Sanctions

A New Sanctions Regime and a Spotlight on Crypto

January 7, 2021 5 minute read

The Parliament of Singapore approves new AML regulations for crypto service providers, the US issues new guidance on crypto technology, and the UK’s new sanctions regime takes effect.

We share our financial crime regulatory highlights from the week of 4 January 2021.

A New Year Brings New Regulations

In a productive start to the new year, the Parliament of Singapore has voted to update the Payment Services Act and tighten AML controls on cryptocurrencies. Following an amendment passed on January 4, all cryptocurrency service providers must now obtain a license from the Monetary Authority of Singapore (MAS), the country’s financial regulatory body.

Previously, only those service providers that were in possession of the money or cryptocurrency involved were regulated. But under the new amendment, the MAS now has the authority to regulate all entities that facilitate the transmission, exchange or storage of cryptocurrencies. Such entities now must cooperate with the MAS to be formally licensed and must devise customer due diligence and transaction monitoring programs that comply with MAS regulations.

Lawmakers hope the expansion of the MAS’s regulatory oversight powers will make it easier to detect and mitigate AML/CFT risks associated with the use of cryptocurrencies. In particular, it will give them visibility into cross-border transactions where the service provider in Singapore is simply a facilitator and not the sender or recipient. Further, through this amendment, the MAS will have the authority to impose regulations on cryptocurrency service providers focused on consumer protection and financial stability.

The regulatory changes come as Bitcoin and other cryptocurrencies see renewed interest from individuals and institutions worldwide. Bitcoin’s price, for example, surged to an all-time high of over $30,000 (S$39,632) on Monday, just weeks after passing $20,000 (S$26,384). So while cryptocurrency use has yet to go mainstream in Singapore, these measures are, at least in part, in anticipation of more widespread adoption. 

Now, according to Transport Minister and MAS board member Ong Ye Kung, the MAS will have the ability to respond as needed to developments in the cryptocurrency space as they happen. While it’s too soon to tell how the MAS will address those concerns, it’s clear that cryptocurrencies will be a top priority for the regulator this year.

The US Embraces Crypto Technology for Payments

On January 4, the US Office of Comptroller of the Currency confirmed via an interpretative letter that US banks are officially allowed to use new technologies and cryptocurrencies to help customers conduct payment transactions.

More specifically, Interpretative Letter 1174 gives banks the green light to use stablecoins — a specific type of cryptocurrency that’s tethered to another asset to reduce its price volatility — when conducting payment transactions for customers. Banks may now issue and exchange stablecoins. They may also validate, store and record them using distributed ledgers or another independent node verification network (INVN) — that is, an electronic database where information is stored not on one computer but several.

The news isn’t a total surprise. Since taking on the role of Acting Comptroller of the Currency in May 2020, Brian Brooks has issued two other interpretive letters that have focused on how banks can take advantage of the new technologies emerging from cryptocurrencies. With the first, he clarified that banks could offer customers cryptocurrency custodial services, and with the second, he confirmed that banks could hold stablecoin reserves.

This third letter builds upon the foundation laid with the previous two and further clarifies that banks may leverage stablecoins to transfer funds between customers and institutions — a move that has the potential to increase efficiency and decrease the time spent waiting for payments to clear. Further, as cryptocurrencies, and the underlying technologies that enable them, have become more widespread, this may create another avenue, perhaps a more efficient one, through which customers and financial institutions alike can conduct cross-border transactions.

The response from the cryptocurrency and fintech industries has been positive, with many encouraged by the seeming embrace of new technologies. Even so, the interpretative letter ends on a cautionary note: it reminds banks that engaging in payments involving cryptocurrencies carries additional risks. Financial institutions must ensure that incorporating such technologies to increase efficiency doesn’t come at the cost of ignoring AML/CFT compliance obligations.

New UK Sanctions Regime Takes Effect

The Brexit transition period is now over. The UK’s new, standalone sanctions regime, which applies throughout the UK and includes Northern Ireland, has officially come into force as of 11 p.m. on December 31.

To provide financial institutions with guidance and ensure compliance, the UK’s Foreign, Commonwealth and Development Office has made two versions of its sanctions list available: a bridging document and a full, consolidated list of all sanctioned entities. The bridging document only contains updates to specific administrative fields, such as regime, group type and other information, and is meant to facilitate adjustments to automated sanctions screening processes. Yet, while it may minimize the number of alerts generated, it’s important to note that it’s not a substitute for using the full, consolidated list.

Nevertheless, there should be very few, if any, surprises. Throughout 2020, the Foreign, Commonwealth and Development Office issued regulations and guidance in preparation for the post-Brexit launch of its sanctions program, which comprises over 30 different sanctions regimes. Further, at first glance, there is significant overlap between the EU’s regulations and those issued by the UK — at least, for now.

The two regimes will likely diverge as the UK starts establishing its own foreign policy strategy. Already, as we mentioned last week, there are critical differences in how the sanctions regimes are applied, with UK sanctions also encompassing entities in which designated individuals have a 50% or more ownership or controlling interest. Additionally, the UK has signaled its willingness to enforce Magnitsky-style sanctions on Russian, Saudi and Belarusian nationals.

Two other distinct characteristics of the regime are: the UK’s ability to designate entities with only a description when singling them out by name isn’t practical, and its authority to grant “general licenses” that allow specific companies to conduct limited business with sanctioned entities. Both will increase the potential for ambiguity and may require financial institutions to conduct additional due diligence.

How detailed the guidance from the Foreign, Commonwealth and Development Office will be and to what extent the UK will enforce compliance — and penalize those found to be non-compliant — remains to be seen. There will likely be several developments in the coming months — just another reminder that financial institutions must ensure their compliance processes are effective and enable a quick response to all regulatory changes.