5th Anti Money Laundering Directive: Are you ready?


By Serhii Mokhniev, Regulatory Affairs Counsel, CEX.IO

The 5th Anti-Money Laundering Directive (“5AMLD”) entered into force in the European Union (“EU”) on July 9, 2018, strengthening the fight against money laundering and terrorist financing in the EU financial market. The Member States are obliged to transpose 5AMLD provisions into their national legislation by January 20, 2020, and time is fast approaching.

Much has been said about the adopted provisions, but what is going on behind the letter of the law gaining even greater importance? How are businesses preparing for the new obligations and how will 5AMLD affect customers?

5AMLD, 5th Anti Money Laundering Directive: Are you ready?

Long story short

The 5AMLD brings several substantial changes to the current Anti-money Laundering and Counter Financing of Terrorism (“AML/CFT”) framework in the EU. One, and probably the most prominent of them is the extension of the scope of AML/CFT regulations on cryptocurrency. This approach has already been known across the industry (such as FinCEN’s money services businesses regulation in USA), but at the same time is completely new to the EU.

Let us get straight in to understand what exactly would change in the life of the crypto community early next year. Before 5AMLD adoption, there was no uniform regulatory framework for cryptocurrency in the EU. Some types of crypto tokens could fall under the financial instruments regulations, but only those recognised as financial instruments. Though traditional cryptocurrencies used as a means of payment such as Bitcoin and the like, remained in a regulatory limbo for a decade.

The directive for the first time covers custodian wallet service providers and crypto-to-fiat exchanges with AML/CFT standards, giving them the status of “obliged entities”. And as obliged entities, they now need to face the same requirements as traditional financial institutions in terms of authorisation with a regulator, customer due diligence (KYC), ongoing account monitoring, recordkeeping and suspicious activity reporting.

Notably, the Member States are free to impose stricter anti-money laundering measures in their national legislation, for example, the UK plans on going beyond the requirements of 5AMLD covering a wide range of crypto businesses including, but not limited to crypto-to-crypto only exchanges and cryptocurrency ATMs.

Another considerable point is the increased transparency regarding beneficial ownership. It means any company incorporated within the EU must hold accurate and up-to-date information about its ultimate beneficial owners as well as the obliged entities are also required to collect information about the identity of the beneficial owners of its customers.

Besides, 5AMLD obliges Member States to make such information available on public registers, which should be interconnected on the EU level to facilitate cross-border cooperation and access to information by regulators and Financial Intelligence Units.

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5AMLD: The challenges it brings

Apart from making a great step in fighting money laundering, the adopted provisions also create significant cost and time challenges for cryptocurrency exchanges and wallets operating in the EU. First of all, exchanges and wallet providers need to go through the authorisation or even full licensing process with their national financial regulator – some exchanges have already done it and there is no excuse for those who are not compliant. Further, they need to ensure their business operations are ready to meet customer identification and other obligations or build an entire KYC system if they don’t have one in place already.

In spite of the challenges, overall, 5AMLD has been very well-received by the crypto industry as it brings trust and stimulates greater adoption of cryptocurrency.

How is CEX.IO preparing for 5AMLD implementation?

To comply with the legislation, we ensure that all our policies and procedures are in line with 5AMLD, our people are trained on the new requirements as well as all systems and controls are aligned with the directive.

We understand the importance of compliance procedures and providing a transparent and trusted service. This is why we implemented mandatory verification long before the 5AMLD adoption. In particular, we introduced verification for fiat-related transactions in 2014 and in December 2018 also made it mandatory for crypto-to-crypto transactions. From that point forward, all customers using our services needed to be verified.

What does it mean for customers?

Customers may find additional compliance measures burdensome, especially since anonymity attached to cryptocurrency is believed to be among the key advantages for many crypto users. At the same time, crypto exchanges and wallet providers become mature financial market players providing a better experience and most importantly safety for the customer.

Verification processes may differ between exchanges. For instance, at CEX.IO we have 3 tiers of verification for individuals. The first is mandatory and every other level in the process offers customers greater advantages. Corporate clients, while passing verification are expected to provide information regarding their beneficial ownership, as well as some additional information about their business operations and purpose of the account to help us understand their needs and expectations.

Last but not least, the General Data Protection Regulation applies to the processing of personal data collected for the purposes of AML/CFT under 5AMLD. This means that crypto exchanges and wallet providers are obliged to ensure technical, organisational and legal measures to protect the information they collect on their customers.

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This is another challenge for service providers which is to find a balance between data privacy and AML/CFT compliance but at the same time assures the end customer that their data is safe and protected.

Summary

  • The 5th Anti-money Laundering Directive becomes a game-changer in the crypto industry in the EU covering custodian wallet service providers and crypto-to-fiat exchanges with AML/CFT standards equal to traditional financial institutions.
  • Crypto service providers need to study their national legislation and must be operationally prepared for the newly imposed obligations by January 20, 2020. It should also be noted that Member States may impose stricter obligations compared to those stipulated in the Directive.
  • Individuals are expected to provide additional information about themselves and relevant supporting documents and corporate customers will be required to provide information regarding their beneficial owners.
  • Overall, strengthened AML/CFT measures will lead to crypto popularisation and market growth since it provides a possibility for customers to work with reliable service providers and receive trustworthy service within a regulated market.

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