In May, the Council of the European Union adopted the new Anti-Money Laundering Directive 5 (AML5), which among other things covers definitions and regulations for virtual currencies.
The directive itself seeks to protect credit and financial institutions against the risks of money laundering and terrorist financing.
One of the distinctive elements of this directive is the clear definition of digital currencies and outline of regulations that virtual currency wallets must comply with. AML5 brings virtual currency platforms and wallet providers under the scope of the directive, and obliges them to introduce anti-money laundering checks. The European Union is placing digital currency businesses on the same level as banks and financial institutions, requiring them to perform robust know your customer (KYC) checks and monitor transactions. However, under AML5, virtual currencies can still be exchanged between private individuals without obligatory checks.
Definition of digital currency
AML5 defines virtual currency as "a digital representation of value that can be digitally transferred, stored or traded and is accepted by natural or legal persons as a medium of exchange, but does not have legal tender status and which is not funds as defined in points (25) of Article 4 of the Directive 2015/2366/EC nor monetary value stored on instruments exempted as specified in Article 3(k) and 3(l) of that Directive".
If AML5 is implemented in the currently-proposed format, cryptocurrency exchange platforms and custodian wallet providers based or operating in Europe will need to meet the detailed requirements of European anti-money laundering and terrorist financing laws:
- to verify the identity of the person they are transacting with ('the 'customer')
- to identify and verify any beneficial owners of a customer
- to carry out an anti-money laundering risk assessment for transactions
- to report suspicious transactions
- to retain records with regard to the above.
Cryptocurrency businesses subject to AML5 would also be required to register with the relevant regulator.
When is it coming?
AML5 enters into force after its publication in the Official Journal of the EU, with member countries having 18 months to then implement it into national law. It's worth noting that many countries are still in the process of implementing the previous, 4th Directive. While the timeframe provides companies with some time to prepare, it is recommended they revise their current KYC processes, and identify any adjustments that must be made.
How digital currency companies should prepare
Companies should ensure they are fully compliant with KYC, anti-money laundering, anti-terrorism financing and anti-corruption regulations. AML5 is set to be implemented in different countries at differing times, so it is better for companies to begin their evaluations early and take a unified approach across all countries.
The screening process includes checking identification, information collection, screening sanction lists, checking ultimate beneficial owners (UBO) and politically-exposed persons (PEP). The KYC check - which can be quite laborious - creates a whole package of information, including media checks in different languages, screening against sanction and PEP lists, corporate structure analysis and finally developing a risk profile.
Such labour-intensive compliance processes can seem excessive, but the newness of cryptocurrencies and the relative difficulty (thus far) to police them do make these exchanges incredibly attractive to money laundering and terrorism financing. That's why extra diligence is recommended.
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