Virtual Currency: Anti-Money Laundering and Terrorist Financing Update

Perkins Coie
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On July 18, 2018, the Financial Action Task Force[1] (“FATF”), published its report to the July 2018 G20 Finance Ministers and Central Bank Governors’ meeting.[2] The report sets out FATF’s ongoing work to fight money laundering and terrorist financing, and in particular FATF’s work programme on virtual currencies, including the money laundering and terrorist financing risks of virtual currencies, the regulatory environment for virtual currencies, and the revision of global standards and guidance to accommodate virtual currency business activity. This post briefly highlights the findings of the FATF report and provides a few key takeaways for market participants from recent regulatory activity designed to fight money laundering and terrorist financing.

The FATF report begins by identifying the patchwork regulatory approaches among G20 participants towards virtual currency. The report found that most G20 participants are still preparing laws designed to respond to virtual currency and only seven participants have adopted comprehensive regulation of virtual currencies. A summary of the report’s findings is below:

In response to the risk of regulatory arbitrage or flight to unregulated safe havens, the FATF stated that they are reviewing their standards, including their virtual currency guidance from 2015, and will consider detailed proposals to clarify the application of standards involving virtual currency. [3] The proposals will be particularly focused on the standards applicable to customer due diligence, money or value transfer services, wire transfers, supervision, and enforcement. Following these proposals, the FATF plans to release updated standards for virtual currencies in October of 2018 for all G20 participants. The standards, while lacking the force of law, are important benchmarks against which national regulators are likely to measure the reasonableness and adequacy of anti-money laundering (“AML”) programs in virtual currency businesses.

The FATF report reflects a growing concern among regulators and government organizations regarding the use of virtual currency for terrorism and other illegal activities. Shortly following the FATF report, U.S. Congressmen, Ed Perlmutter and Steve Pearce, introduced the FinCEN Improvement Act (“H.R. 6411”) designed to extend the mandate of the Financial Crimes Enforcement Network (“FinCEN”) to include “matters involving emerging technologies or value that substitutes for currency, and similar efforts.”[4] H.R. 6411 hopes to modernize FinCEN’s operations in light of new technological developments, including the use of virtual currency for illegal activity.

Similarly, the European Union’s (“EU”) Fifth Anti-Money Laundering Directive (“5AMLD”) was formally published in the European Union’s Office Journal, following its adoption by the European Parliament and Council in May of this year.[5] 5AMLD is the first EU regulatory framework specifically dealing with the regulation of virtual currency exchanges and marks a significant departure from previous guidance regarding virtual currency. 5AMLD largely reflects current AML requirements in the US under the U.S. Bank Secrecy Act.

The results of the FATF standards meeting in October may also further augment AML requirements as new regulations are adopted amongst G20 participants.

[1] The Financial Action Task Force is an independent inter-governmental body that develops standards to protect the global financial system against money laundering, terrorist financing, and the financing and proliferation of weapons of mass destruction.

[2] FATF (2018), FATF Report to G20 Finance Ministers and Central Bank Governors, FATF, Paris, France,

www.fatf-gafi.org/publications/fatfgeneral/documents/report-g20-fm-cbg-july-2018.html.

[3] See FATF (2015), Guidance for a Risk-Based Approach to Virtual Currencies, FATF, http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf; See also Perkins Coie Client Alert – FATF Issues 2015 Update on Last Year’s Virtual Currency Guidance (July 16, 2015), available at https://www.virtualcurrencyreport.com/2015/07/fatf-issues-2015-update-on-last-years-virtual-currency-guidance/.

[4] FinCEN Improvement Act of 2018, H.R. 6411, 115th Cong. (2018) available at https://www.congress.gov/bill/115th-congress/house-bill/6411/text.

[5] Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2018.156.01.0043.01.ENG&toc=OJ:L:2018:156:TOC.

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