23 May Anti-Money Laundering Regulation & Directive 6
1. Introduction:
The recast of the Anti-Money Laundering Directive (AMLD) and new Anti-Money Laundering Regulation (AMLR) serve the primary purpose of the Anti-Money Laundering (AML) package to increase and facilitate cooperation between Member States in the fight against money laundering (ML) and terrorist financing (TF), while simultaneously closing gaps in the existing legal framework that may be exploited by criminals. Splitting the existing legal regime into a Directive and a Regulation represents a fundamental reorganisation of the European AML framework. It is envisaged that the proposed AML Regulation will contain all directly binding rules and definitions relevant to the private sector, including which entities are considered ‘obliged entities’. The sixth AMLD, on the other hand, will remain an instrument setting the standards for institutional cooperation in a way that preserves the autonomy of Member States to set up the organisation of their FIUs and national supervising authorities.
2. Amendments introduced in the AMLR:
The choice of legislative instrument for the provisions contained in the Anti-Money Laundering Regulation is one of the main amendments in itself. Currently, the EU AML legal framework is laid down in Directives, containing obligations for Member States to adopt a certain set of measures for the purpose of combating ML and TF. In general, Directives are a form of harmonisation instrument. However, they still leave a degree of discretion for national legislators, which in the context of AML and Countering the Financing of Terrorism (CFT) efforts has led to fragmentation in the application of existing rules to obliged entities. For example, the lack of complete EU harmonisation has caused variations in the mandatory procedures for executing customer due diligence across Member States. Regulations, on the other hand, are directly applicable in national jurisdictions, meaning that the adoption and entry into force of the AMLR would signify the first Union-wide uniform AML regime.
One of the objectives of the new AML package is to address regulatory gaps that allow the exploitation of upcoming technologies for the purpose of evading the EU financial regulatory framework. Therefore, it may come as a surprise that both the AMLR and AMLD6 proposals omit the registration requirements for crypto-asset service providers (CASPs) that are already established by the AMLD5. In order to explain this, it is necessary to take a wider look at EU Regulation proposals aimed at crypto-assets and CASPs, namely, the Markets in Crypto-Assets Regulation (MiCA) proposal. The MiCA Regulation puts forward provisions that tighten control over crypto-assets that do not qualify as financial instruments, such as cryptocurrencies, asset-referenced, electronic money and utility tokens, as well as all entities engaged in providing services related to those types of crypto-assets. According to its articles, CASPs that wish to operate in the EU have to be authorised by national competent authorities. This authorisation procedure includes registering an office in at least one Member State and fulfilling various prudential requirements. Successful applicants would be included in a Union-wide public register, established and maintained by ESMA, which would dispense the need for competent authorities to create similar registers for the purpose of AML supervision.
Additionally, as already mentioned, the AMLR proposal focuses on private sector actors. One of the key changes in that regard is an expansion of the list of obliged entities to include more types of CASPs and crowdfunding platforms. Whereas, in relation to crypto-assets,[1] the AMLD5 covers only operators of exchanges between crypto and fiat currencies as well as custodian wallet providers, the AMLR proposal further adds operators of crypto-to-crypto exchanges, brokers executing third party crypto-asset transactions, crypto-asset payment service providers, entities placing crypto-assets, entities receiving and transmitting orders, and entities providing advice or portfolio management on crypto-assets. Similarly, whereas the AMLD5 makes no reference to crowdfunding platforms at all, the AMLR includes a catch all provision for non-business crowdfunding platforms.[2] The goal of these amendments is to take into account contributions by international coordination and cooperation bodies, namely, the Financial Action Task Force (FATF), as well as the constant evolution of technology.
Other important AMLR provisions are the cap of crypto-assets payments without identification at € 1,000, the specifications on customer identification and verification procedures, the conditions on the processing of sensitive personal information by obliged entities and the prohibition on the provision and custody of anonymous crypto-asset wallets. Under the AMLD5, Member States are given broad directions as to what comprises due diligence measures, requiring “reliable sources” of information and “reasonable measures”. In contrast, the AMLR proposal lays out the minimum amount of data (e.g. name, date of birth, nationality and permanent residence) that ‘obliged entities’ must collect in order to sufficiently identify their clients and assess the beneficial ownership of assets. Similar clarifications have been made with regard to the processing of personal information. Accordingly, obliged entities will have to inform clients of the processing of their personal data, use reliable and up-to-date files, and never process for commercial purposes. Finally, the AMLR prohibits crypto-asset service providers from keeping anonymous crypto-asset wallets, requiring any existing wallets with unidentified holders to undergo customer due diligence before they can be used again.
On the 28th of March 2023, amendments to the proposal for AMLR have been suggested by the EU Parliament. The amendments proposed by the EU Parliament include an expansion of the list of obliged entities, which includes the addition of crowdfunding service providers falling inside the scope of Regulation 2020/1503, lowering the minimal amounts for application of the AMLR from € 10,000 to € 5,000, extra provisions for CASPs providing crypto-asset services to CASPs from third countries, a ban on business relationships with non-compliant CASPs and lowering the ultimate beneficial owner (UBO) threshold to 5%.
3. Amendments introduced in AMLD6:
The AMLD6 proposal solely contains obligations concerning the Member States and as such it will not directly affect obliged entities. Nevertheless it is important to have an understanding of its provisions, since they define the powers that national supervising authorities and FIUs must have and the procedures that they should follow when it comes to the implementation of AML/CFT rules.
Although the upcoming AML package aims to lay down a uniform EU legal framework, it also recognises that ML and TF risks and vulnerabilities may vary across countries and economic sectors. That is why the new AMLD will allow national authorities the flexibility to extend the application of AML and CFT requirements to entities that are not initially covered by the AMLR. Additionally, since crypto-asset and payment service providers have been singled out as posing specific AML vulnerabilities, the new Directive proposal allows host Member States to require such entities to establish a central contact point responsible for AML/CFT compliance. Based on regular Member States’ assessments of national specific ML and TF risks, the Commission and future Anti-Money Laundering Authority will evaluate the appropriateness of national measures and determine whether legislative action at EU level is more appropriate in each instance.
Lastly, the AMLD6 proposal establishes a number of cooperation obligations for national supervising authorities and FIUs. For example, in relation to beneficial ownership information, which Member States are currently required to collect in centralised registers, the AMLD6 empowers the Commission to adopt a common format for submission of such data and develop a single access point cross-border interconnection system for centralised databases. In addition, the new proposal specifies the minimum types of ‘financial’, ‘administrative’ and ‘law enforcement’ information that FIUs must have access to and lays down commitments to participate in joint analyses of suspicious transactions initiated by the Anti-Money Laundering Authority (AMLA). Overall, these developments are meant to strengthen the ability of FIUs to conduct preventive investigations and ensure their active collaboration with counterparts from other Member States.
4. Final remarks:
Together, the AMLR and AMLD6 introduce two primary changes compared to the AMLD5. They promote greater level of AML and CFT convergence across EU Member States and adopt new rules and definitions that conform to recommendations issued by international standard setting bodies. Since ML and TF often involve international transfers of funds, the EU is set on implementing legislation that is compatible with global standard setting bodies, such as FATF, in order to maximise regulatory effectiveness. Equally so, the Union is trying to progressively address new financial system vulnerabilities, arising out of technological developments. Increased levels of detail with regards to defining which entities fall under the AML regime, what constitutes sufficient customer due diligence and the minimum information that supervising authorities and FIUs must have access to are meant to converge differing Member State interpretations of the current regime. The overarching expectation is that improving harmonisation of practices and facilitating the cross-border flow of AML related information would speed up financial analyses of suspicious transactions and simplify investigations conducted by FIUs.
Series of blogs AML/CFT
In July 2021, the European Commission presented a new package of legislative proposals to tighten measures against money laundering and terrorist financing across the European Union. The new EU anti-money laundering and counter-terrorist financing (AML/CFT) rules will be extended to the entire crypto sector. In this blog series, we will therefore discuss in detail various topics that may be of interest.
The following topics are covered:
- Overview of the new AML/CFT package
- Transfer of Funds Regulation Amendments
- Anti-Money Laundering Regulation & Directive 6
- Anti-Money Laundering Authority Regulation
Questions?
If you have any questions about the AML/CFT package, please contact Willem-Jan Smits or Rens Kattenbelt. Our team is ready to help you.
[1] Note that the AMLD5 designates a much wider spectrum of entities as ‘obliged entities’, but for the purpose of assessing the proposed amendments we focus on the changes introduced in relation to crypto-assets.
[2] That is crowdfunding service providers falling outside the scope of Regulation 2020/1503.