Virtual asset businesses in the United Kingdom have to comply with the anti-money laundering legislation, as the United Kingdom is joining a growing list of countries in line with the global FATF guidelines As of 10 January 2020, UK companies in digital assets (crypto asset) have to comply with the national anti-money laundering and counter-terrorism financing (AML / CTF) Legislation.
The EU’s 5th Anti-Money Laundering Directive (5AMLD) would improve EU Member States ‘ anti-money laundering and terrorist financing provisions. One of the main changes is the introduction of certain activities related to virtual properties. Member States were set to make necessary changes to their national laws to put the Directive into force by 10 January 2020.
This has been done in the UK through the implementation of The 2019 Regulations on Money Laundering and Terrorist Financing (Amendment) amending the Regulations 2017 (MLRs) on Money Laundering, Terrorist Finance and Transfer of Funds (Payer Information). The UK solution does, however, go beyond the 5AMLD criteria, which concentrate on virtual asset firms that trade virtual assets for fiat (traditional) currencies and vice versa and custodian wallet providers.
The Financial Action Task Force (FATF) in October 2018 adopted amendments to its recommendations to make it explicitly clear that they apply to Virtual Assets and virtual asset services (VASP) financial activities. The Digital Asset Activities concept of FATF is much wider. The UK has sought to match the MLRs more closely with the FATF Recommendations.
The UK Virtual Asset Supervisor (AML / CFT) is the Financial Conduct Authority (FCA).
Who is affected?
The amendments refer to the following types of virtual asset businesses:
Virtual asset exchange providers
- Companies exchanging fiat currencies for virtual assets and vice versa and between virtual assets of one type and one kind.
- Companies that enable or provide a market that brings forward buyers and sellers together to exchange virtual assets with the currencies of fiat and vice versa between one type of virtual asset and another.
- Issuers of new virtual assets in initial coin offerings (ICOs) or initial exchange offer (IEOs), for example.
- Companies that operate automatic counters (ATMs) swap fiat currencies for virtual assets and vice versa.
Custodial wallet providers
- Companies that provide virtual asset safeguarding and management services or private cryptographic keys for their customers to store, hold or transfer virtual assets.
In the United Kingdom, a crypto asset is defined as an encrypted digital display of value or contractual rights using a distributed ledger technology and can be transferred, saved or electronically traded.
What is the impact on those affected?
All virtual asset companies that fall within the framework will assess the risks associated with money laundering and terrorist financing. Businesses must develop and maintain policies and procedures that are identified in their risk assessment to effectively manage and mitigate the risk of money laundering and terrorist financing.
In reality, they will have to take due care of the individuals and companies with whom they operate, including identity verification, knowledge of their economic activities and their client’s resources. They will have to monitor transactions and report to the National Crime Agency (NCA) any suspicious activities.
Controls must be commensurate with the scale, complexity and risk level of the company. In other words, businesses will need a risk-based approach, that due diligence and customer surveillance as well as activities that pose the biggest risks of money laundering and terrorist financing.
Board members and senior management must have the knowledge and experience to efficiently detect and minimize money laundering and terrorist risk.
A risk assessment is not sufficient as a one-off exercise. Virtual asset companies need to regularly examine their environment and business relations and review their policies and procedures to ensure that they remain efficient and fit for purposes.
Registration with the FCA
Beginning 10 January 2020, virtual asset companies will register with the FCA. Any company that carries out virtual activity related to assets before this date may continue by the MLRs but it must have registered with the FCA by 10 January 2021. Therefore, businesses are required to file at the earliest opportunity.
Within three months, the FCA aims at reviewing registrations. To be decided in good time, applications from existing businesses must be submitted by 30 June 2020. Companies that have not completed the registration will cease operations by 10 January 2021.
Until beginning operations, new virtual asset companies must be licensed.
When part of the registration process, businesses will need to prove to the FCA that they have assessed the money laundering and terrorist financing threats their companies are exposed to. The evaluation shall take account of the products and services it offers, the type of customers it treats, the delivery channels and the countries in which it provides service.
The companies must demonstrate to FCA that robust controls have been implemented to mitigate the risk of money laundering and terrorist financing identified in their assessment.
Board members and senior managers also need to show that they have the experience to play their duties. The FCA will determine this through interviews with key players.
The FCA promotes the use of independent third parties with the necessary experience to enable boards to understand the risks and managers to comply with their regulatory obligations.
From 10 January 2020, virtual asset companies in the UK and throughout the EU will be subject to the same AML / CFT requirements as financial services firms, thus creating a fairer playing field.
The FATF clarifies that its guidelines relate to virtual assets and VASPs and sets out a global trend for putting virtual asset companies in line with traditional finance and for standardizing cryptographic innovation. Crypto now belongs to the global financial system.
While this will certainly present a challenge for virtual asset companies and increase business costs, it will also present some opportunities. Aligning virtual assets with traditional financial institutions and putting them under the same AML / CFT responsibilities will help to solve one of the major challenges facing virtual asset companies–access to financial services such as banking facilities. It will also lead to greater institutional engagement.
It is practical to be aware of the risk of money laundering and terrorist financing your enterprise is exposed to and able to develop ways to mitigate it. The aim is to ensure that you understand the risks reasonably well to be able to create tailored measures that reduce risk efficiently and meet business priorities so that businesses remain competitive and customer-oriented.