#briefbites: European Commission's Amendment to the 4AMLD
Greetings!
#briefbites is an attempt to share thoughts on topics or concepts related to virtual currencies, payments, regulation (and maybe more. Life? Sports? Tacos?) in a simple and brief manner. I don't claim to be an expert on a particular topic, however, I do read and think about some of these topics of interest. Happy to have constructive conversation below :)
I'm from Malaysia, and so most knowledge circles around the ASEAN region (with some experience abroad, having lived abroad for a while but that is besides the point).
This proposal by the European Commission (EC) is not a text that has come out recently, and much has already been written about it. This proposal may be one of the more thoughtful pieces of work by a regulator in the space.
It acknowledges the inescapable technology advances of virtual currencies while at the same time bearing a guarded outlook to the risks inherent with new technology.
The Fourth Anti-Money Laundering Directive (4AMLD) targets several items, namely:
A) Designate virtual currency exchange platforms as obliged entities
B) Set lower maximum transaction limits for certain pre-paid instruments
C) Enable Financial Intelligence Units (FIUs) to request information on money laundering and terrorist financing from any obliged entity
The list goes on until an item (G), but we can skip those. Section (A) is mainly the area of interest.
First though, lets dial back to the context of the proposal. There are three main parts to this:
I) It's too easy to hide and move funds these days
Too easy. The paper sets out that it is increasingly difficult to track down money due to the ease of setting up paper companies and facilitated by a globally interconnected financial system. Terrorist threats have increased and are increasing. It is no secret that bad hats are taking advantage of these opportunities. #wannacry #alreadycried
II) Big gaps in oversight exist in the financial means used by terrorists
Terrorists have been using all sorts of methods to transfer funds, including anonymous prepaid cards, virtual currencies and alternative assets (e.g. art) to shift funds. This is hugely problematic for regulators as much of these methods are anonymous (or pseudonymous). The EC addressed this issue by lowering maximum transaction limits for certain prepaid instruments (B).
III) Offshore jurisdictions are guilty of concealing funds
And so, the proposal to amend the 4AMLD seeks to prevent exactly that, the large-scale concealment of funds, which can "hinder the effective fight against financial crime ..."
As mentioned above, the EC proposes to designate virtual currency exchange platforms as obliged entities (A). What this means is that virtual currency exchange providers (VCEP) that operate in the EU would have to be added as an obliged entity.
The original Article 2 includes auditors, external accountants, tax advisors, independent legal professionals, estate agents, providers of gambling services and more. VCEPs would now be added.
Why is this important?
VCEPs are typically the first intermediaries that users who wish to convert fiat into virtual currencies interface with. Given the characteristics of VCs that may facilitate money laundering / terrorist financing (more on this perhaps in the future), the EC believes that it is very important to subject these guys under certain obligations.
"... it is essential to provide a regulator framework for the functioning of exchanges as well as of custodian wallet providers that operate, as gatekeepers permit the public to have access to the various schemes of virtual currencies."
VCEPs would now be obliged to implement preventive measures and report suspicious transactions. A good outcome would be to mitigate risks associated with money laundering and terrorist financing while allowing the organic growth of the virtual currency ecosystem to deliver value to users.
To be sure, the EC is not alone in taking this step. The Financial Action Task Force (FATF) published a paper in 2014 on key definitions and potential AML/CFT risks of virtual currencies. Other jurisdictions have also moved in this direction.
For a country like Malaysia (my home country!), the developments in the virtual currency space could result in tangible benefits beyond speculative activity. At the same time, the risks need to be managed.
For now, the central bank, Bank Negara Malaysia (BNM), has released a caveat emptor statement to warn users of the risks associated with Bitcoin (and other cryptos) in 2014.
It could be that Malaysia may move in a similar direction to the EC (and other jurisdictions) in the future. That would be a good thing for the virtual currency space here :)
Thanks for sticking around!
Sources:
Proposal to amend the 4AMLD - http://ec.europa.eu/justice/criminal/document/files/aml-directive_en.pdf
FATF paper on key definitions and potential AML/CFT risks - http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf
BNM statement on Bitcoin - http://www.bnm.gov.my/index.php?ch=en_announcement&pg=en_announcement&ac=49&lang=en