What is the 5th Anti Money Laundering Directive

What do you need to know about the 5th Anti Money Laundering Directive from the UK and European Union? In a nutshell, the 5AMLD has increased the requirements for individual and private transparency on all forms of digital financial transactions. 

Who will the changes affect the most? Going forward, all digital and international transactions will be subject to greater scrutiny. This includes digital currency transactions, all letting and landlord services, as well as art sales. The design of the 5AMLD is in large part to mandate increased due diligence when it comes to cryptocurrencies such as Bitcoin. 

Why is this happening? The rational from the UK and European Union for increased AML and KYC measures on all such transactions is an effort to reduce terrorist factions and money laundering. Given the anonymity that cryptocurrencies and digital exchanges provide, there is an increased concern around digital transactions for use in nefarious and illegal transactions. As a result, all legal entities that accept digital currency or cryptocurrency must now report any behavior that appears suspect. 

In this article, we go through some of the specifics of the 5MLD that effect digital assets and transactions, which came into effect on January 10, 2020.

The main changes resulting from 2020 5MLD:

  • Transparency of information from the corporations and the individuals who use digital and cryptocurrency regulations, this includes increased regulations for prepaid cards.
  • Countries deemed as “high-risk” will need to improve safeguards for financial transactions. Europeans may not be able to make transactions with high-risk countries if they do no comply with the new standards. 
  • Traditional centralized national bank and payment systems must register for central data retrieval systems that are accessible by all compliant member states.

Timeline of the 5MLD implementation. As of 2020 the following must take place:

  • 10 January 2020: Beneficial ownership for corporates
  • 10 March 2020: Beneficial ownership of trusts
  • 10 September 2020: Centralised automated mechanisms must insist on identification from those who hold or control payment accounts and bank accounts

Digital Currency and Cryptocurrency Defined

In order to push these new regulations through, another major undertaking of the 5MLD was to clearly build a legal definition for digital and cryptocurrency. 

The 5MLD defines virtual currencies as follows:

“A digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.”

Key Changes from the 5AMLD affect the following:

  • Virtual Asset Service Providers and Custodian Wallet Providers
  • Virtual asset service providers and custodian wallet providers are now subject to AML/CTF regulations
  • Prepaid Cards and E-money
  • Customers using prepaid cards that have more than 150 euros are now subject to identity checks.

Background

January 10, 2020, saw the implementation of increased efforts from the UK and the European Union to increase anti-money laundering regulations; this is known as the “Fifth Anti-Money Laundering Directive” of the “5th AMLD.” 

The measures put forth are focused on digital forms of payment and digital transactions. This is because they are deemed to be the most hospitable to money laundering and terrorist organizations. Therefore, the most significant and demanding changes are the need or identity verification and data transparency. This information is required of the individuals and companies involved in digital transactions, which now includes prepaid cards over the amount of €150. 

The primary transactions that concern the AMLD are cryptocurrencies and digital payments, property letting, and art sales.

How

In order to achieve a new level of transparency, all registered and legal companies, trusts and other legal affiliations must allow the transparency of transactions and increased access to all transaction information.

With increased client and transaction information the 5AMLD plans to increase the power of the EU Financial Intelligence Units. As such, this will allow them access to transaction information which will allow for further information collection regarding digital sales and transactions. 

The result will limit the anonymity of virtual currencies and transactions. This includes the use of prepaid cards. As mentioned, customer verification and identity checks are now required for prepaid cards of €150 and over. This is compared to the previous amount, which only required verification for prepaid cards in amounts of €250 or more. Moreover, the use of prepaid cards will be prohibited outside of Europe if the countries involved in the transactions do not comply with the current 5AMLD.

Why

The new directives are considered to be a “risk-based approach” to the increased use of digital currency for illegal activities and money laundering. As a result, the 5AMLD removes many of the previous exemptions for digital transactions. 

In order to achieve enhanced security, the 5AMLD demands greater access to information and increased transparency from the beneficial owners of information and of trusts. 

The rationale behind the increased criterion of fiscal transactions is to include an assessment of “high-risk” third countries. This information is intended to improve the safeguards for financial transactions to and from the countries which are deemed “high-risk.”

Member states are now required to set up central bank account registries or retrieval systems. This procedure is designed to improve cooperation and enhance information sharing between corporations and anti-money laundering supervisors of the European Central Bank.

Increased due diligence means that all business relationships and transactions which involve high-risk third countries are from now on required to obtain the following information:

  • The information of the customer and/or beneficial owner(s)
  • The intended nature of the business relationship between customer and firm
  • Where the source of funds and wealth of the customer and beneficial owner(s) originates
  • The reasons for the intended or performed transactions

Politically Exposed Persons

As a contributing factor to increased regulations, there are now new considerations that define a “politically exposed person,” (PEP). This is relevant because it will make a difference in the details of information sharing required from corporate entities that facilitate transactions and identity verification. 

The following is the official list of PEPs taken from the official UK transposition document:

  • All member states are to maintain up-to-date lists of politically exposed persons
  • High-Risk Third Countries
  • Any business relationship or financial transactions involving high-risk third countries require enhanced due diligence.
  • Other Stores of Values
  • AML requirements apply to any professionals trading value goods (value exceeding €10,000)
  • Range of high-value goods: artworks, oil, arms, precious metals, tobacco, etc
  • Ultimate Beneficial Ownership Registry
  • UBO national registers must be inter-connected at an EU level.
  • Companies, trusts, or any similar arrangements must make ultimate beneficial ownership information available to authorities

Digital Assets and Cryptocurrencies

The pressure to increase information of KYC (know-you-customer) is on those that offer services that use cryptocurrencies and digital assets. As a result of the 5AMLD, there is a renewed and increased focus on the exchange between fiat currencies and cryptocurrencies. This, therefore, includes those that provide custodian wallets and escrow services. 

All registered corporation which indents to run operations in the European Union and the UK will need to comply with the new regulations for increased individual user information. 

This means that services offering exchanges of fiat and cryptocurrency will be required to obtain information about the reason for the transaction, as well as where the assets originated from. And, as mentioned, in compliance with the new due diligence measures, service providers will also need to keep all transactions and record. 

Therefore, if any of the information gathered suggests suspicious behavior, such customers must be reported to the relevant European supervisor. As such, whistleblowers now also receive further protection under the 5AMLD.

In order to ensure that all of these obligations are met, corporations must:

  • Ensure that they verify the identity of their customers
  • Provide access to this information to law enforcement agencies that are able to use this information to identify the perpetrators of illicit activity

What You Need to Take Away from the Changes

  • 5AMLD builds on the regulations set by the 4AMLD. Going forward Financial Intelligence Units (FIU) have the authority to obtain the addresses and identities of owners of virtual currency. Therefore the legal exchange of completely autonomous cryptocurrency is no longer permitted. 
  • Complaint European countries now have a legal definition of cryptocurrency. That means that essentially, all digital representations of value fall under this definition and are therefore subject to the new regulations. 
  • As all cryptocurrencies and cryptocurrency exchanges are now considered “obliged entities,” corporations are now obligated to perform customer due diligence (CDD) and are required to submit suspicious activity reports (SAR).
  • Regulations are now also in place for providers of cryptocurrency exchanges and wallets. Wallets must now be registered with the authorities in their domestic locations, for example, Germany’s BaFin, or the UK’s Financial Conduct Authority.
  • Customer verification and identity checks are now extended to prepaid cards of €150 or more as well, (this is a change from the earlier €250).

What Does This Mean for Cryptocurrency Users

It is always important to stay in the know when it comes to new regulations of cryptocurrencies. The laws concerning KYC, AML, and taxation all quickly change to respond to the needs and concerns of the public and governments. 

This is further evidenced by the 32 Bills regarding blockchain and cryptocurrency put forward in the 116th United States’ Congressional meeting of 2020. All of the 32 Bills make suggestions on how cryptocurrency and the blockchain technology that allows them to operate should be treated under American law.

While the restrictions are getting tighter, there are still fully decentralized exchanges. Two examples that are available which maintain your anonymity are HodlHodl and Bisq. 

Finally, the central argument for maintaining the anonymity of digital transactions is that most people are law-abiding. And, sharing personal information puts people at risk of theft of assets as well as data. While this may be a strong argument, and is central to the cryptocurrency and decentralized ethos, the reality is that the landscape of cryptocurrency is changing quickly. 

It is a reality that the dark web exists, which has become an increasing focus of the FBI. Likewise, the focus of the 5AMLD purports to be on quashing terrorist actions and trafficking. Although most users are indeed law-abiding, the estimated 2% of Bitcoin that is used for trafficking and terrorist actions represents an incredible dollar value.

The best thing to do is to stay informed to that you do not put yourself in a troubling position.

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