A Guide to Anti-Money Laundering for Crypto Firms

5th Anti-Money Laundering Directive (5AMLD): What You Need To Know

Regulation Knowledge & Training

The Fifth Money Laundering Directive (5AMLD) came into force on January 10, 2020. Building on the regulatory regime applied under 4AMLD, 5AMLD was designed to reinforce the European Union’s AML/CFT regime to address emergent and ongoing compliance issues. The impact of 5AMLD is far-reaching: in this article, we’ll discuss its key highlights.

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How 5th Anti-Money Laundering Directive Affects Cryptocurrency

Although much of 5th Anti-Money Laundering Directive’s content updated 4AMLD, it took a significant new legislative step in the treatment of virtual currencies. 5AMLD introduced the following measures:

  • A legal definition of cryptocurrency, which may broadly be regarded as “a digital representation of value that can be digitally transferred, stored or traded and is accepted…as a medium of exchange.”
  • Cryptocurrencies and cryptocurrency exchanges were classified as “obliged entities”, and now face the same CFT/AML regulations applicable to financial institutions under 4AMLD. Practically, this involves an obligation to perform customer due diligence (CDD), and submit suspicious activity reports (SAR).
  • 5th Anti-Money Laundering Directive went further than 4AMLD in imposing reporting AML obligations by giving Financial Intelligence Units (FIU) the authority to obtain the addresses and identities of owners of virtual currency. In so doing, 5AMLD pushed back against the anonymity associated with the use of cryptocurrency.
  • 5AMLD introduced regulations for providers of cryptocurrency exchanges and wallets. Those institutions must now be registered with the competent authorities in their domestic locations – for example, Germany’s BaFin, or the UK’s Financial Conduct Authority.

The introduction of regulations under 5AMLD paves the way for EU operators to release more cryptocurrency products and, crucially, compete with Asian countries which have already made legislative progress in integrating cryptocurrencies with financial markets. 

How 5AMLD Impacts Prepaid Cards

After 4AMLD cut the monthly transaction limit on anonymous prepaid cards to €250 (a measure to combat terrorist financing), 5th Anti-Money Laundering Directive set an even lower limit of €150. This limit also applies to the amount that can be stored or topped-up on the cards. The 5AMLD limit means that firms are required to carry out identity checks on customers using prepaid cards funded with more than €150. Similarly, anonymous remote or online transaction limits have been reduced to €50.

Under 5AMLD, prepaid cards issued outside the EU are prohibited unless they were issued in a territory enforcing legislation equivalent to the EU’s AML/CFT and KYC standards. Obligated entities must review the way they handle prepaid card payments and put mechanisms in place to identify (and refuse) transactions using cards from non-EU sources. This requirement may involve significant revision of existing systems and procedures.

5th Anti-Money Laundering Directive and High Value Goods

5AMLD expanded the scope of legislation regarding other stores of value: art traders, for example, or those acting as intermediaries, now have AML/CFT reporting obligations and have to perform due diligence procedures on their customers. The directive specifically singled out high value works of art for the first time, by imposing AML checks on transactions involving art which amount to €10,000 or more. That rule applies to single transactions or multiple linked transactions.

The scope of 5AMLD is not limited to art. Under the directive, transactions involving a range of high value goods are considered high risk, including oil, arms, precious metals, and tobacco. Notably, historical, cultural and archaeological artifacts are included in the regulation – a move to specifically target funding for terrorist groups such as ISIS.

How 5AMLD Affects Beneficial Ownership

In 2017, 4AMLD introduced a focus on ultimate beneficial ownership (UBO) for the purposes of risk mitigation and money laundering prevention. 5AMLD built on those steps, introducing the following measures:

  • UBO lists (drawn up under 4AMLD) were made publicly accessible.
  • Trusts (or any similar arrangement) must observe beneficial ownership regulations and, like companies, must make that information available to authorities or others demonstrating legitimate interest.
  • UBO national registers must be inter-connected at an EU level in order to facilitate cooperation and the exchange of information between member-state authorities.
  • Member states must strengthen their UBO verification mechanisms to ensure the information they carry is accurate and reliable.
  • Member states must establish separate UBO registers for bank accounts: unlike company UBO registers, these lists are not publicly available and only accessible by authorities.

5th Anti-Money Laundering Directive and High-Risk Third Countries

Companies that do business with customers from high-risk third countries are, under 5AMLD, required to perform enhanced due diligence measures specifically focused on addressing the deficiencies in those countries’ AML protections and the money laundering risks they present. The measures require firms to:

  • Obtain information on customers and UBO, including establishing the purpose of proposed transactions and the source of UBO funding and wealth.
  • Report transaction details with high-risk third countries to senior management and obtain approval prior to establishing or continuing those business relationships.
  • Increase controls on specific business relationships and identify transactions that may need further scrutiny.

Politically Exposed Persons (PEPs)

Under 5AMLD, EU member states must compile and publicly release a functional PEP list made up of prominent politically exposed public functions. This requirement extends to accredited international organizations: the EU will also release an EU-level version of the list.

Functional PEP lists are rare and so can require explanation. The lists created by the EU member states under their 5AMLD compliance obligations must feature the positions that are considered politically exposed without naming the individual that is fulfilling the function (which, of course, will change periodically). These lists are designed to make it easier for smaller compliance teams, or those with lower volumes of customers, to identify the PEPs that they should be screening and monitoring for ongoing changes. 

What countries have not implemented 5AMLD?

As of April 2022, the following procedures remained active: 

  • Austria
  • Belgium
  • Cyprus
  • Czech Republic
  • Denmark
  • Estonia
  • France
  • Greece
  • Hungary
  • Ireland
  • Luxembourg
  • Netherlands
  • Poland
  • Portugal
  • Romania
  • Slovakia
  • Slovenia
  • Sweden

The EU’s infringement procedures entail an initial letter of formal notice which requires a detailed reply from the relevant member-state explaining the reasons for their noncompliance with the directive. The EU will then set out measures which the country must implement in order to achieve compliance. 

If, at the end of the process, the EU determines that the country has not satisfied the prescribed measures, the European Commission may impose financial penalties. 

6AMLD and Future EU AML Regulations

After 5AMLD, the EU issued the Sixth Anti-Money Laundering Directive (6AMLD) which came into effect across the bloc on June 3 2021. Where 5AMLD expanded AML regulations to account for new technologies such as virtual currency, 6AMLD focuses on harmonizing those regulations across EU member-states, toughening penalties, and empowering financial institutions to take an active role in the global fight against money laundering. The key highlights of 6AMLD include:

  • A harmonized list of 22 money laundering predicate offenses
  • The expansion of the definition of money laundering to include ‘aiding and abetting’ 
  • The extension of criminal liability for money laundering to legal persons
  • Mandatory minimum prison sentences of 4 years for money laundering 
  • Information-sharing requirements between member-states in order to facilitate cross-border money laundering prosecutions

The EU AML/CFT Framework: In 2021, the European Commission announced a significant overhaul of its AML/CFT regulations with ‘an ambitious package of legislative proposals’ designed to account for new money laundering threats and fintech innovations. As part of that package, the EU revealed that it would be issuing an update to 6AMLD which would repeal and replace many regulatory measures introduced in the existing directive. 

The updated 6AMLD will introduce the following key measures:

  • National supervisory bodies to be established in all EU member-states.
  • A requirement for all member-states to conduct national risk-assessments on a 4 year basis. 
  • Enhanced protections for corporate money laundering whistleblowers.
  • A framework to facilitate the joint-analysis of financial criminal activity by member-state FIUs.
  • Clarification on information to be included in member-state beneficial ownership registers.
  • Enhanced data-processing rules for personal data.

Find out more about the EU’s planned regulatory framework in our guide

 

This article should be used as a guide and not taken as legal advice.

 

Originally published September 2, 2018, updated May 20, 2022

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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