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Anti-Money Laundering Laws, Regulating Crypto Assets and the Impact of MiCA


18 May 2023 - Stj. Av. Sabrin Nuray ALBAYRAK

Anti-Money Laundering Laws, Regulating Crypto Assets and the Impact of MiCA

  1. Introduction

Money laundering refers to the process of disguising illegally obtained assets as if they were obtained legally. The purpose of money laundering is to conceal the source, ownership or destination of illegally obtained funds or assets, allowing them to be used undetected by law enforcement or other authorities. Crypto assets and other digital assets have become increasingly common for laundering the proceeds of crime, as they make it possible to transfer large sums of money anonymously without borders.

The European Union (EU) has proposed new regulations under the Markets in Crypto Assets ("MiCA") framework to combat money laundering through crypto assets. In this article, we will examine the current state of AML laws from the perspective of crypto assets and discuss what can be expected from MiCA in this context.

  1. How are Crypto Assets Used for Money Laundering?

Money laundering through crypto assets refers to the use of crypto or digital assets that use cryptographic techniques to regulate the production of currencies and verify the transfer of funds.

Similar to traditional money laundering, money laundering through crypto assets typically consists of three phases: placement, layering and integration. In the placement phase, perpetrators convert their illicit funds into crypto assets by purchasing them with cash or transferring them from traditional bank accounts. Layering is the stage where perpetrators use various techniques to hide the origin of crypto assets, such as mixing them with other crypto assets, sending them through multiple wallets, or using privacy-oriented coins. Finally, in the integration phase, perpetrators convert the crypto asset back into fiat currency or use it to purchase goods and services in a way that makes it appear legitimate.

  1. AML Regulations: Turkey, the US and the EU
  1. AML in Turkey

The primary law regulating AML efforts in Turkey is the Law No. 5549 on Prevention of Laundering Proceeds of Crime, adopted on October 11, 2006. This law establishes the legal framework for detecting, preventing and punishing money laundering activities in the country.  A number of prevention techniques, such as customer identification, monitoring and reporting suspicious transactions, internal audit and regular provision of information, are regulated by the law and related secondary legislation.

Turkey also applies international AML standards, such as the recommendations of the Financial Action Task Force ("FATF") and has established the Financial Crimes Investigation Board ("MASAK") to effectively combat money laundering and terrorist financing. MASAK is responsible for supervising and coordinating the AML process in Turkey. It is also authorized to freeze assets and seize property suspected of involvement in illegal activities. MASAK conducts detection and supervision of crypto asset service providers, their compliance with regulations and any illegal activities.

  1. FATF

The Financial Action Task Force (FATF) is an intergovernmental organization that develops global AML standards and guidelines. More than 200 jurisdictions worldwide are committed to complying with the FATF Recommendations. In June 2019, the FATF issued guidance on the regulation of virtual assets and virtual asset service providers (VASPs), requiring VASPs to comply with AML standards, including customer due diligence, transaction monitoring and reporting suspicious activity. MiCA is also aligned with FATF guidance requiring crypto asset service providers to comply with AML regulations.

  1. AML in the US

In the United States of America (USA), the existence of multiple actors taking steps to regulate blockchain and crypto assets in particular has led to different understandings and approaches. The focus is mostly on administrative agencies, with the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CTFC), Federal Trade Commission (FTC), Internal Revenue Service (IRS), Office of the Comptroller of the Currency (OCC), and Financial Crimes Enforcement Network (FinCEN). Whether and how these agencies recognize crypto assets will be examined in a separate article, as different steps are being taken in this regard across agencies.  

AML laws in the US have been expanded in recent years. For example, the Anti-Money Laundering Act of 2020 took effect in January 2021 and includes several changes and updates to the Bank Secrecy Act (BSA) and other AML laws, including new reporting requirements and expanded authority for FinCEN and other agencies to enforce AML regulations. The BSA provides that money service businesses (MSBs) will be supervised by FinCEN.

FinCEN requires MSBs to develop, implement and maintain a written program reasonably designed to prevent MSBs from being used to facilitate money laundering and the financing of terrorist activities. In this context, MSBs are required to implement an AML program, which must include written policies, procedures, and internal controls reasonably designed to ensure ongoing compliance, and designate an individual compliance officer who ensures day-to-day compliance with this AML program and the BSA requirements. It should also include training for necessary personnel, such as in identifying suspicious transactions, and provide for independent review to monitor and maintain the adequacy of the program.

  1. AML in the EU

The sixth Anti-Money Laundering Directive in the EU was issued on December 3, 2020. The 6AMLD provides a list of 22 specific crimes, including cybercrimes, environmental crimes and tax crimes. While previously only companies could be held liable, the 6AMLD extends criminal liability to persons acting on behalf of companies/partnerships, such as companies, partnerships, legal representatives or persons with decision-making authority over a specific legal entity. In this context, persons who passively assist in money laundering are also held liable.

Previously, the minimum penalty for money laundering was one year imprisonment. Under the 6AMLD, this penalty has been significantly increased and the minimum penalty is now four years imprisonment.

  1. MiCA

The EU has proposed new regulations under MiCA, which aims to establish a comprehensive legal framework for digital assets, including crypto assets. The European Parliament gave its final approval to MiCA on April 20, 2023. The regulation will apply to all issuers and service providers of crypto assets, regardless of whether they are based in the EU. The main provisions of MiCA include authorization requirements from national authorities, actions for investor protection where service providers must provide investors with clear information about the risks of investing in crypto assets, compliance with AML laws such as customer due diligence, transaction monitoring and suspicious activity monitoring and reporting, establishment of rules for stablecoins... etc.

  1. MiCA's Impact on AML Laws

MiCA will be able to bring greater consistency to AML laws across the EU by providing a legal framework for digital assets. Strengthening AML measures for digital assets is another aspect of MiCA that addresses the risks associated with the anonymity of crypto assets. The obligation for service providers to keep records of customer identities through the implementation of Know Your Customer (KYC) measures will combat illicit activity across the EU.

  1. Impact of MiCA from an International Perspective

MiCA has a major impact as the EU is a major economic and financial player in the global economy. MiCA will set the standard that other jurisdictions will most likely follow. While many in the crypto assets space, whether legal professionals or investors, have criticized MiCA as an attempt to regulate a new technology with an old technology mindset, the EU's successful provision of a clear and comprehensive regulatory framework for crypto assets could lead to greater consistency and harmonization in global crypto asset regulation.

The regulation of crypto assets inherently requires international cooperation and coordination, which MiCA seems to be a highly effective opportunity to achieve. Overall, by setting a standard for the regulation of crypto assets, MiCA has the potential to influence the international space by creating competition and cooperation between different jurisdictions and balancing regulation with innovation.

  1. Conclusion

AML laws are necessary to prevent money laundering and the financing of terrorism, and the growing popularity of cryptocurrencies and digital assets has made the need for these laws even more critical. While there are aspects that can be criticized, MiCA is a positive step towards creating a legal framework for digital assets and strengthening AML measures for crypto assets.

However, with the ever-evolving technology behind these assets, it is inevitable that the form of illicit activity will evolve. While the consequences of this inevitable evolution are unpredictable, how the current regulations in place and in development will combat illicit activity will not be out of the spotlight anytime soon.

 

Sources:

  1. Money Laundering: What It Is and How to Prevent It, James Chen, Somer Anderson, Ryan Eichler, Date Updated: 28 March 2023, https://www.investopedia.com/terms/m/moneylaundering.asp
  2. Anti-money laundering: Provisional agreement reached on transparency of crypto asset transfers, EU Council, 29 June 2022, https://www.consilium.europa.eu/en/press/press-releases/2022/06/29/anti-money-laundering-provisional-agreement-reached-on-transparency-of-crypto-asset-transfers/
  3. Supervising crypto assets for anti-money laundering By Rodrigo Coelho, Jonathan Fishman and Denise Garcia Ocampo, April 2021, https://www.bis.org/fsi/publ/insights31.pdf
  4. Law No. 5546 on the Prevention of Laundering Proceeds of Crime, https://www.mevzuat.gov.tr/MevzuatMetin/1.5.5549.pdf
  5. Anti-Money Laundering (AML) in Turkey, 10 February 2020, https://sanctionscanner.com/Aml-Guide/anti-money-laundering-aml-in-turkey-91
  6. Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, 28 October 2021, https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Guidance-rba-virtual-assets-2021.html
  7. A Quick Overview of the 6th Anti-Money Laundering Directive, ComplyCube, https://www.complycube.com/en/a-quick-overview-of-the-6th-anti-money-laundering-directive-6amld/
  8. 6th Anti Money Laundering Directive: A Steo Forward To Tax Transparency And Accountability, KPMG, January 2019, https://assets.kpmg.com/content/dam/kpmg/mt/pdf/2019/01/aml6-directive.pdf
  9. Blockchain & Cryptocurrency Laws and Regulations 2023 USA, Josias Dewey, Samir Patel, https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/usa
  10. A critique of MiCA and an alternative proposal to save the EU from a crypto catastrophe, Alexandros Ntolgkov, 28 July 2022, https://www.linkedin.com/pulse/critique-mica-travel-rule-alternative-proposal-save-eu-ntolgkov-cbx-/