A Guide to Anti-Money Laundering for Crypto Firms
5AMLD is just around the corner and it’s targeting a great number of issues. Some of which aren’t yet fit for purpose. We take a quick look at some of the key changes 5AMLD will bring.
The 5AMLD requirements are creating an environment where EU businesses can introduce more cryptocurrency products and compete with Asian markets. This is great news for the crypto sector, one of the critical problems the crypto sector has faced over the last ten years has been confusion on what laws, regulations and regulatory agencies crypto service providers of different types were subject to.
5AMLD helps create a more stable framework in the EU than either Asia Pacific – where there is a wide variety of approaches across multiple jurisdictions Singapore, HK (positive) China (very negative) and even the US, where there are lots of potentially interested federal agencies plus 50 odd state governors who also take a view. In short, clarity is always good for business.
The new regulations will make a significant difference to anonymity, in theory. However, cryptocurrency tumblers are an effective workaround to make it near impossible to track who owns what cryptocurrency. Peer-to-peer exchanges also add another layer of anonymity that will be tough to crack given the lack of clarity around the owners of the cryptocurrency being exchanged. Implementation is just the first stage of the journey for tackling AML/CFT issues in crypto. Compliance teams will need to keep an eye on developing criminal MOs.
Prepayment card crackdown
The new limits on prepayment cards look like a direct attack on financial inclusion at first glance. Prepayment cards are legitimately used by those on low incomes or with limited access to high-street banks due to past financial difficulties such as bankruptcy. However, the reduction in use may see an increase in the market for basic-level bank accounts with low or no access to credit. Something that some banks have considered to some degree with HSBC offering accounts to those with no permanent address, while these solutions may be imperfect, they are managing to address part of the issues the unbanked face.
Regulatory homogenization is at the heart of 5AMLD but while the new directive brings alignment it is, in reality, a new minimum standard. Just higher ones than is common across the industry. Key objectives can vary as to how they’re achieved, such as CDD in France requiring a passport but certified risk in Luxembourg.
One of the key ways of moving away from this would be for the EU to move away from issuing minimum standard directives that need to be transposed into national law and turn the AML rules into EU regulations, which have the force of law and can be directly implemented and enforced from Brussels. This would allow the Commission to be more precise about the kind of requirements it wants from states and private companies.
The Art Affair
Money laundering through art is an appealing concept for media, everyone loves the Thomas Crown Affair. But it’s difficult to see how 5AMLD will have a significant impact on criminals.
At the high end – think Monet, Van Gogh, whoever your favorite Impressionist is – this is going to be difficult to apprehend. Art tends to be bought at the integration stage of the money laundering process, so the funds have usually been through multiple offshore transactions and mixed up before they end up in the concentration account of the person buying the art. Due diligence on buyers (and sellers) could help, especially if there seems to be a discrepancy between the apparent means and lifestyle of the buyer and the cost of the purchase.
But even the ultimate criminal purchasers can find ways around this, such as finding or grooming apparently rich nominee purchasers who act as a cutout. These nominees can just ‘give’ the item to the criminal at the end of the process without any financial record. Unexplained Wealth Orders can help with this, but then law enforcement agencies like the NCA would need to know who owns what piece of art, when. Without a comprehensive global register (which is likely impossible) it would be difficult to justify a piece of art under a UWO.
Listen to our podcast with Aminah Samad from UK Finance for more on 5AMLD here.
Originally published January 8, 2020, updated May 6, 2022
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