Due diligence and AML in the Crypto Industry- A New Age for Due Diligence?

Although money laundering has, for centuries, been a default method for escaping regulatory hurdles, the recent global pandemic has strengthened this unregulated financial leeway for several industries, such as the crypto currency industry.

 The new EU regulatory framework for anti money laundering- 6 AMLD aims to tackle money laundering in a specific methodology which has not been underlined, let alone approached on an EU level till now.

6 AMLD has set a new threshold of criminal liability and intense due diligence.

What does 6 AMLD entail?

1. Criminal Liability- legal and natural persons which are registered as UBOs/ nominee directors will fall under intense scrutiny for criminal liability in the respective Member States.

2. The conversion/ transfer of property deriving from countries from outside the EU will undergo even more intense scrutiny.

3. Aiding/ abetting or even attempting to conduct alleged money laundering activity will be punishable (in the respective Member State) as a criminal offence.

4. Member States will not be able to issue mitigated circumstances penalties, and are obliged to issue proportionate and dissuasive criminal penalties.

5. Member States are under the strict obligation to issue additional sanctions for money laundering.

6. Specific sanctions for legal persons include enhanced judicial enforcement, closing of the institution and increased fines.

The criteria above is applicable not only to the traditional banking and financial industry, but also to the entire fintech industry as a whole. Electronic Money Institutions, crypto currency exchanges and financial institutions which operate with trading and exchanging of digital currencies are now considered operating in an even more volatile EU regulatory environment.

Furthermore, even the low-risk financial industry is now considered under regulatory threat, as 6 AMLD covers the scope of the low risk industry, and not just the high risk industry.

Thus, it is inherit that sound in-house AML practices should be sharpened in accordance with 6 AMLD.

The vital issue that 6 AMLD raises in relation to crypto currency activity is the use of enhanced and simplified due diligence, while applying a methodology which is different from the methodology applied in 5 AMLD.

While 5 AMLD shed a light on the concepts of enhanced and simplified due diligence, 6 AMLD discusses the obligation of the EU Member States to conduct effective investigations on alleged organized crimes and money laundering activity. Although this obligation is on a Directive level, and not a Regulation level, it does release the Member State from adhering to the same level of due diligence.

This uncanny regulatory resemblance to certain aspects of 5 AMLD is not a coincidence. Crypto exchanges operating in the EU should brace themselves to the new regulatory due diligence conditions to be imposed by the Member States, namely:

1. An effective and sound KYC test, with a report for each client, whether it is on a B2B or B2C level.

2. The report itself should be in accordance to the regulatory needs of each individual FIU by Member State.

3. The scope for Enhanced Due Diligence will expand dramatically. Meaning that the EMIs and banks providing the source of funds for the crypto exchanges will have the liability shifted towards them.

4. The scope for Simplified Due Diligence will amount to the previous definition of Enhanced Due Diligence, under the definitions of 5 AMLD.

By this, it is safe to assume that AML procedures that do not encompass the new due diligence requirements, especially in the crypto industry, will be subject to intense scrutiny and regulatory inspection. It is in this day and age, in which states are considering taxation of crypto, digital coins value soaring through the roof, and impact of Brexit and the Covid-19 pandemic which has not gone unnoticed, that financial institutions need to take into consideration their due diligence practices.

This artcile  is sponsored and co-authored by Ella Rosenberg, an EU Regulatory and Defense Fintech Expert and Aviel Marciano, a HLS and due diligence expert. Ella consults on AML,  crypto currency industry,  Blockchain, financial investigations etc. And Mr. Marciano brings vast experience for KYC services, due diligence, cyber security, and intelligence services for the construction, banking and property sectors, and combating property disputes with the financial sector, in the EU/ EEA and US market.