Anti-Money Laundering (AML) Regulations: The Global Approach

While reaping the rewards of a flourishing crypto market many nations ignore the need for stringent AML rules to eliminate illicit activities and threat entities.

With cryptocurrency hiking rocky terrains and attracting billions from investors worldwide, there is an urgent need for the standardization of global AML protocols with regard to cryptocurrency trading. There has been some convergence, though, towards the Financial Action Task Force (FATF) view that cryptocurrency payment processors should be meted the same obligations as their non-crypto counterparts. The majority of the states that have chosen to regulate crypto-activities have conceded that commercial exchange of cryptocurrency to fiat currency, including through Virtual Currency Exchanges (VCEs), must be subject to AML obligations as suggested by FATF.

Noticeable variations in national regulations lie in the following ranges:

i) charting of special licensing requirements for VCEs;
ii) the extent to which AML regulations encompass administrative and wallet services;
iii) the extent to which ICOs fall within bounds of securities laws or equivalent regulations with AML regulatory implications; and
iv) the extent to which crypto-to-crypto exchange is observed differently from the crypto-to-fiat exchange.

AML Risks in Cryptocurrency

Rapidly evolving technology and ease of use for consumers entail substantial risks at the checkpoints of user access at the exchange and wallet sites. Potential vulnerability gets exposed when the consumers access the DLT. Most of the risks do not pertain to the blockchain but to the related ecosystem of issuance, wallets, and customer support for the DLT access.

The evils of the system surface in the form of:

Trafficking in illicit goods- cryptocurrency provides easy transactions of illegal goods and services. They create a conducive environment for nefarious activities like narcotic dealing, human trafficking, organ harvesting, child pornography.

Hacking and Identity Theft – crypto exchanges and wallets provide enough scope for hacking and data theft. Once hacked the crypto holdings can be easily exfiltrated to anonymous accounts, leaving little or no opportunity to reverse the transaction or identify the entity.

Market Manipulation and Fraud – without regulatory oversight, the VCEs run the risk of manipulation by mal-entities with regards to unregistered offerings, and ease by which those threat-actors may create new accounts to operate with malicious intent.

Facilitating Unlicensed Business- the absence of standardized AML regulations it is exceeding difficult to oversee the crypto-activities in areas of varying jurisdictions. This is especially important in determining if the businesses are in compliance with the local rules. Affording financial services to non-compliant businesses may have serious implications.

Terror Financing and Sanctions evasion – the anonymity and ease of creation make it easier for threat-entities to transfer funds and finance terror.

US Regulatory Approach

Under the US Federal Law, recognizing a certain cryptocurrency as a currency, security, or commodity. And potentially more than one of these at a given time under overlapping regulatory regimes. Whether or not, a crypto-activity is subject to AML obligations, depends heavily on the person involved, by virtue of committing the task falls within one of the listed categories of ‘financial institutions’ designated pursuant to the US Bank Secrecy Act (BSA).

Financial Crimes Enforcement Network(FinCEN) seeks to distinguish the crypto-activities that trigger “Financial Institute” status. According to a 2013 guideline, FinCEN deduces that virtual currency is a valuable substitute for currency. Moreover, persons administering, and exchanging the same may be classified as Money Services Business (MSB). Persons using virtual currency to simply purchase goods or services do not fall under this category, however, the administrators and exchangers are categorized under MSB.

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FinCEN requires smaller companies to disclose relevant ownership details. FinCEN forbids a person from misappropriating or concealing material facts from a Financial Institution. Facts that concern ownership or control of assets involve a monetary transaction. If, the person or entity who owns or controls the assets is a senior foreign political figure, or any immediate family member or close associate of a senior foreign political figure. The aggregate value of the assets involved in 1 or more monetary transactions is not less than $1,000,000.

Europe Regulatory Approach

The latest AML directive comes in the form of the Fourth Money Laundering Directive (MLD4). This however doesn’t entail cryptocurrency. The proposed fifth reached an agreement to extend AML obligations to firms operating centralized crypto exchanges or providers of custodial wallet services for cryptocurrency.

Despite the held-up MLD5, some EU members have legislated along the lines of the pending directives on their own. Although, with significant variations.

Germany and Italy have largely kept to the regime of MLD5 by implementing national laws or regulatory actions. The UK and Netherlands have stayed away from enforcing any sort of AML regulations on crypto trading.

Asia-Pacific Regulatory Approach

Regulatory directives fluctuate greatly in the Asia-Pacific region among the nations China, Korea, Japan, and Australia. At one extreme stands China which enforces the prohibition of commercial issuance of cryptocurrency. Governments of Japan, Australia, Singapore, and Malta are allowing the licensing and supervising of VCEs and other crypto businesses. This, while Korea has still to strategize regulatory schemes of any sort.

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Hence…

Without stringent protocols governing cryptocurrency activities, it is impossible to mitigate risks. Regulations by individual states vary in many respects making it easier for the malactors to grab the advantage. AML regulations need to be strong and global in order to reap actual benefits in an ethical and low-risk environment.