How AML regulation will diminish cryptocurrency anonymity

Julian Dixon

September 3, 2018

The anonymous haven that cryptocurrencies offer has long been known to criminals and terrorists.

Operating independently and free from the watchful eye of a central bank, cryptocurrencies such as bitcoin are transferred direct from person to person and cannot be hindered, restricted, frozen, stopped, confiscated or reversed.

By definition, cryptocurrencies are decentralised and therefore extremely difficult to control. Neither transactions nor accounts are connected to real-world identities. What’s more, cryptocurrency software can be downloaded for free by absolutely anyone. Payments and transfers made with cryptocurrencies are beyond the control of banks and governments, and attack the scope of monetary policy.

Thus, in a world where money laundering is rife and fuelled by a frightening level of sophistication, cryptocurrencies offer a perfect disguise and are serving to compound the issue of illicit money flows.

What then, can be done to disrupt this seemingly untouchable hideout?

The answer starts with the new 5th Anti-Money Laundering Directive, which EU member states have until 20 January 2020 to implement into their national law.

The 5AMLD, as it’s also known, will bring more transparency to financial transactions to improve the fight against money laundering and terrorist financing across the EU.

Along with several other objectives, the 5th Anti-Money Laundering Directive will prevent risks associated with the use of cryptocurrencies for terrorist financing.

Specifically, it will require cryptocurrency exchanges and custodian wallet providers (which hold service users’ private keys) to perform due diligence on their customers, including know-your-customer (KYC) checks.

Cryptocurrency exchanges and custodian wallet providers will be classified under the 5th Anti-Money Laundering Directive’s definition of “obliged entities”. This means they will be subject to the same obligations as other firms to implement preventative measures and report suspicious activity.

These obliged entities will need to be registered for AML purposes and will be regulated for AML purposes in the same way as financial services firms (and subject to the same AML regulatory obligations).

Such changes will be significant for relevant businesses and are likely to increase regulatory compliance costs substantially.

Under the 5th Anti-Money Laundering Directive, obliged entities need to gather information not only about their customers but about other third parties not in a direct relationship with the respective obliged entities, such as beneficial owners.

Perhaps most importantly, tax and national authorities will also be able to obtain information from virtual currency exchanges and wallets. In turn, this will allow them to associate virtual currency addresses to the identity of the owner of virtual currencies. Bank and payment accounts will be able to be matched with their corresponding account holders, proxy holders and beneficial owners, therefore diminishing anonymity for the purposes of AML.

Crucially, the 5th Anti-Money Laundering Directive reflects the EU’s shifting focus towards cryptocurrencies and distributed ledger technology. Hassans International Law Firm expects we may see more from regulators in 2018 on issues arising from new technologies, such as cryptocurrencies and blockchain. Cryptocurrency exchanges, custodian wallet providers and other related businesses should therefore expect to be confronted with a continuous stream of new challenges in achieving legal compliance.

Obliged entities will need a robust and adaptive AML strategy to ensure compliance with AML regulations, including effective AML software to help identify and monitor money laundering.

….

Achieve compliance with the 5th Anti-Money Laundering Directive

At Fortytwo Data we offer an AML Augmentation Platform, which can enhance or completely replace existing AML processes to ensure compliance with the latest AML legislation.

By adopting big data technology, artificial intelligence and machine learning, our platform leverages the very latest technology that can be applied to meeting AML obligations. It identifies previously unknown threats and strengthens controls, with the goal of combating evolving threats and reducing financial and reputational risk.

To find out more about our AML Augmentation Platform, email info@fortytwodata.com.

Or you can book a demo here.

References

Hackernoon. 2018. What impact will the 5th Anti Money Laundering Directive have on the crypto world? 

https://hackernoon.com/what-impact-will-the-5th-anti-money-laundering-directive-have-on-the-crypto-world-f903f6d08900

Latham & Watkins LLP, cited on Lexology. 2018. Cryptocurrencies and prepaid cards face closer AML regulation in the EU.

Hassans International Law Firm. 2018. MLD5: EU’s latest AML directive introduces cryptocurrency regulation.

http://www.gibraltarlaw.com/eu-mld5-cryptocurrency/

Hassans. 2018. MLD5: EU’s latest AML directive introduces cryptocurrency regulation.

BlockGeeks.com. 2016. What is cryptocurrency: everything you need to know.

https://blockgeeks.com/guides/what-is-cryptocurrency/

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