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The European Commission and UK's Treasury to Tighten AML/CFT Measures

Last week, the European Commission and the United Kingdom's HM Treasury separately introduced proposals to further strengthen crypto anti-money laundering frameworks — highlighting the continent’s desire to bring crypto assets and services into the financial ecosystem’s fold. 

On 20 July 2021, the European Commission has today presented an ambitious package of legislative proposals “to improve the detection of suspicious transactions and activities, and to close loopholes used by criminals to launder illicit proceeds or finance terrorist activities through the financial system.” The EU Commission added that these measures aim to enhance the existing EU framework by taking into account challenges linked to technological innovation such as virtual currencies, more integrated financial flows in the single market and the global nature of terrorist organizations.

Additionally, on 22 July 2021, the United Kingdom HM Treasury issued a consultation (The Consultation) inviting views and evidence on the steps that the government proposes to take to amend the Money Laundering Regulations (MLRs). According to the official release These amendments will allow the government to make some time-sensitive updates to the MLRs, which are required to ensure that the UK continues to meet international standards set by the Financial Action Task Force, whilst also strengthening and ensuring clarity on how the anti-money laundering regime operates, following feedback from industry and supervisors on the implementation of the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020.” The UK HM Treasury also highlighted how it plans to implement the FATF’s Travel Rule.

A) Highlights from the European Commission Package

The package issued by European Commission consists of four legislative proposals 

Establishing a New AML/CFT Authority

The European Commission will be creating a new AML/CFT authority to bring those financial sector entities that are exposed to the highest risk of money laundering and terrorist financing under its direct supervision. The authority will have indirect supervision of both the financial sector and non-financial sector obliged entities through oversight of supervisors, including self-regulatory bodies (SRBs) and national AML/CFT supervisors. Further, the new authority would also play a key role in improving the exchange of information and cooperation between Financial Intelligence Units (FIUs) — the investigative units established by individual countries that gather any suspicious activity reports related to financial criminal activity.

Introduction of Regulation on AML/CFT, Containing Directly-Applicable Rules, Including the Area of Customer Due Diligence and Beneficial Ownership.

The new regulation does not simply transfer provisions directly from the existing AML/CFT directive, but in fact, makes significant changes to it. The proposed regulation expands the list of obliged entities to include crypto asset service providers but also other sectors such as crowdfunding platforms and migration operators. Further, to ensure consistent application of AML/CFT rules across the internal market, this regulation seeks to clarify AML/CFT requirements in relation to internal policies, controls and procedures that crypto businesses will have to put in place. The said regulation also aims to make customer due diligence measures more granular by laying down clearer requirements according to the risk level of the customer.

Additionally, the proposed regulation will also make clarifications in the definition of politically exposed persons (PEPs). The regulation also streamlines beneficial ownership requirements so that an adequate level of transparency is ensured across the European Union. Beneficial ownership requirements are also streamlined to ensure an adequate level of transparency across the EU and new requirements are introduced concerning nominees and foreign entities to mitigate risks that criminals hide behind at the intermediate levels. To facilitate the clearer recording of suspicious transactions, the proposed regulation better clarifies red flags raising suspicion are clarified, however, disclosure requirements and private-to-private sharing of information remain unaltered.

iii. Introducing the 6th Directive on AML/CFT (AMLD 6)

The 6th Directive on AML/CFT will replace the existing Directive 2015/849/EU (AMLD4) containing provisions that will be transposed into national law. The powers and tasks of supervisors are clarified to ensure that all supervisors have the instruments to take adequate remedial actions. The approach to risk-based supervision is harmonised through the introduction of a common risk-categorisation tool that will assist in avoiding divergent risk understanding in comparable situations. ​​Under the current AML directive member States are required to create and maintain registers of Beneficial Ownership of legal entities and legal arrangements. The powers of the registers of beneficial ownership are clarified to make sure that they can obtain up-to-date, adequate and accurate information.

A Revision of the Current Regulations on the Transfer of Funds will Enable Full Traceability of Crypto Assets Transfers.

The revision to Regulation 2015/847/EU will make it possible for the authorities to trace transfers of crypto assets and limit large cash payments. The revision aims to limit large cash payments and has therefore introduced a limit of €10,000 on large cash payments, which is high enough not to put into question the euro as legal tender and recognises the vital role of cash while making it harder for criminals to launder dirty money. In addition, providing anonymous crypto asset wallets will be prohibited, just as anonymous bank accounts are already prohibited by EU AML/CFT rules. 

Next Steps 

The proposed legislation is yet to be discussed at the European Parliament and Council; however, the commission is hopeful for a speedy legislation process. The AML authority should be operating by 2024 but will start the work of direct supervision slightly later, once the directive has been transported and new rules start to apply.

B) Updates from the UK HM’s Treasury on its Approach to Travel Rule Implementation

According to the Treasury’s consultation paper noted that “the government’s approach to implementation is guided by the principle that the application of the FATF’s Recommendation 16 aka the ‘Travel Rule,’ and it should be consistent across the financial services industry, regardless of the technology being used to facilitate transfers, unless there is a compelling reason to adopt a different approach.” The consultation, however, also takes into account the private sector’s contribution in development of Travel Rule solutions and notes that  “the government has been kept informed of technological developments, such as the development of common data standards and the progress of a large number of software solutions, and considers that the time is now right to begin planning for the implementation of the Travel Rule." 

These requirements when enacted will apply to crypto asset exchange providers and custodian wallet providers, as defined in The Money Laundering and Terrorist Financing (Amendment) Regulations 2019, which are carrying on business in the UK.

For bank transfers, R.16 was implemented in the UK via the Funds Transfer Regulation (FTR), which now forms part of retained EU law. The government believes that the requirements set out in the FTR remain the right way to implement R.16. The proposal seeks to replicate the FTR’s requirements for the crypto asset sector as much as possible. However, the proposal does not seek to expand the scope of the FTR to include crypto asset firms but to adapt certain necessary provisions of FTR. Crypto businesses will be given a grace period to integrate the amendment which will be made to the Money Laundering Regulation.

Why Merkle Science

With the UK’s HM Treasury and European Commission, both strengthening their AML/CFT regime, Merkle Science’s highly customizable and easy-to-use platform provides near real-time detection of blockchain transactional risks  Our predictive cryptocurrency risk and intelligence platform set the standard for the next generation of financial safeguards and criminal detection. Merkle Science proprietary Behavioral Rule Engine allows crypto businesses to tailor the tool according to their risk policies based on the recent changes so that businesses may stay ahead of emerging illicit activities and fulfil their local compliance obligations.

Furthermore, with the UK's HM Treasury gearing up to ensure strict implementation of the Travel Rule, Merkle Science stands in support of the crypto industry, nations, and VASPs as they prepare to implement Recommendation 16.