A Guide to Anti-Money Laundering for Crypto Firms
Following the United Kingdom’s (UK) official exit from the European Union (EU), the country has adopted a new strategy to stimulate the economy and compensate for any reduction in trade with the EU. This new strategy will include the creation and use of freeports within the UK. In an attempt to position itself as a hub for incoming and outgoing goods, the UK government announced in its March 2021 Budget at least eight new freeports in England, the first time it has had this many freeports since 2012.
Despite the British government’s enthusiasm, the Welsh and Scottish governments have announced reservations and have held off on introducing their own freeports. While freeports can provide businesses with significant tax and operational advantages, these free trade zones (FTZs) are also notoriously difficult for compliance officers to manage. Between increased financial crime and the overlapping legislative burdens, FTZs require businesses to adopt a more dynamic compliance strategy.
Compliance challenges businesses face when operating in UK freeports
EU’s 6th Anti Money Laundering Directive increases the compliance burden for businesses, even in the UK
The EU’s 6AMLD came into effect at the end of last year and was required to be implemented by financial institutions by June 3, 2021. While compliance requirements remained broadly similar to the directive’s direct successor, 5AMLD, some key tweaks could be consequential for compliance officers. The directive aimed to harmonize the definition of money laundering across EU member states, particularly regarding predicate offenses that previously might not have constituted money laundering.
While most of the changes within the 6AMLD had already been embedded in UK legislation, there is one area where there is still significant divergence and is still being debated by regulators. Regulators seem to be unable to collectively decide if employers are legally responsible for financial crimes committed by their employees. This decision will be taken by the EU and the UK independently and there is scope for further divergence in compliance requirements down the road.
One notable change in the latest directive is the more stringent penalties for compliance failures. The 6AMLD not only expanded the definition of money laundering but also included culpability for fringe actors who are viewed as “enablers” of financial crime. These regulations and penalties will continue to apply to UK businesses even after the UK’s exit from the EU. This means that compliance officers must now check corporate compliance against regulations from multiple jurisdictions, particularly if they operate in FTZs that are designed to increase collaboration between companies from different countries.
Sanctions and Anti Money Laundering Act 2018 created a disparate and more comprehensive list of sanctioned businesses and individuals
Following its separation from the EU, the UK will rely on the Sanctions and Anti-Money Laundering Act 2018 (SAMLA) to act as the defining AML and CFT regulation within the country, particularly in the absence of unified regional regulations. This can be a major challenge for businesses that wish to operate in UK freeports; the UK has 30 autonomous sanctions regimes under this act and the existence of freeports is likely to cause a spike in this number.
These sanctions regimes act independently of the EU’s regulations and this can be a challenge for businesses that operate across geographies or have workers from different jurisdictions. There is already divergence between the two regions, with the UK choosing not to replicate EU sanctions on Egypt, Tunisia, and Ukraine.
In addition to this, the UK is still debating whether sanctions can be imposed on jurisdictions where descriptions of human rights violations are used in lieu of official designations, particularly against economies like Russia and China. With the outcome of these discussions uncertain, compliance officers must prepare to react in a variety of ways to ensure long-term compliance when interacting with international actors within FTZs.
How businesses can successfully balance compliance and business objectives in a complicated and dynamic regulatory landscape
Conduct risk assessments based on global recommendations and regulations from organizations such as the OECD
While it can be extremely time-consuming to identify regulatory overlaps, divergent policies, and changing enforcement metrics, businesses operating in freeports can protect themselves against inadvertent money laundering or illicit financing operations by accepting and adhering to international recommendations set by international bodies such as the Organisation for Economic Co-operation and Development (OECD) or the International Chamber of Commerce (ICC).
The OECD, as an example, has adherents across jurisdictions and includes both the UK and key nations in the EU, such as Germany and France. The recommendations made by the OECD take into account the regulatory priorities and policy directions that member states have set out.
Use technology to help stay on top of the latest developments and ensure compliance with UK and EU regulatory requirements
Cross-border organizations commonly have compliance teams keeping abreast of developments in international regulations and compliance requirements in their operating jurisdictions. However, as compliance requirements grow in diversity and complexity due to the introduction of divergent data privacy laws, the risk of compliance errors caused by human error increases.
As such, it is crucial for businesses to adopt and use intelligent programs to monitor and highlight AML regulation changes across countries. This allows companies to reduce the lag time between regulatory announcements and internal policy making, thereby increasing overall efficiency and reducing the likelihood of overlooking crucial policy changes.
Ultimately, compliance requirements are only expected to get more complicated as additional areas emerge where the UK and EU have differing regulatory priorities and divergent compliance policies. Businesses that operate in freeports have to pay particular attention to the regulations that apply to each operation. International guidelines (such as recommendations from the OECD) can help to make compliance easier for businesses, but managers must still retain a high level of adaptability to react to changing regulations effectively and efficiently.
If you would like to find out more about the specific challenges that British businesses will face when operating in upcoming free ports, read our latest white paper discussing the future of AML in a post-Brexit world.
Originally published July 29, 2021, updated November 18, 2021
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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