The boom of new cryptocurrencies issued through ICOs and the rising interest in the crypto market have led to the implementation of regulatory requirements for the entire financial market. In 2018, the European Parliament issued a proposal for the AML5 directive, which will come into effect in 2020 – in some countries, it will happen in mid-2019. AML5 is a commonly used abbreviation for the fifth EU Directive on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.
To explain why the AML5 is important for companies like SpectroCoin, we need to go back to 2015, when the AML4 (the fourth EU Directive on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing) was adopted. The current AML4 directive includes a set of rules aimed at preventing money laundering and terrorist financing in banks and other big financial companies. Now, the AML5 will make those rules applicable to both, virtual currencies and fiat currencies.
Key aspects of the AML5 directive
The main purpose behind the AML5 is the prevention of illegal activities in fiat and crypto-involved companies. Its strict requirements can cause stress and some inconvenience for clients, but we believe that this also will help to protect our users against identity theft and fraud. The AML5 directive is the first AML to consider new financial technologies and the virtual currency market as places where regulatory authorities and consumers interact in data sharing, transparency and trust. This means that:
- For the first time, tokens and cryptocurrencies are granted legal status
‘Virtual currencies’ means a digital representation of value that can be digitally transferred, stored or traded and functions as a medium of exchange, but does not have legal tender status in any jurisdiction and which is not funds as defined in point (25) of Article of Directive 2015/2366/EC nor monetary value stored on instruments exempted as specified in Article 3(k) and 3(l) of that directive.
and will be subject to the existing regulatory framework. This means that all crypto-service providers will be obliged to comply with AML and KYC requirements.
- New requirements were set for prepaid cards and other services – companies working in the financial sector cannot provide anonymous services and maximum monthly transaction limits will be reduced.
The anonymity of virtual currencies allows their potential misuse for criminal purposes. The inclusion of providers engaged in services between virtual currencies and fiat currencies and custodian wallet providers will not entirely address the issue of anonymity attached to virtual currency transactions, as a large part of the virtual currency environment will remain anonymous because users can also transact without these providers. To combat the risks related to the anonymity, national Financial Intelligence Units (FIUs) should be able to obtain information allowing to associate virtual currency addresses to the identity of the owner of virtual currencies.
- Stricter requirements will be applied for transactions that involve high-risk third countries. Virtual currency exchange platforms and wallet providers will be obliged to function as any other financial institution which monitors transactions and reports suspicious activities to authorities.
Obliged entities as far as reasonably possible conduct monitoring of the business relationship by increasing the number and timing of controls applied, and selecting patterns of transactions that need further examination.
These steps will ensure a safer environment and substantially reduce illegal activities across financial platforms.
- To meet the upcoming AML5 directives, companies like SpectroCoin will have to implement some regulatory changes for its current operations – identifying our clients, implementing additional KYC processes and monitoring suspicious activities, to name a few. These steps will include a revision of current customers’ documents and, if needed, implementing additional documents-gathering processes to fill the gaps in the beneficial ownership data.
The bright side
As financial companies rely on complex data analysis in order to detect potentially suspicious activities, Machine Learning and Artificial Intelligence solutions are applied to identify complicated patterns in large amounts of loosely structured data. These implementations transform and improve the workflow as well as the quality and efficiency of services, and the overall customer experience.
At SpectroCoin, a fair balance between customers’ interests and security is one of our priorities. The improvement of fraud identification, AML transaction monitoring, sanctions and know your customer (KYC) checks will have a huge impact in preventing financial crimes and, at the same time, ensuring a more stable economical environment for businesses.
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Reference: DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU