FATF to finalize interpretation of virtual assets, digital currency exchanges and ICOs to require they be FIU-registered and supervised for AML compliance

By Christine Duhaime | May 21st, 2019

In furtherance of the US approach to responsible innovation, the Financial Action Task Force (“FATF“)’s private sector consultation in Vienna two weeks ago, will help drive changes to FATF Recommendation 15 to bring digital currencies, ICOs, and digital currency exchanges more fully into the AML requirements in June 2019.

The Vienna change will take effect by adoption of an Interpretive Note and new Guidance to the Recommendations and will require, inter alia, that digital currency companies be FIU-registered, that their owners and senior management pass an investigation to be registered, that digital currency companies be supervised and monitored to ensure AML compliance, and that investigators have the power to compel documents from them. The constitutional right against unreasonable search and seizure for electronic and other records, would not apply to digital currency companies. As a result of the fact that it has emerged that some ICOs, digital currency exchanges and darknet marketplace operations accepting digital currency payments have connections to organized crime, have been launched by owners with criminal records or who have affiliations with illegal drug trafficking, FIU registration is expected to be similar to the New York BitLicence where registration will be denied where there is an integrity concern. This could result in what happened in the online gambling sector where organizations shed owners, executives and employees with criminal records or who were ever subject to court orders that speak to integrity.

Vienna Interpretative Note

The Vienna Interpretative Note and new Guidance will cause a trickle down effect in most countries which will have to amend federal legislation to adopt digital currency assets and transactions as part of their AML requirements to protect the financial system.

The Vienna Interpretive Note and new Guidance adds to previous amendments to Recommendation 15 and such changes will require crypto companies, except wallet holding companies, ICOs, digital currency exchanges and such that provide financial transactions to:

  1. obtain and verify the identity of their customers when they open an account (and not when they move money);
  2. understand what predicate offences are;
  3. undertake risk assessments to mitigate risks;
  4. monitor suspicious transactions;
  5. report suspicious transactions;
  6. report transactions above prescribed thresholds;
  7. have procedures in place for PEPs;
  8. register with a federal FIU;
  9. have no criminality attached to the organization (because they will not be able to be FIU registered);
  10. draft and implement compliance programs and policies based the results of a risk assessment;
  11. hire independent auditors to audit internal controls;
  12. be subject to compliance reviews;
  13. retain appropriate records of customers and financial transactions; and
  14. conduct training to train staff on AML.

Criminal sanctions against exchanges and their officers

An interesting addition in the Interpretive Note is the requirement that countries impose a range of civil, criminal or administration offences that are effective and act as a deterrent against digital currency companies and other crypto service providers that fail to register with a FIU or to comply with the requirements under AML legislation, as well as against their directors and senior management.

Supervision of exchanges for AML purposes

The FATF recommends that digital currency exchanges and other virtual asset issuers, be subject to supervision and be monitored to ensure they comply with AML law and the FATF recommends that that the supervision be by a competent authority (and not by a self-governing body of crypto people), and that the supervisory body be able to compel evidence and information, as well as to impose criminal and other sanctions.

No jurisdiction-hopping to avoid the law

Sigal Mandelker, Under Secretary for Terrorism and Financial Intelligence at the US Department of the Treasury, mentioned the FATF changes affecting digital currency exchanges and virtual assets at a talk she gave in New York on May 13, 2019 at Consensus. She remarked that AML compliance should not be viewed as a chore but rather should be viewed a a duty serving national security. The US and British Columbia are on the same page on that issue as this is precisely what the RCMP financial crime lead in Vancouver, Canada, said to bankers, credit unions, payments companies, FinTechs and digital currency executives and innovators during a FinTech conference we convened three years ago on responsible innovation. The Under Secretary also said, importantly, that the FATF changes coming in June 2019 will create a level playing field and ensure that crypto companies do not, as some currently do, jurisdiction-hop to avoid being tied to any one country to avoid financial regulation.

Vetting of Insiders

The most important part of the new requirements will be vetting of insiders of digital currency exchanges (directors, officers, majority shareholders, AML officers). Typically, a vetting for integrity purposes requires, inter alia, the disclosure of financials, disclosure of a criminal record and disclosure of whether any of the insiders have ever been the subject of a Court Order directly or indirectly as part of an organization that was subject to a Court order. In gaming regulation where vetting must occur to protect the integrity of gaming, some insiders elect not to pursue registration and to quit an organization because they know that if they were ever the subject of an adverse Court order even if not named, that fact will stand in the way of the entity being registered.

A draft of the Interpretive Note is here.

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