Since the launch of Bitcoin in 2009, the world of cryptocurrency has grown immensely. It is a new and innovative way of addressing the world’s economic needs and has led to some great advancements in financial infrastructure. The ongoing question, however, which affects stakeholders, including regulators, compliance professionals and law enforcement, is how do the AML (Anti-Money Laundering) Regulations impact acceptance of cryptocurrency?
There is a general lack of clarity surrounding AML compliance and cryptocurrency, and stakeholders are often confused by whether or not it should be accepted and if so, how they can protect themselves from breaching AML Regulations.
Given the considerable and rapid growth of cryptocurrency adoption, this has become a key issue in compliance circles. While many cryptocurrency transactions have proven to be legitimate, the mere fact that cryptocurrency does not fall under a traditional financial system heightens its appeal to cybercriminals and other money launderers. It is essential for companies impacted by the AML Regulations to understand this new and non-traditional financial system, and the risks it poses to minimise any criminal activity.
It is for these reasons that many law firms continue to shy away from accepting matters where cryptocurrency is being used as the source of wealth.
The importance of AML compliance regarding Crypto exchanges
With the adoption of cryptocurrencies on the rise, many firms are rightly reconsidering the importance of Anti-Money Laundering compliance. Many authorities have been trying to fight for stricter AML and compliance measures for crypto risks for years. In countries like Switzerland, they have adopted an open approach that allows for investment and trade; however, as at September 2021, more stringent measures were being imposed in recognition of the risks. Countries such as China and India have strict restrictions on mining and exchanges. In these cases, compliance with AML measures have become a standard procedure.
The unpredictability of cryptocurrency has incentivised governments to put more effort into developing a more regulatory framework for cryptocurrency globally. The FATF (Financial Action Task Force) has said they are working on this and managed to set international AML standards in June 2019. It has been suggested in regulatory circles however that without government intervention, crypto businesses must encourage regulation to enhance the addressable market for adoption.
What are the current AML Regulations on Crypto exchanges?
Regulators in Asia are most likely to take progressive steps regarding crypto regulations. It has been found that the Monetary Authority of Singapore (MAS) enhanced their engagement with the sector in 2018. The EU’s fifth Anti-Money Laundering Directive outlines the AML Regulations for cryptocurrency exchanges in the member states, and these were to be followed in 2020. In the EU, the law differs when considering fiat-to-crypto exchanges. Exchanges from Fiat currency to Crypto need to implement KYC (Know Your Customer/Client) checks, but other exchanges which only consist of Crypto do not.
On the other hand, in the USA, FinCEN views all cryptocurrencies in the same way, meaning all cryptocurrency exchanges must carry out KYC checks and have effective AML policies, regardless of the currency.
How can The Strategic Partner enhance my understanding of Cryptocurrency and AML Regulations?
Part of the Anti-Money Laundering (AML) Regulations require a business to undertake a formal risk assessment. The predominant purpose of this is to identify, manage and, where possible, eradicate the potential for the Firms to be caught up in money laundering, and cryptocurrency considerations form part of this.
Regardless of the size, type and complexity of your clients and their transactions, a risk assessment must be performed. We can support you with this and work with firms of all sizes and across all sectors and multi jurisdictions.
Cryptocurrency should be an immediate high risk indicator and firms should report any client seeking to use cryptocurrency as part of their funds to the MLRO for further guidance. Enhanced Due Diligence is a must and understanding how the currency has been financed and by who is the starting point in deciding whether to allow a matter to proceed.
A risk assessment provides a valuable insight into a client when performed correctly protect firms from exposure to Money Laundering, Terrorist Financing and Risk.
As part of The Strategic Partners risk and compliance solutions, training for all staff on the codes of conduct and implementing a supervisory structure that complements the firm’s approach and protects staff (and the COLP) is standard.
The Strategic Partner has devised 2 products for law firms:
- first, our Risk, Regulation and Compliance Service (including AML) provides firms with the necessary Policies Control and Procedures (PCP’s) alongside training, supervision structure, an annual independent assessment and reporting. This solution ensures firms and their staff are compliant and remain there. It also makes it clear what to do in the event of a mistake and/or a breach occurs.
- The second, our Risk, Compliance, AML Guidance and Register Administration Service provides an outsource solution for firms where The Strategic Partner not only manage and maintain the risk registers and take reports from all staff (inc Partners) and provides advice on an ongoing basis but also provides a monthly compliance report.
The combination of these two solutions provides a law firm with a robust and cost-effective risk and compliance strategy that ensures staff have access to expert guidance as it is needed.
How we can help
The Strategic Partner provides essential support to law firms. We offer a range of services and consultancy tailored to the Legal sector. We have gained a wealth of knowledge and experience in the overall management of law firms and work with them to achieve profitability, stability, and efficiency. Our goal is to become a valued and respected partner to our member law firms providing high-quality services and solutions at all times.