The European Union’s Fifth Anti-Money Laundering Directive recently became binding upon EU Member States. This latest directive must be enacted by member states by January 10, 2020. It follows the implementation of the Fourth Anti-Money Laundering Directive, which went into effect in June 2017.
Specific provisions in the directive represent a paradigm shift in the EU virtual currency regulatory landscape and provide a strong indication of how the EU plans to tackle the money laundering and terrorist financing risks that stem from virtual currencies. While regulators look to balance the needs of law enforcement with the desire not to hamper innovation and technological progress, there is little doubt that these new requirements will have a major impact on this rapidly growing industry.
Staying Ahead of the Curve
K2 Intelligence has been at the leading edge of this new technology, working with virtual currency exchange clients, particularly in the United States, to tackle many of the complex licensing, chartering, training, and other approval hurdles focused on Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations that U.S.-based financial regulators have erected. The crafting and implementation of robust AML and KYC policies will become even more important as companies continue to evaluate their ongoing European regulatory exposure and EU member states begin to take new action in response to the Fifth Directive.
As noted in Is Your AML Program Up to the Task? in a previous article, meeting today’s requirements for AML and counterterrorism financing compliance presents major challenges for financial institutions. The regulatory landscape is constantly evolving, imposing new obligations on financial services firms.
While the EU virtual currency regulatory efforts currently lag behind the efforts undertaken by federal and state regulators in the United States, such as those implemented by the New York Department of Financial Services, we expect many country-level regulatory rulemaking and enforcement efforts to take significant steps forward in the next few years. Virtual currency exchanges and wallet providers may want to take additional actions to ensure that they are staying apprised of and compliant with the new regulations that will be rolled out at the EU country level.
Monitoring Virtual Currency Transactions
One of the most important changes found in the Fifth Directive—and one we expect to see repeated by local regulators across the EU in the coming years—is the broadening of the scope of obliged entities to include virtual currency exchange platforms and custodian wallet providers. This represents a major change from the Fourth Directive.
In its release announcing the new directive, the Commission stated that it was seeking to address the anonymity and potential misuse of virtual currencies by terrorist and criminal organizations. It was in that spirit that the Commission added virtual currency exchanges and wallet providers to the list of obliged entities covered and monitored by national financial intelligence units (FIUs). The Fifth Directive also requires exchange platforms and wallet providers to register with member state AML authorities.
Previously, exchanges and wallet providers were not subject to EU legal obligations to regularly monitor transactions, identify suspicious activity, or implement robust customer due diligence controls. Under this latest directive, that will change—these companies will face the same regulatory requirements as banks and other financial institutions and will be required to identify their customers and report any suspicious activity to member state FIUs. They will also have to be registered with the AML authority in their jurisdiction.
With implementation of the Fifth Directive to take place at the member state–level over the next 18 months, and with continued calls by Danièle Nouy at the European Central Bank as well as European lawmakers for a centralized European AML authority, the regulatory environment in Europe will likely remain challenging for virtual currency exchanges and custodian wallet providers in the coming months and years. By keeping up to date with new policies and regulations as they are rolled out at the EU country level, these institutions can ensure that they have compliance programs in place that protect their customers and are able to withstand regulatory scrutiny.