The EU's Fifth Anti-Money Laundering Directive (“5AMLD”) will subject certain participants in the crypto-asset sector to regulation for anti-money
laundering (AML) and counter-terrorism financing (CTF) compliance purposes. While it most crypto-asset companies will not be ready to comply by 10 January 2020 (the date EU member states are required to bring it into effect), there are lots of tools available
that they should consider utilising now so that when they do implement the directive, the process is far quicker and easier.
What’s changing and why?
According to a
statement from the European Commission, 5AMLD is being introduced as part of an action plan to counteract the financing of terror plots and ensure more is done to prevent illegal financial dealings like those revealed in the Panama papers. With
4AMLD, digital wallet providers and both virtual and fiat currency exchanges were under no obligation by the EU to identify suspicious activity. This was despite the anonymity of crypto-assets making them vulnerable to misuse, something recognised by both
UK government. Therefore, from 10 January 2020, digital wallet providers and crypto-asset/cryptocurrency exchanges will be subject to registration and supervision for AML compliance. This is a vital measure, particularly given that because it becomes harder
to hide criminal activity via traditional forms of banking, it becomes more important for fintechs and other providers of financial services to take responsibility for preventing terrorist financing, money laundering, tax evasion and other financial crime.
Digital wallet providers and crypto-asset exchanges will be regulated and supervised to ensure they have a variety of AML, CTF and other checks in place to verify clients are operating legally and are reporting suspicious activity. This will include the
need to have:
- Proper KYC onboarding
- Adequate checks on company ownership
- Sufficient checks that they are not dealing with sanctioned countries
- Transaction and money flows checks
- Regular periodic client outreach
What tools are available to help digital wallet providers and exchanges comply?
At 31 pages, 5AMLD does not make for light reading, and there are still clarifications the UK government could be making to make it easier for crypto-asset businesses to know what is expected of them. Fortunately, there are lots of tools available that enable
firms to start putting 5AMLD into practice. Software and intelligent automation platforms can be a huge help. For example, there is software available that can automatically background check an organisation to see if its ownership structure has changed, how
long it has been established and where the company is registered. Furthermore, robotic and digital process automation (RPA and DPA) can be used to trigger an action such as an email asking banks for financial information such as P&L statements to show source
of income, check for originating payments and even discrepancies in costs and profit to check for employees secretly siphoning off funds.
How long will it take for crypto-asset companies to abide by 5AMLD?
Don’t expect crypto-asset companies to comply at the drop of a hat in January. Like any regulation, there is a lot to consider, and getting the proper procedures in place and making sure there is consistency across all checks is more important than rushing
to meet a deadline and consequently not putting all the rules into effect. While the FAANGs of this world can afford to implement the directive in six months if they wanted to, smaller and medium sized companies with fewer resources will need longer, so it
could be two or three years before we see widespread compliance.
While there are still details to be ironed out on 5AMLD, it is important crypto-asset organisations and banks alike stay poised and ready to act, not only for the sake of complying with the EU but also for the sakes of the future of their businesses.