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Commission brings virtual currency exchanges under AML rules

The European Commission has adopted a proposal that would bring virtual currency exchange platforms and custodian wallet providers under the scope of the Fourth Anti-Money Laundering Directive.06 Jul 2016

The proposed changes to the Directive, which was adopted in May 2015, include specific measures to better counter the financing of terrorism, and increase the transparency of financial transactions and legal entities, the Commission said.

Under the changes, virtual currency exchange platforms and custodian wallet providers would "have to apply customer due diligence controls when exchanging virtual for real currencies, ending the anonymity associated with such exchanges", the Commission said.

This would have a significant impact on the speed and attractiveness of virtual currencies, according to financial regulation and enforcement expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com.

"While such currencies can be used for money laundering and related criminal activity, they are also used by a large number of companies and individuals who may otherwise have no access to the traditional banking system," he said.

"This could affect the commercial viability and accessibility of virtual currencies to those who use them as their only source for lawful financial transactions," he said.

Beneficial ownership registers would also be made public on companies and business-related trusts, while information on all other trusts would be included in national registers and made available "to parties who can show a legitimate interest", the Commission said.

National registers should be interconnected, to aid cooperation between states, it said.

The registers will "hopefully provide an additional intelligence source for due diligence by money laundering reporting officers (MLROs), but will not be a one stop shop," said Ruck.

"In practice, MLROs will not only need to ensure they are up to date with the new provisions, but also consider the spirit of the Directive and of wider regulatory and legislative requirements. They must also continue to consider all risks and information available to them," he said.

The transparency of the planned registers is "limited", he said, with senior managers allowed to be named as the beneficial owners when the true beneficial owners cannot be named.

"That raises significant questions not only around the transparency of the regime but also how senior managers are able to fulfil their obligations if they do not have full knowledge of the corporate ownership structure," Ruck said.

The UK's Financial Conduct Authority (FCA) will expect MLROs to both use the registers and also ask questions of any senior managers and nominees "to fully understand the nature of the business, its ownership structure, sources of revenue and so on. All this due diligence will still need to be undertaken on a risk-based approach, as it is now," he said.

Despite the UK's plans to leave the EU, its intelligence sharing is likely to follow the EU's lead for now, Ruck said.

"As with many things Brexit-related, only time will tell. In the interim, I would expect intelligence sharing to continue to operate in much the way it has to date. Any difficulties will arise when legislation begins to diverge between the UK and the EU," he said.

"The EU relies upon intelligence coming from the UK as much, if not more, than the UK relies upon intelligence from the EU. I would hope that the prevention of criminal activities through intelligence sharing is something which can rise above any nationalistic priorities," Ruck said.

Other proposed changes include increasing the powers of EU Financial Intelligence Units (FIUs), giving them access to more information including centralised bank and payment account registers. EU countries would have to create central data retrieval systems to identify the holders of bank and payment accounts, and make these accessible to the FIUs.

The threshold for identification requirements on pre-paid cards will be reduced from €250 to €150, and the Commission will harmonise the list of extra checks that banks will need to carry out on financial flows from countries with deficiencies in their AML and counter-terrorism finance regimes, it said.

Commission vice president Frans Timmermans said: "Today's proposals will help national authorities to track down people who hide their finances in order to commit crimes such as terrorism. Member states will be able to get and share vital information about who really owns companies or trusts, who is dealing in online currencies, and who is using pre-paid cards. Making information public on who is behind companies and trusts should also be a strong deterrent for potential tax-evaders."

The Commission outlined an action plan in February to fight funding for terrorism, with measures it wants to put in place including better tracking of cash and asset freezes.