September.13.2018
The Fifth Anti-Money Laundering Directive (MLD5) entered into force in July 2018. MLD5 updates the legal framework under the Fourth Anti-Money Laundering Directive (MLD4) and must be implemented by the EU member states by January 2020. In response to the growing concerns over terrorist financing and the revelations of the Panama Papers, the amendments in MLD5:
• increase transparency with respect to the beneficial ownership registers, which EU member states are required to establish under MLD4;
• clarify and harmonize the enhanced due diligence measures that need to be applied to business relationships or transactions involving “high risk third countries”;
• require EU member states to create and maintain a list of public functions that qualify as “politically exposed persons” or “PEPs” in their jurisdiction;
• restrict the anonymous use of prepaid cards in order to mitigate the risk that they may be used for terrorist financing;
• grant new powers for financial intelligence units, including the power to request, obtain and use information from any obliged entity based on their own analysis and intelligence, rather than just when triggered by a prior suspicious activity report; and
• require member states to establish centralised registers or data retrieval systems to enable financial intelligence units and national competent authorities to access information about the identities of holders of bank and payment accounts and safe-deposit boxes.
In addition to these broad objectives, MLD5—for the first time—brings certain virtual currency service providers within the scope of EU anti-money laundering and terrorist financing regulations.
Extension of the AML Regime to Virtual Currencies
Virtual currencies, as defined in MLD5, are “a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.”
Under this definition, most of the coins, tokens, and cryptocurrencies known today probably qualify as “virtual currency.” While not all of the tokens are necessarily used as a “means of exchange,” and this may not be their intended purpose, MLD5 adds that its objective is to cover “all the potential uses of virtual currencies,” such as “means of exchange, investment, store-of-value or use in online casinos.”
As for the reason behind the extension of the AML regime to virtual currencies, in its 2016 Communication on an Action Plan for Strengthening the Fight Against Terrorist Financing, the European Commission identified the ability for virtual currencies to be abused to conceal transactions related to terrorist financing, due to the relative anonymity of the virtual currency environment and the lack of an EU-level reporting mechanism for identifying suspicious activity.
To tackle these issues, MLD5 brings the “gatekeepers” of virtual currencies within the scope of EU anti-money laundering and terrorist financing legislation. Providers engaged in exchange services between virtual currencies and fiat currencies (“virtual currency exchange platforms”) and providers of services to hold, store and transfer virtual currencies (“custodian wallet providers”) have been made “obliged entities” for the purposes of the EU anti-money laundering and terrorist-financing framework. This means that providers of those services will be subject to the same obligations to carry out customer due diligence and report suspicious transactions as other firms designated as obliged entities under EU law, including credit institutions, financial institutions and certain professionals such as auditors and accountants.
The EU acknowledges that regulating virtual currency exchange providers and custodian wallet providers will not entirely address the issue of anonymity attached to virtual currency transactions, since users can transact without going through such providers. But to combat the risks related to anonymity, MLD5 states that national financial intelligence units should be able to obtain information allowing them to associate virtual currency addresses to the identity of the owner of virtual currency.
What’s Next for the UK AML Regime?
EU Member States have until 10 January 2020 to implement MLD5 into their national legislation. Since the implementation date falls within the anticipated transitional period of the UK’s exit from the EU, it is widely assumed that the UK will implement MLD5. MLD5 takes the form of a minimum harmonising Directive, which means that it sets minimum EU-wide standards that the UK could, if it chooses, go beyond.
Going forward, the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA 2018”), which received Royal Assent on 23 May 2018, establishes a broad framework allowing the Secretary of State to pass UK anti-money laundering and terrorist financing regulations after the UK leaves the EU. Regulations may be passed to detect, investigate or prevent money laundering and terrorist financing and implement standards published by the Financial Action Task Force. SAMLA 2018 does not affect the substantive UK money laundering and terrorist financing offences under the Proceeds of Crime Act 2002 and Terrorism Act 2000, which can only be amended by Parliament. However, the broad enabling powers created under the legislation give rise to the possibility that the EU and UK anti-money laundering regimes could start to diverge over time.