2020 ushers in the EU’s 5th AML directive | PKF Malta

It comes as no surprise that recent terrorist attacks have exacerbated the attention of financial regulators to combat the traffic of funds by terrorist groups.

The popular TV series “Queen of the South” on Netflix shows Teresa Mendoza as a runaway drug baroness - where in Season 3 she finds refuge in Malta. Here, she exchanges millions of dirty money into virtual currency after being introduced to a shady crypto-banker Rocco. This fictional character runs a remarkable bitcoin empire in Malta - he openly brags of protection due to his close relationship with the island authorities.

This movie certainly did not do justice to the legal filters launched last year by MDIA and MFSA to regulate the Blockchain island.

Undoubtedly, the crypto crowd that were attracted in droves to the government sponsored “Delta Summits” were stunned at the lax controls depicted by the fictional drug cartel story weaved for Netflix series. Still, it is no exaggeration to state that one of the typical routes how illicit transactions are being facilitated is by use of virtual currencies.

The European Banking Authority cautioned that virtual currency transactions are particularly vulnerable to criminal misuse because essentially, they facilitate anonymous transactions and have no jurisdictional borders. Watch out for the onset of the AMLD5 which entered into force on 9 July 2018 - it is due for implementation by January 2020.

This directive reacts to these risks through several key amendments, partially triggered by Swiss leaks, Panama Papers, and a number of rogue banks in Latvia, Estonia and Denmark (these were accused of massive money laundering scheme for dirty Russian monies). 5AMLD has sharpened its armoury. It provides that any natural or legal person who can demonstrate a legitimate interest is to be given access to the information recorded on the central beneficial ownership register (BOR).

The information will be accessible through a pan-European interconnected system of national registers, and individual States may make the information on their BOR subject to an online registration and payment of an administrative fee.

There is additional scrutiny for anonymous prepaid cards since these could be used to conceal criminal activity such as terrorist financing. The 5th AMLD also contains various provisions which aim to strengthen Financial Intelligence Analysis Units (“FIUs”) and the due diligence procedures which subject persons are required to carry out on individuals and entities from high-risk jurisdictions.

For the first time, it includes virtual currency exchange platforms (“VCEPs”) which function as electronic currency exchanges and custodian wallet providers (“CWPs”) effectively holding crypto currencies on behalf of third parties. As “obliged entities,” VCEPs and CWPs now will face the same regulatory requirements under the 5th directive similar to banks and other financial institutions.

These include onerous obligations to register with national anti-money laundering authorities, implement customer due diligence controls, regularly monitor virtual currency transactions, and promptly report suspicious activity to government entities.

One hopes that these additional safeguards will make it easier to detect terrorist financing and expose money laundering. To further tighten the net, it aims to create central databases comprised of virtual currency users’ identities and wallet addresses as well as self-declaration forms submitted by virtual currency users.

The EU’s extension of the regulatory perimeter is designed to prevent criminal groups from exploiting the anonymity of virtual currency-based transactions and to strengthen the means how to supervise users of virtual currencies. When one reads the detail, one realises that the spirit behind the new directive is careful not to hamper technical progress or commercial development.

Readers will note the definition of crypt currencies is that of a “digital representation of value which is not issued or guaranteed by a central bank or a public authority and is not attached to a Fiat 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’.

At this stage, one observes how Malta started last year to regulate blockchain and virtual currencies in a government sponsored drive to attract new players without lowering the bar for effective regulation. The journey is not an easy one when taken in the context of complaints by EU towards the alleged lack of proper banking supervision by FIAU of locally registered Iranian owned bank-Pilatus.

The Opposition party in Malta made a ruckus about the result of an inspection by the Council of Europe watchdog - Moneyval.

It is important to comment that the report criticised Malta saying it failed to effectively address recent trends in money laundering and terrorist financing. However, one is confident that with the transposition of new measures and a promise by government to better resource FIAU/MFSA, this will succeed to implement all recommendations of the Moneyval report.

Change always comes as a challenge. One appreciates that there are no transition periods and/or days of grace, so once 5AMLD is transposed into the national laws, it empowers regulators with the ability to demand information from virtual currency exchanges and wallets.

This includes addresses and the identity of the owner of virtual currencies. Some conclude, that the anonymity and speed of operation currently prevailing in the crypto field will be faded as a result of 5AML rules.

On another aspect, one expects national governments to be nippy to protect whistle blowers who come forth and expose scams. The new directive however still leaves a certain amount of debateable or grey areas.

Really and truly, virtual currencies might be viewed as a new form of money, however, such definition does not provide all answers and does not address an anomaly that virtual currencies might not always operate as means of payment but rather function as assets, commodities or securities. In this scenario, they will be regulated under MIFID11 rules. Moving on, supporters of the 5th directive boast that the new framework has stronger foundations and a better armoury. In fact, we come across four distinct bodies. These consist of the Commission, the European parliament, The Council of European Union and last but not least, the Financial Action Task Force (“FATF”).

In conclusion, we all wish to welcome the new framework which if properly administered will be able to identify covert acts of terrorist financing and /or money laundering. Back to “Queen of the South” - the script writers on the next episode will surely not risk Theresa Mendoza to seek refuge in the crypto island as facing the rigours of the 5th directive will be hard-hitting.