Complying with AML Laws for Investments in Digital Assets

The following report by Dr Karin Lorez of Scale Compliance GmbH discusses the two most important directives affecting companies in Europe that deal with digital assets. These include the Financial Action Task Force, originating in France, and the EU’s 5th Money Laundering Directive.

The subject of money laundering is often mentioned in connection with digital assets. The Financial Action Task Force (FATF), is an intergovernmental body that sets international standards worldwide for monitoring money laundering and terrorist financing. As a policy maker, the FATF is committed to national legislative and regulatory reform in the fight against money laundering and terrorist financing. Switzerland, Germany and Austria are among the 39 members18 of the FATF and have agreed to implement the FATF Recommendations. Liechtenstein is a member of MONEYVAL (Committee of Experts on the Evaluation of Anti-Money Laundering Measures), which is also a FATF member. The EU has taken into account the recommendations of the FATF in the 5th EU Anti-Money Laundering Directive, which also has been implemented into national law by the respective EU member states.

The FATF has stated in its definition of “virtual assets”19 that the risk of money laundering and terrorist financing (ML/TF) exists as far as virtual or digital assets are concerned. Countries are expected to identify the risks related to virtual assets and their service providers (virtual asset service providers — VASPs) and apply a risk-based approach to tackling ML/TF risks. The FATF Recommendations include, for example, that a financial institution should execute a know your customer (KYC) check of the customer starting at USD/EUR 1,000. In addition, FATF recommends that the virtual asset provider identifies the sender and recipient of digital assets and sends the information to the recipient or their service provider, as in the case of a bank transfer. This so-called “Travel Rule” causes some service providers anguish, because unlike in the banking world, there is no network and standard for the transmission of such data. The FATF members were asked to implement this recommendation in national law by June 2020.

In addition to the FATF, the EU has found that service providers who switch between virtual currencies and fiat money as well as providers of electronic wallets have not been obliged to report suspicious activities in the past. As part of the 5th EU Anti-Money Laundering Directive20, this has been taken into account and the scope extended to include precisely such (service) providers. With regard to the Travel Rule, the EU regulation is not quite as strict and only stipulates that KYC data should only be transferred to the financial supervisory authorities upon request. The 5th EU Anti-Money Laundering Directive was implemented by the EU Member States on January 1, 2020.

In Switzerland, it was only necessary to slightly amend the existing money laundering regulations based on the new FATF Recommendations, as Swiss regulation provides for a technology-neutral application of the law and the law, therefore, also applies to service providers in the field of digital assets. The recommendation on KYC verification from USD/EUR 1,000 was taken up by FINMA, and it was proposed to reduce the current CHF 5,000 to CHF 1,000. It is envisaged that the reduction of the threshold will come into force in the fourth quarter of 2020. In cases, where uncertainties about the applicability of the law arise in the market, the Swiss Financial Market Supervisory Authority FINMA specifies in communications and guidance the applicability of the provisions in order to provide more clarity.

In general, the provisions of money laundering legislation must be implemented in the same way for digital assets as for fiat money, both at EU/EEA level and in Switzerland.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, BitmainBlocksize Capital, and Nexo.