The European Commission has introduced the Anti-Money Laundering Directive 5 (AMLD5) to control money laundering. The aim of this fifth money laundering direction is to combat fraudulent transactions.
We are all familiar with the significant money laundering scandals that have surfaced, for example, the Panama Papers. These revelations have caused governments and other regulatory authorities worldwide to adopt Anti-Money Laundering regulations to counter financial crime.
The rules also affect the crypto market, where crypto companies and service providers must keep AML regulations in mind. But what exactly does AML, and specifically AMLD5, mean? And what effect will it have on the crypto world? Discover the EU's Anti-Money Laundering regulations in this article!
What is AMLD5?
AMLD5 is the new regulation aimed at ensuring that money laundering and terrorist financing are no longer possible within the EU financial system. With this, the European Commission tries to obstruct criminal organizations so their illegal money cannot be laundered. It also makes it more difficult for terrorist organizations to receive financial aid. Through such regulations, the EU is trying to combat financial crime, but not at the expense of the global financial system.
Because the European Union draws up directives, countries within the union can determine what laws and objectives they will comply with under these directives. The guidelines are not legally binding, but when a country does not comply with these rules, a fine may be imposed.
To ensure that all countries get started with the updated regulations, the European Union has set a deadline. January 10, 2020, was the final deadline by which countries within the European Union could adjust their plans and thus comply with the new regulations.
However, many countries within the European Union have not yet met this deadline. Indeed, after the deadline had passed, only five countries — Luxemburg, Slovenia, Bulgaria, Latvia and Denmark — had complied with the plans.
The measures impact on the crypto world, for example, the Know Your Customer (KYC) process and other crypto services. Is this positive for cryptocurrencies? Many people see the regulation of the crypto market as an essential step, assuming that the crypto market could grow even further. Large companies, for example, BlackRock and Vanguard, will not invest directly in cryptocurrencies without regulation.
Why is AMLD5 important?
After several money laundering cases and several terrorist attacks occurred in Europe, the European Union decided to introduce AMLD5. This move seeks to counter-terrorism and crime by discouraging the financial motive of criminals.
Because AMLD5 is the fifth edition of the Anti-Money Laundering regulations, there were already four editions before it. So, why does the edition before AMLD5, called AMLD4, not meet the plans of the European Union? AMLD5 provides financial institutions with better protection from criminal activities. It will be even more difficult for criminals to carry out their activities once regulations such as mandatory identification processes have been tightened.
AML rules — How does AML work?
AMLD5 originates from the AML rules, the first rules to deal with crime in the financial field. The AML rules include the laws, procedures and regulations of a country, which relate to the prevention of money laundering and other criminal activities.
By adjustments or additions from the EU, there will be new versions created all the time. As the world changes, the regulations will be updated. AMLD5 will therefore not be the last version, especially with the developments around cryptocurrencies and blockchain technology. It is only a matter of time before the regulations are sharpened.
The most important regulatory changes in the AMLD5
With the arrival of AMLD5, several changes are being implemented. But what do these changes entail and how can they affect you? We go over the four biggest changes below:
Politically Exposed Persons (PEP) screening
A person who has been given a prominent public position is considered to be politically exposed in the field of financial regulation. Due to their position and potential influence, PEPs often pose a higher risk of being involved in bribery and corruption.
PEP screening means that all EU member states have to draw up a list of prominent officials. In this way, important persons in the political field can be easily identified, thanks to the AMLD5 regulation.
Within the EU directives, all companies and individuals that follow the directives fall under “Mandatory Entities.” This includes various companies in the financial sector, such as investment firms, insurance companies and other financial service providers.
With the advent of AMLD5, companies active within the crypto and blockchain spaces, such as crypto wallet providers, will also belong to this group. As a result, all crypto-related companies are "Mandatory Entities."
Identification when buying prepaid cards
To ensure that criminals cannot pay or launder money via a sly detour, the regulations for buying prepaid cards have been tightened. Identification was already required for large amounts, but this amount has been lowered in AMLD5. Previously, the limit was €250 ($252.47), but this has been changed to €150 ($151.47).
Customer Due Diligence (CDD)
Collecting or checking a client’s information via their photograph or an official identification document is called customer due diligence.This process is carried out to detect terrorist financing.
AMLD5 guidelines state that companies should not open branches in high-risk countries, such as Syria, North Korea and Yemen. This measure should ensure that companies establish fewer relationships with these countries. By doing so, the EU is trying to reduce the risk of fraudulent practices both for the customer and the company.
What is AML in crypto?
A report by the blockchain analytics company Chainalysis has revealed that about $8.6 billion worth of money was laundered via cryptocurrencies in 2021. This amount is not only obviously huge but is also 30% higher than in the previous year. Both the amount and the increase from the previous year are motives for tightening the rules.
In 2014, the first AML guidelines were created for cryptocurrencies. Since then, more and more rules have been added or modified. This not only means that crypto exchanges, stablecoins and other companies have to stick to the AML guidelines, but also that the KYC process is increasingly entering the crypto world.
For example, DeFi protocols or NFT marketplaces may have to perform more and more checks, where both transactions and customers will be verified prior to onboarding. In addition, these crypto projects must also report when they find suspicious activity.
The KYC process in crypto
So the KYC process at crypto companies should be the same as at other financial institutions, because such companies are now subject to the same regulations. You probably have experienced the KYC process while creating accounts at exchanges such as Binance or Coinbase. The KYC process usually consists of three parts; namely, customer identification, continued monitoring of customers and customer due diligence.
With these three checks, the customer is looked at in different ways. Customer identification involves looking at the data that the customer enters. This data is verified and assessed against its authenticity
In addition, customer due diligence looks at the risk of onboarding a new customer. This involves looking at a person's transaction history and background, for example. Based on this, a risk analysis is made. Furthermore, the monitoring of transactions continues whereby transactions are continually tracked to prevent criminal activities.
The future of crypto regulations
The European Commission and other regulators worldwide take the crypto market more seriously due to cryptocurrencies and nonfungible tokens (NFTs)-related scams. Therefore, it is plausible that crypto regulation will be adapted in the future with the AMLD6, the follow-up to AMLD5.
Regulating the crypto market is both encouraged and disliked by various stakeholders in the crypto space. By controlling the crypto market, companies, individuals and governments will gain confidence in the crypto market, which could be favorable for adopting crypto. However, this may negate the primary purpose of cryptocurrencies, i.e., no centralization.