Another tightening of European regulations or how cryptocurrencies came under the radar of EU financial intelligence

It seems that with each new year, the hysteria of state regulators around the cryptocurrency market will only increase. This is confirmed by new changes to the well-known EU Directive 2015/849 regarding combating money laundering and legalization of funds obtained from criminal activities, as well as the financing of terrorism.

2018 began with a whole series of attacks from government agencies in most European countries against various players in the cryptocurrency market, from crypto exchanges to various exchangers, ICO startups and online wallets.

The main task is the fight against anonymity.

But, perhaps, the apogee of forceful pressure on the cryptosphere can safely be called the recent amendmentsadopted on April 26, 2018 by the European Parliament and the Council of the EU to the well-known Directive 2015/849/EU of May 20, 2015, “On the prevention of the use of the financial system for the purposes of money laundering or financing” terrorism" (came into force on June 25, 2015).

It is worth recalling that Directive 2015/849 is the 4th and key Directive that regulates the procedure for preventing the use of the financial system of the European Union for illegal purposes.

The new amendments to the Directive are aimed primarily at reducing the level of anonymity of users and transactions. They want to achieve this by imposing customer identification (KYC) obligations on cryptocurrency exchanges and crypto wallet developers

The most interesting point is that the new amendments finally include a definition of virtual currencies, which includes cryptocurrencies. 

By virtual currencies, the Directive understands a certain value that has not been issued and has no guarantees from either the central bank or any government. institutions. In addition, virtual currencies do not have the status of legal currency, but can be accepted by exchange participants.

Who is the observer?

To solve the KYC problems outlined in the 4th Directive, a single database of beneficial owners was initially created, access to which in accordance with Art... 30 The following subjects received the Directives:

— competent authorities, EU authorities and European financial intelligence agencies;

— obligated persons, including: financial institutions, tax consultants, realtors, auditors, notaries and other persons who verify clients due to the specifics of the activities performed;

— other persons and companies with a legitimate interest in gaining access to information from registry.

It is worth noting that such changes to EU anti-money laundering legislation were perceived differently by different European countries. So, for example, France, Great Britain (while still part of the EU), as well as the Netherlands and Denmark advocated full transparency and public registers. However, another part of the EU countries, led by Germany, insisted on maintaining the confidentiality of information about beneficiaries and providing only limited access to the data contained in the registers.

So, according to Art. 11 Directives, mandatory identification and due diligence (Due Diligence), as one of the main innovations of the Fourth Directive, in relation to the beneficial owners of companies/trusts (including from third countries) should be carried out in the following cases:

- when establishing a business relationship;

- when concluding a transaction worth over 10,000 euros (no matter in one or more related transactions);

- when conducting transactions worth over 2000 euros in the gambling industry;

- if there is a risk of money laundering and terrorist financing;

- in cases of doubts regarding the reliability and sufficiency of information previously received from the client.

There are more questions than answers

Innovations in European legislation to combat money laundering and the financing of terrorism caused considerable excitement and many questions, especially regarding the relationship of the new regulation with the legislation on personal data. The main problem is that the Fourth Directive and its amendments do not set out how its rules and requirements relate to the requirements of the General Data Protection Regulation, which was adopted by the European Parliament on December 17, 2015 and came into force on May 25, 2018..

It is not yet known how public registries of beneficial owners will help identify suspicious financial activity and prevent the financing of terrorism and other illegal activities associated with money laundering. 

Meanwhile, since April 2016, any companies registered in the EU are required to send information about their ultimate beneficiaries to a single register, as well as update data in case of changes when submitting an annual report. And if, for example, in the British central register, information about beneficiaries is open and available to the public, then in other European countries, for example in Holland, such information is provided upon request in the form of an extract from the register.

According to experts, virtual currencies owe their attention from regulators to the rapid growth in the number of cryptocurrency transactions, when in the period 2017-2018 they began to number up to 100 thousand per day or more. That is why, every day, virtual currency platforms and e-wallet depositories are increasingly subject to the same “know your client” requirements as banks. 

As a result, the suspicions of law enforcement authorities of EU member states regarding the use of prepaid anonymous cards for illegal purposes, in particular in money laundering and terrorist financing, resulted in such unpopular measures as lowering the account balance threshold for obligations to disclose identity, namely from €250 to €150.

To summarize, I would like to note that in addition to eliminating anonymity, providers payment services will now be required to monitor suspicious user actions, and national financial intelligence agencies should be able to request such data at any time along with linking transaction addresses to their owners. 

These requirements are general, which means that each EU member state (including candidate countries, including Ukraine) will need to analyze its own legislation and subsequently implement them within 18 months from the date of adoption of the amendments.

According to vegaslex