EU's Fifth Anti Money Laundering Directive to combat terrorist financing

Virtual currencies covered under the EU's Fifth Anti Money Laundering Directive to combat terrorist financing

The European Union's Fourth Anti Money Laundering Directive 2015/849 (AMLD 4) was implemented into UK legislation by 'The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017', which came in to force on 26 June 2017. 

Hot on their heels is a proposed set of amendments – otherwise known as the 'Fifth' Anti Money Laundering Directive 2016/0208 (AMLD 5). These further amendments were proposed by the EU in July 2016, after a warning from the European Central Bank that illegal activities might continue to be financed under the proposed new AMLD 4 regime. AMLD 5 aims to strengthen the core provisions of AMLD 4 in light of the Panama Papers revelations of April 2016 and in direct response to recent terrorist attacks in Europe.

AMLD 5 has five goals. These are to:

  • ensure a high level of safeguards for financial flows from high-risk third countries
  • enhance the powers of EU Financial Intelligence Units (FIUs) and facilitate their cooperation
  • ensure centralised national bank and payment account registers or central data retrieval systems in all Member States
  • tackle terrorist financing risks linked to virtual currencies
  • tackle risks linked to anonymous pre-paid instruments (e.g. pre-paid cards).

To tackle the terrorist finance risks relating to virtual currencies, the Commission wants to bring virtual currency exchange platforms (VCEPs) and custodian wallet providers (CWPs) within the scope of the framework. It has broadened the scope to include them within the definition 'obliged entities', giving them the same responsibilities as banks and requiring them to apply customer due diligence controls and conduct ongoing monitoring of transactions in order to report suspicious activity to government entities. To combat the risks related to the anonymity of virtual currencies, which allows their potential misuse for criminal purposes, it is also proposed that national FIUs should be able to obtain information allowing them to associate virtual currency addresses to the identity of the owner of virtual currencies.

AMLD 5 provides a definition of digital 'virtual currencies' as:

"a digital representation of value that can be digitally transferred, stored or traded and is accepted by natural or legal persons as a medium of exchange, but does not have legal tender status and which is not funds as defined in points (25) of Article 4 of the Directive 2015/2366/EC nor monetary value stored on instruments exempted as specified in Article 3(k) and 3(l) of that Directive".

All Member States will be obliged to implement this legal definition, along with the definition of 'custodian wallet provider', into their AML legislation. It is worth noting that in light of various central banks, including the Bank of England, having an interest in digital fiat currencies and the announcement as far back as January 2016 that the People's Bank of China would be looking to develop its own national digital currency, the definition outlined above from EU has been modified to remove text that would have meant that a virtual currency "is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency".

AMLD 5 remains under review for any further counter proposal or approval between the EU Parliament and the European Council. Discussions were scheduled for January 2017 but were postponed to mid-2017. While the discussions could take several months, further legislative amendments required to be implemented into UK AML law can be expected soon. It seems unlikely that Brexit will have a significant impact, in this regard.

We have particular expertise on the cross-over between fintech and international financial regulation. We are a recognised leader for advice to governments and state organisations on international financial policy and regulation, including virtual currency platforms.

For further insight into the legislative frameworks emerging around virtual currencies, please contact Justin Barrow, Tom Torkar, Partner and Head of Technology or Andrew Oldland QC, Senior Partner and Head of the Financial Services and Regulatory teams.