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The 5th Anti-Money-Laundering Directive for the European Union and the still not addressed fintech issue

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The 5th Anti-Money Laundering (AML) Directive will come in effect as of January 10, 2020 for the European Union countries. The purpose of the different European directives  2009/138/EC, 2013/36/EU, 2015/849 already enacted is to prevent the use of the European financial system for the purpose of money laundering and terrorist financing. The 5th AML Directive intends to address some structural flaws identified.

5th AML Directive in a Nutshell

There will be some variances in the application of the 5th AML directive in the different EU member states but the following points will be addressed in each country:

  • everyone will be enabled to identify the ultimate beneficial owners of companies operating in the EU;
  • closer controls on virtual currency service providers;
  • enhanced due diligence requirements for transactions and business relationships with high-risk third countries;
  • protection for whistleblowers who report money laundering (including the right to anonymity);
  • an extension of the Directive to cover all forms of tax advisory services, letting agents, art dealers.

Public access to Ultimate Beneficial Owners information

The 5th AML Directive will give EU citizens the right to access information on the Ultimate Beneficial Owners (UBO) of companies that operate in the EU. This could help quash the corrupt use of shell companies created to perform scams, launder money, hide wealth and avoid paying taxes – a practice that received widespread attention in the wake of the Panama Papers.

Companies registered in the EU are required to obtain and hold adequate, accurate and current information on their ultimate beneficial owners who benefit from the company and/or control it. They are required to file the information with a central register that would be maintained by companies registers.

Prepaid cards and Cryptocurrency service providers

The 5th AML Direction includes a reduction in the threshold for identifying the holders of prepaid cards from currently €250 to €150.

To end the anonymity associated with cryptocurrencies, cryptocurrency exchange platforms and custodian wallet providers will have to conduct proper Know-Your-Customer (KYC) checks, monitor transactions, and file Suspicious Activity Reports (SARs) with the respective law enforcement.  

These platforms and providers will also have to be registered, as will currency exchanges and cheque cashing offices, and trust or company services providers. The crypto regulatory frameworks in the different EU-countries currently diverge significantly from one country to another.

  • Germany, for example, has proposed a rigorous licensing framework for authorizing crypto business operating there, while France is pursuing a licensing framework with opt-in features. 
  • The Netherlands has indicated that it will only regulate crypto exchanges and custodial wallet providers, aligned with 5th AMLD’s specific requirements.
  • The UK and Austria, in light of the FATF’s extensive crypto guidance from June, have made clear that they will go beyond the requirements of 5AMLD and will supervise a much broader universe of service providers, including ICO and IEO issuers, peer-to-peer, crypto ATMs, and others. 

EFRI Principal Elfriede Sixt and her take on 5th AMLD

Based on our day-to-day checks on documentation received from hundreds of victims of Investment scams, with the flow of the stolen money facilitated by European banks and payment services providers (increasingly also crypto service providers), we know best that there is an evident massive lack of compliance with the legal requirements and in addition massive governance failures in relation to Anti-Money Laundering (AML).

We much appreciate the concept of enabling everybody to check the UBO (ultimate beneficial owners) and we even more welcome the regulatory approach to require financial services providers and professionals to conduct due diligence on banking relations to high-risk third countries. As a matter of fact, however, we do not expect any material changes on the fraud volume by the implementation of these new regulations.

Currently, it evidently pays off in the EU to NOT adhere to the AML rules. Fintechs are offering their technology and acquiring services to illegal gaming providers as well as to fraudulent investment scam operators. Fraudulent merchants are enabled to do business with registered PSPs providing them access to the global financial system – without legal consequences so far. Fintechs are earning quite a lot of money from these “black or grey” merchants and are not being challenged and punished by the authorities for their regulatory misconduct.

We are still convinced that only a supranational EU authority charged with AML/CFT responsibilities could overcome the evident issues in the EU. Moreover, we have to rethink the regulatory framework for fintechs.

Until that, every day hundreds of European retail investors will be ripped off by unscrupulous fraudsters not having any issues with transferring money and/or cryptos stolen within Europe and to non-EU-countries.

Elfriede Sixt, CPA and EFRI Co-founder and principal

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