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As money laundering has become the subject of many news cycles over the past few years, there has been added pressure to revise the regulatory standards of the Anti-Money Laundering Directive (AMLD).
Being aware of these changes as a merchant is crucial to ensure your business remains protected from fraudulent activity and lawfully abiding according to EU member states.
The AMLD 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 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, which came just one year after the legalisation of 4AMLD, is to be enforced across EU member states by 20th January 2020.
5AMLD aims to prevent money laundering and concealment by further promoting transparency for businesses operating across Europe.
The significance of 5AMLD comes in light of the crypto surge and the challenge to its purpose, which seeks to operate in a peer-to-peer trading environment, with no third-party regulation. Anonymity between all parties is one of the benefits of this space and is what draws both individuals and merchants in, but it also comes with its own risks.
Under the scope of the previous 4th directive, 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 (£8,568).
But with the implementation of 5AMLD, other business types are now under the directive including businesses involving virtual currencies, anonymous prepaid cards, cryptocurrency exchanges, custodial e-wallets and artwork dealers.
Whilst we’ll go on to look into the consequences of 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 in the UK, or the equivalent in other EU member states.
Those with a legitimate interest will then be granted public access to a central register of beneficial business owners. But how is this legitimate interest defined? Well, it’s businesses who have 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. So, the number of beneficial owners and/or trusts registered is expected to drastically increase from 200,000 to over two million. EU member states must hold accurate information on all legal and corporate entities within 18 months of 5AMLD.
The main change in which prepaid cards are being regulated primarily involves spending limits and anonymity.
Prior to 5AMLD, a prepaid card allowed for goods to be bought anonymously. However, the identity of a customer will now be required if a transaction exceeds €50. This will apply to all transactions after 36 months, regardless of its value.
The value that a prepaid card is allowed to hold has also been lowered from €250 (£214) to €150 (£128) and it cannot be funded electronically with anonymous money, nor can it be reloaded.
With the removal of anonymity, there are similarities to the regulation of virtual currencies. 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’, it can be considered just the beginning of 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 wallets. A non-custodial wallet grants sole access and recovery methods to the user. Whereas a custodial wallet gives the access, backup and recovery (private key) to the custodian, also known as an exchange wallet.
Whilst in the decentralised crypto space, a custodial wallet 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 customise.
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 could be affected would likely be in the due diligence it performs for the necessary Know Your Customer (KYC) requirements. As part of the new directive, all businesses within the scope must perform extra due diligence on KYCs from countries that are regarded to be high risk for money laundering or terrorist financing as defined by the EU commission.
These new requirements may not only affect the number of users signing up for custodial wallets, but they 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 wallets 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.
But, it’s unlikely to end there. 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. But will this ruin the nature of the industry?
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 increased 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 Britain to only bring into national law the amendments that have significant proof of concept in countering the challenges raised by the AML amendments.
Check out our 6AMLD blog for the latest updates.
*Currency conversions correct as of 15/01/2020
