licensin of commercial banks! %t speaks to the inte rity of the Senior )ana ers of a bank and states all the necessary re'uirements for startin and operatin a bank in Jamaica!

Frances Poole

Summer Research Paper

ID# 0904687

26

Luidelines for ,lectronic Retail Payment Services 6B;? The ob$ectives of the Luidelines are to: ?: a/ b/ c/ d/ define authorisation re'uirements by the "ankE outline the standards to be observed by electronic retail payment service providersE foster and maintain public trust and confidence in electronic means of paymentE and promote financial inclusion

The uidelines systematically outline the re'uirements and re ulations that overn electronic retail payments! %t states that only deposit takin institutions re ulated by the "ank of Jamaica have the authority to conduct deposit takin business!<B Therefore# all funds held on behalf of mobile money service providers must be placed in a re ulated deposit takin institution! 4owever# already in Jamaica# persons can receive air time electronically for their mobile phones at various retail outlets such as pharmacies and as stations! These transactions are done throu h +%), and *i icel# the two mobile phone service providersE additionally# 2ool 2orporation +imited offers a similar service! The uidelines were crafted after receivin feedback from various stakeholders and cover a wide ran e of uidelines which include# inter alia# capital re'uirements# overnance# operational re'uirements and consumer protection! The uidelines also include arran ements for maintainin custodian accounts and the reportin re'uirements! The Proceeds of 2rimes Act (PA2A/ 6BB8 As it relates to fraudulent transactions which could include spoofin of a S%)# the A)+K2FT policy 6BB9 provides some applicable uidelines! The policy states that# Noffences to which the criminal lifestyle re ime applies can be found at the second schedule of the PA2A: NA defendant shall be re arded as havin a criminal lifestyle if the offence concerned( .a/ is specified in the Second ScheduleE

39 40

S! ?!; S 6!6 Luidelines for ,lectronic Retail Payment Services

Frances Poole

Summer Research Paper

ID# 0904687

27

.b/ constitutes conduct formin part of a course of criminal activity# from which the defendant obtains a benefitE or .c/ is committed over a period of at least one month and the defendant has benefited from the conduct which constitutes the offence&<; The Act deems it an offence Nwhere a person ac'uires# uses or has possession of criminal property and the person knows or has reasonable rounds to believe that the property is criminal property! The penalty on conviction in the case of an individual is a fine not exceedin O?million andKor imprisonment for a term not exceedin five .=/ years# in the case of a body corporate# a fine not exceedin O=million!&<6

%t has already been established that in order to reduce the incidences of crime it is essential to have the relevant information on your customer stored electronically! %n order to satisfy the 0P2 re'uirements the followin information should be obtained from all prospective customers: .a/ iven name and names usedE .b/ correct permanent address# includin postal addressE .c/ previous address E .d/ date of birthE .e/ nationalityE .f/ source of funds# and source of wealth# where considered appropriateE . / contact numbers .workE homeE cellularE/ .h/ Taxpayer Re istration @umber .TR@/E .i/ photo identification and .$/ two references!

PA2A .)oney +aunderin Prevention/ Re ulations 6BB8 These Re ulations speak broadly to all deposit takin institutions and focuses on the anti(money launderin operational and re ulatory re ulations! Re ulation ? states: NSub$ect to the provisions of these Re ulations# it shall be the duty of a financial institution to make a report to the desi nated authority# either on its own initiative or in response to a re'uest made to it by the desi nated authority# in relation to any cash transaction involvin the prescribed amount bein carried out by any person with that institution!&
41 42

S 7.;/ The Proceeds of 2rime Act S!:? The Proceeds of 2rime Act

Frances Poole

Summer Research Paper

ID# 0904687

28

Re ulation < waives the obli ation of Re ulation ? for established customers# bein customer for ;6 months or more! The Re ulation states: NA financial institution may apply in writin to the )inister responsible for finance or a person desi nated in writin by that )inister for exemption from the re'uirements of re ulation ? in relation to a transaction or series of transactions carried out or to be carried out by a person who is an established customer of that institution!&<?

The Re ulations also state the re'uirements for record keepin # internal controls# communication and the trainin of employees!

The +arceny Act ;:<6 As it relates to the theft of a mobile phone instrument or the funds desi nated to a phone# the provisions of the +arceny Act addresses the crime ade'uately# althou h it doesn&t refer specifically to mobile phones# Section ;: states: N,very person who steals any chattels# money# or valuable security # from the person of another shall be uilty of felony# and on conviction thereof liable to imprisonment with hard labour for any term not exceedin ten years!& Gith re ards to the employees of the service providers# banks or a ents who make fraudulent conversion! Section 66 addresses this offence: N.;/ bein a clerk or servant or person employed in the capacity of a clerk or servant 1 .a/ steals any chattel# money# or valuable security belon in possession or power of his master or employerE or .b/ fraudulently embe--les the whole or part any part of any chattel# money# or valuable security# delivered to or received or taken into possession by him for or in the name or on the account of his master or employerE 5
43

to or in the

Re ulation <

Frances Poole

Summer Research Paper

ID# 0904687

29

shall be uilty of felony# and on conviction thereof liable to imprisonment with hard labour for any term not exceedin ten years!& The Act# althou h assented in ;:<6<< it is so skilfully crafted to avoid the exclusion of any tan ible valuable possession! The notions of mobile money# or instruments related to mobile money were not likely to have been conceived at this time but appear to be ade'uately addressed!

The Telecommunication Act 6BBB )obile phone service providers under overned by Act and by which licenses are ranted! Section <8 of the Act addresses the privacy of customer information# while section <: addresses the improper use of services or facilities!

The 2onsumer Protection Act 6BB= This Act Ncarries out# at the re'uest of a consumer who has been adversely affected# such investi ations in relation to the sale of oods or the provision of services as will enable it to determine whether the oods were sold or the services were provided in contravention of this Act or Part %> of the ,lectronic Transactions Act and thereafter to make such report and recommendations in connection therewith as it thinks fit to the )inister!&<=

24APT,R >%

7!;

2onclusion and Recommendations

44
45

+ast amended 6BB6 S!7 .;/ .a/

Frances Poole

Summer Research Paper

ID# 0904687

30

Ghile the introduction of mobile money in Jamaica will potentially provide unlimited opportunities for services operators# banks# companies# merchants and a ents etc!# the associated risks are evident! The ob$ective of all stakeholders should be to abate the innovative fraudsters who are able to implement new ways of manipulatin systems for their own benefit at the detriment of others! 4owever# with the advanced evolvin technolo y that is available in today&s environment# their task is reatly minimised! %nnovative technolo y# stron mana ement and effective re ulations and le islation are the tools re'uired to combat fraudulent activity in the financial sector includin that of mobile money services! As such# althou h fraud may not be totally eliminated it can be effectively mana ed! % submit that the newly implemented "AJ Luidelines for Retail Payment Services . uidelines/ are comprehensive and extensive and applicable to overn the introduction of mobile money services in Jamaica! @evertheless# % recommend that the established le islation# such as the Telecommunications Act and the 2onsumer Protection Act that will also serve to uide this product be amended over time to specifically include mobile money services! Gith reference to the @ational Payment System "ill# 6B;; of 0enya# % also recommend that the re ulators in Jamaica include in our uidelines provisions for the settlement of disputes# particularly those relatin to the recovery of erroneous and fraudulent transfers!

APP,@*%2,S
Appendix D ;

Frances Poole

Summer Research Paper

ID# 0904687

31

+e al and Re ulatory Framework<7 ,ntity
ACR   )inistry of %ndustry and 2ommerce )inistry of Justice )inistry of Finance •     

)andate
Re ulates the utilities and the telecom sector 4as limited involvement in mobile financial services *efines the rules of en a ement for e( commerce %n char e of the le islative framework Lrants and revokes all licenses *ele ates authority to "AJ +ikely to lead mobile financial services initiatives Supervises deposit takin entities .commercial banks# merchant banks R buildin societies/ and provides re ulatory oversi ht for cambios and remittance companies Re ulates and supports the ma$or clearin and settlement systems

"ank of Jamaica



Appendix D 6 ,xamples of the Re'uirements for Safe uardin 2ustomer )oney

2ountry

Safe uard

46

Amarante 2onsultin # Jamaica 9 4ount) :iagnostic and %ecommendations6 July :# 6BB:

Frances Poole

Summer Research Paper

ID# 0904687

32
Af hanistan @ambia Funds must be held in a local currency in licensed banks Funds must be unencumbered and kept in pooled deposit accounts! %n exceptional circumstances # a provider may re'uest a waiver# provided that ;BBS of outstandin funds are set aside and that these funds are protected *emocratic Republic of 2on o 0enya Philippines a ainst loss and creditor&s claims %ssued e(money value must be matched by an e'uivalent sum held in a rin (fenced account! Funds must be unencumbered and kept in banks or any other li'uid asset permitted by the central bank )ust maintain unencumbered li'uid assets in the form of bank deposits# certain GA,)C ."2,AA/ overnment securities# or any other li'uid asset permitted by the central bank Funds must be deposited in banks# invested in central overnment or central bank securities# or invested in other approved corporate securities! Total value of assets held as securities may not exceed ;B times provider&s ,uropean Cnion capital Funds must be deposited in banks or invested in low(risk li'uid assets .such as securities issued by overnments and certain corporate entities! Alternatively# providers may take out sufficient insurance to cover any deficiency!

Appendix D ?

,xamples of 2ontrols in )obile )oney<8
Preventive 2ontrols • 2ontrol access ri hts to protect customer information • *etective 2ontrols )onitor and analyse suspicious activity

47

+ara Lilman and )ichael Joyce# )ana in the Risk of Fraud in )obile )oney# http:KKwww! sma!comKmmu

Frances Poole

Summer Research Paper

ID# 0904687

33

• T •

Se re ation of duties to reduce error or fraud on hi h risk procedures .e e(money reconciliation/ Threshold limits to reduce risk associated with A)+K2FT 2ustomer awareness campai ns to increase customer education and protection A ent trainin on acceptable practices and terms and conditions ,mployee trainin on roles and responsibilities



)onitor activity on system access



2reate robust customer recourse and escalation procedures )onitor a ent transaction activity









S)S alerts to customers





)ana ement transactions

review

of

hi h(value

References
Articles Avia 2ollinder# N"usiness Griter&U hhtp:KK o($amaica!comV Trevorn# N)obile )oney Just Steps Away in Jamaica& .6B;?/ hhtp:KKwww!@iceFmRadio!com @eural Technolo ies# N)obile Payment Fraud&U hhtp: www!neuralt!comV
0itty *ann# NAlaric and Transcel Tar et Jamaica&s Cnbanked& .February 67# 6B;?/

http:KKwww!elctronicpaymentsinternational!comKnewsKalaric(and(transcel(tar et($amaicas(u

Frances Poole

Summer Research Paper

ID# 0904687

34

+ara Lilman and )ichael Joyce# )ana in http:KKwww! sma!comKmmu

the Risk of Fraud in )obile )oneyU

Paul )akin# NRe ulatory %ssues around "ranchless "ankin &Uhttp:KKwww!chyp!com Al a 0harif# "usiness Geek# NA @ew Frontier for 2riminals& .Actober B<# 6B;6/Uhttp:KKwww!businessweek!comKarticlesK6B;6(;B(B<Kmobile(payment(a(new(frontier(for( criminalsV *aniel )auricio Alarcon +o-ano# NA @ew A ent )odel for "ranchless "ankin 2olumbia&Vhttp:KKwww!idlo!intV Steven Jackson# NJtart(ups want mobile money nowJ The Jamaica Lleaner# )ay 9# 6B;? ,lly Akutoyi# I)obile money a 4i h Risk for Fraud in AfricaJ .April ;:# 6B;6/http:KKwww!neuralt!com )obile )oney Services ( Telecoms Risk )ana ement: A PrQsidium "usiness 2onsultancy Ghite Paper# .February 6B;6/Uhppt:KKwww!praesidium!comV Richard 4u hes# IThird Gorld +eads First in )obile "ankin @# The Sydney )ornin 4erald# .)ay 6:# 6B;?/ Aia-e )itha ( Amarante 2onsultin # IFinancial Services throu h )obile devicesJ .July :# 6BB:/ Leor e @ i i# I(obile (one) ;sers %isk -osses under <e/ %ules@5 "usiness *aily .April ;7# 6B;?/ *alber # N4aiti )obile )oney& A(Point(%n(Time 2ase Study Legislations and Regulations Luidelines for ,lectronic Retail Payment Services 6B;? Payment System Aversi ht Policy .6B;6/ Payment 2learin and Settlement Act .6B;B/ The "ankin Act ;:7B PA2A .)oney +aunderin Prevention/ Re ulations 6BB8 The +arceny Act ;:<6
Frances Poole Summer Research Paper ID# 0904687

in

35

The Telecommunication Act 6BBB The 2onsumer Protection Act 6BB= @ational Payments System "ill 6B;; .0enya/

Frances Poole

Summer Research Paper

ID# 0904687

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