As money laundering has become the subject of many news cycles over the past few years, there has been an added pressure to revise the regulatory standards on AMLD.
The Anti-Money Laundering Directive was issued as a set of legal requirements to regulate certain entities within EU member states. Designed by the European Commission, AMLD contains a set of rules to be enforced to prevent and fight against money laundering and terrorist financing.
The main way in which the Anti-Money Laundering Directive functions, is in its risk-based approach; requiring businesses and obliged entities to perform strict due diligence on customers for auditing and record purposes, as well as enforcing policies on data protection.
The introduction of 5AMLD, the 5th directive of AMLD, that came just 1 year after the legalisation of 4AMLD, is to be enforced across EU member states by January 20th 2020. 5AMLD aims to prevent money laundering and concealment by further promoting transparency for businesses operating across Europe.
The significance of 5AMLD comes in the light of the crypto surge and the challenge to its ethos, that seeks to operate in a peer to peer trading environment, with no 3rd party regulation.
The ideal of this space is to maintain anonymity between all parties.
Whilst we’ll cover the other amendments that make this new 5th directive differ from its predecessor, businesses within the exchanges and virtual currencies industry, are perceived to be the most harshly affected by these new amendments to AML.
Under the scope of the previous 4th directive, obliged entities that had to comply with the AMLD were financial institutions, accountants, tax advisors, lawyers, trust providers, estate/letting agents and, gambling providers trading more than 10,000 euros (8,568GBP).
Under 5AMLD, this scope extends to include businesses involving virtual currencies, anonymous prepaid cards, cryptocurrency exchanges, custodial e-wallets and artwork dealers.
Whilst we’ll go on to expand on the consequences to the expansion of this scope, it is first important to cover the generalised amendments to the directive.
First and foremost, all businesses and services that fall within the scope of the 5th directive are required to register their entity with their local governing bodies, such as the FCA with the UK, or the equivalent in other EU member states.
Public access will be granted to those with a legitimate interest to a central register of beneficial business owners whether or not they have tax consequences. However, to protect minors and beneficial identities under these new amendments, legitimate interest is defined as those with an active interest in anti-money laundering or counter-terrorism and can underpin their claim with evidence.
In regards to the UK’s adoption of 5AMLD, the scope of this register will now include non-EU residents that own UK land or are in some way tied to a UK business. The number of beneficials and/or trusts registered is expected to increase from 200,000 to over 2 million. EU member states must hold accurate information on all legal and corporate entities within 18 months of 5AMLD.
In a further step to promote the transparency of businesses within the UK, the anonymity of savings accounts and safety deposit boxes within the EU are strictly prohibited.
Anonymous Prepaid Cards
The way in which prepaid cards are being regulated primarily involves spending limits and the scope of anonymity. Whereas, prior to 5AMLD, an anonymous prepaid card allowed for goods to be bought anonymously - the identity of a customer will now be required if a transaction exceeds 50 euros. This will apply to all transactions after 36 months, regardless of value.
The value that a prepaid card is allowed to hold has also been lowered from 250 euros (214GBP) to 150 euros (128GBP) and it cannot be funded electronically with anonymous money, nor can it be reloaded.
With this stark eradication of anonymity, there is a relevance to the similar regulation of virtual currencies and its associated industries. As this directive legally defines cryptocurrency as ‘a digital representation of value that can be digitally transferred, stored or traded, and is accepted as a medium of exchange’ (namescan insights), it can be considered just the beginning of an intense scrutiny on the industry in the years to come.
Custodial wallets, exchanges and virtual currencies will interchangeably be affected by the 5th amendment in value and due diligence.
There are two types of digital wallet. One type grants sole access and recovery methods to the user, and the other - a custodial wallet - gives the access, backup and recovery (private key) to the custodian.
Whilst in the decentralized crypto space this can often be seen as controversial against the plight to retain sole access and control over your funds, it is the most convenient and easiest avenue into crypto for novices - especially those likely to forget lengthy passcodes that you can’t customize.
With device losses or corruption, a custodial wallet can be backed up and recovered and therefore, so can your financial assets. Alternatively, this would not be the case with a non-custodial wallet.
The way in which a custodial wallet would be affected, would likely be in the due diligence it performs for the necessary KYC requirements. As part of the new directive, all businesses within the scope must also perform extra due diligence on KYCs from third countries - as defined by the EU commission as high risk - in regards to money-laundering or terrorist financing.
These new requirements may not only affect the number of users signing up to not only custodial wallets, but it may also affect cryptocurrency usage in general, and in turn, the trading volume of exchanges.
Under the directive, both exchanges and wallets must regularly monitor and report any suspicious activity to local governing bodies; breaching the presumed trust that already compromises the anonymous and decentralised ethos of cryptocurrency.
There may also be a resultant rise in the use of non-custodial wallet and local trading services that rely on peer to peer trading. Whilst businesses may initially be affected, the trading volume of cryptocurrencies will likely adapt.
Cryptocurrency exchange, ‘CryptoBridge’ has already complied with the new amendments brought about by 5AMLD, expanding their KYC due diligence to users. However, it is important to note that 'CryptoBridge' is not a custodian to their users’ assets; bringing about less friction to their business model than others in the industry.
Increased regulation of cryptocurrencies is expected in the years to come, with expressed desire by the EU commission to build a central database of user wallet addresses and have traders self-declare their identities.
The broader scope of this 5th directive comes in the wake of the Panama papers, that exposed the off-shore money laundering of national leaders and politicians amongst many others. Alongside other threats such as terrorist financing, and a building negativity towards cryptocurrency - the call to review and quickly regulate anti-money laundering policies on a national and international scale grew rapidly; with every EU member state ultimately offering their own consultation papers in response. However, with the popularity of cryptocurrency growing and challenging for a further economic response, even Britain is compliant with the new directive. Despite leaving the EU at the end of the month, the HM Treasury has permitted that Britain will only bring into national law, the amendments that have significant proof of concept in countering the challenges raised by the AML amendments.
*Currency conversions correct as of 15/01/2020