A Guide to Anti-Money Laundering for Crypto Firms
For most of 2020, the focus of the media and general public has shifted away from Brexit and towards the Covid-19 pandemic. However, with 2021 just a few months away and the end of the UK’s “transition period” coming into view, Brexit is arguably once again going to become more important than ever.
As we edge closer to the end of the transition period, a degree of uncertainty still remains. Of particular interest is whether the UK will continue to bring its anti-money laundering laws into line with those set out by the EU or whether it will establish its own more distinctive regime.
The Relationship to Date: Implementation of the 5th Money Laundering Directive in the UK
The Fifth Money Laundering Directive (5AMLD) introduced a number of key changes to the European money-laundering regime, for example, extending the scope of the directive to cryptocurrency wallets and exchanges.
5AMLD came into effect in January 2020, yet despite its impending exit from the EU, the UK implemented the directive into national law. The implementation of 5AMLD not only brought the domestic regime in line with EU regulations, it also bolstered the UK’s AML rules and ensured they continue to meet the global standards as set out by the Financial Action Task Force (FATF).
5AMLD was introduced into UK law primarily through the Money Laundering and Terrorist Financing (Amendment) Regulations 2019, which implemented the key changes as mentioned previously.
Issues to Consider After the Transition Period
The Money Laundering and Transfer of Funds Regulations 2019 (SI 2019 No. 253), part of the “UK Exit Regulations”, were brought into law earlier this year. The UK Exit Regulations essentially tie up a number of loose ends regarding the UK’s exit, maintaining key AML rules, while at the same time removing references to the EU and its institutions. Even with the legislation in place, certain issues still remain.
The UK’s Status as a Third Country
In the event of a “no-deal” Brexit, one potential issue to consider following the end of the transition period is the treatment of the UK as a “third country”. Under the rules set out in 5AMLD, higher standards must be applied to third countries to mitigate the potential risk involved with payment transactions and other business relationships.
Requiring the third country to perform enhanced customer due-diligence checks generally mitigates this risk. However, this could have negative consequences for business relationships and transactions, potentially slowing down and making the process more cumbersome.
Taking this into consideration, it seems unlikely that the EU will consider the UK as a high-risk third country for the purposes of AML. Therefore, while it’s worth thinking about, the likelihood that the above scenario will play out is a remote possibility.
Impact of EU Legislation on the UK Following Brexit
In order to address some the issue highlighted above, the latest iteration of the UK Exit Regulations (SI 2020 No. 991) were put before parliament on 15 September 2020.
As discussed briefly above, the UK Exit Regulations aim to bring UK anti-money laundering rules in line with current EU legislation and also fix any “deficiencies” that might arise at the end of the transition period.
The Regulations do make some changes, which impact UBO rules. For example, firms are expected to report discrepancies they find between their own KYC and the information on the PSC register. In addition, updates have been made regarding access to the UK’s register of express trusts, requiring information to be made available to those with a “legitimate interest”. While not completely in line with EU rules, this does appear to be a move towards the more detailed approach to UBO information.
Impact of the Sixth Money Laundering Directive in the UK
The Sixth Money Laundering Directive (6AMLD) will be transposed into EU law this December and must be implemented into member states’ national laws by 3 June 2021. However, unlike 5AMLD, the UK will not transpose 6AMLD into the domestic AML framework. One of the primary reasons for this decision was that the UK AML regime already complies with many of the 6AMLD rules.
In fact, the UK government reasoned that domestic legislation actually goes further than 6AMLD, for example, UK AML rules already impose longer sentences for certain money laundering offences (imprisonment of up to 14 years in some cases). In addition, UK law includes broader provisions relating to predicate offences than the specified crimes that qualify as predicate offences set out in 6AMLD.
Ultimately the government “did not consider that opting in would enhance the UK approach to tackling money laundering”.
One notable area, however, where the UK does not meet the standard of 6AMLD is the issue of corporate liability for the failure to prevent money laundering. 6AMLD makes it possible for a legal person to be held liable where they failed to exercise control or supervision, which enabled or allowed money laundering.
While the principle of “corporate criminal liability” exists under UK law, it remains to be seen whether it will be expanded to include a “failure to prevent” type offence. Discussions have taken place regarding the topic, with some push-back coming from industry on the basis that such an offence would put too much pressure on an already burdened internal control environment.
Divergence After 2021?
While it’s still not certain whether the UK is going to leave the EU with or without a deal, it’s very much evident that the aim of both the UK and EU with regard to money laundering will be more convergent than not. During the course of exit negotiations, both the UK and EU have agreed to “support international efforts”, with a particular emphasis on the FATF rules.
This is a clear indication that, while there might be a slight degree of future divergence, UK rules will follow a similar approach to EU and other countries that follow international “best practice” with regard to AML.
Originally published November 12, 2020, updated November 17, 2021
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