On June 20, 2021, the European Commission published a proposal for regulating the transfers of funds and certain crypto-assets. This current proposal recasts Regulation EU 2015/847 as part of an AML/CFT package of four legislative proposals that are considered one coherent whole in implementing the Commission Action Plan of May 7, 2020. This proposal creates a new and more coherent AML/CFT regulatory and institutional framework within the EU. The package encompasses:
- a proposal for a regulation on the prevention of the use of the financial system for the purposes of money laundering (ML) and terrorist financing (TF)
- a proposal for a Directive establishing the mechanisms that Member States should put in place to prevent the use of the financial system for ML/TF purposes, and repealing Directive (EU) 2015/849;
- a proposal for a Regulation creating an EU Anti-Money Laundering Authority (AMLA)8, and
- This proposal for the recast of Regulation EU 2015/847 expanding traceability requirements to crypto-assets.
In essence, this regulation takes May 2015’s Directive (EU) 2015/847 on ‘the information accompanying transfers of funds and updates it to adequately cover virtual assets while repealing the over-reaching requirements of Directive (EU) 2015/849.
This regulation will enter into force on the 20th day after publication in the official journal.
Read Notabene's key takeaways:
1. The EU sees the need for harmonized international rules
This proposal package addressed the need for harmonized rules across the internal market.
On May 7, 2020, the Commission presented an Action Plan for a comprehensive Union policy on preventing money laundering and terrorism financing. In that Action Plan, the Commission committed to taking measures to strengthen the EU’s rules on combating money laundering and terrorism financing and their implementation, with six priorities or pillars:
1. Ensuring effective implementation of the existing EU AML/CFT framework,
2. Establishing an EU single rulebook on AML/CFT,
3. Bringing about EU-level AML/CFT supervision,
4. Establishing a support and cooperation mechanism for FIUs,
5. Enforcing EU-level criminal law provisions and information exchange,
6. Strengthening the international dimension of the EU AML/CFT framework.
Pillars 1, 5, and 6 of the Action Plan are currently being implemented partly due to the support of both The European Parliament and the Council. The other pillars demand legislative action. Yet, evidence provided by reports and internal assessments identified that. In contrast, the requirements of Directive (EU) 2015/84912 were far-reaching; their lack of direct applicability and granularity led to a fragmentation in their application along national lines and divergent interpretations.
In response, this proposal updates Regulation EU 2015/847 while repealing Directive (EU) 2015/849.
Notabene’s assessment: The EU believes a more harmonized front to combat money-laundering and terrorism financing is required. A country-by-country implementation has not proven very effective. They hope this would alleviate jurisdictional arbitrage or the milder term they call “jurisdictional shopping.”
2. GDPR applies to CASPs
The EU clarifies that GDPR applies to CASPs (crypto asset service providers - the EU’s terminology equivalent to FATF’s virtual asset service providers.)
The EU is committed to ensuring high standards of protection of fundamental rights. Under article 15 of the current regulation, the processing of personal data under this Regulation is subject to Regulation (EU) 2016/679 of the European Parliament and of the Council31.Personal data that is processed pursuant to this Regulation by the Commission or EBA is subject to Regulation (EU) 2018/1725 of the European Parliament and of the Council32. The General Data Protection Regulation33 will apply to CASPs as regards the personal data handled and attached to cross-border transfers of value using virtual assets.
Payment and crypto-asset service providers shall ensure that the confidentiality of the data processed is respected.
Additionally, CASPs must keep records of information on the originator and the beneficiary for five years; they must delete them.
2015/847 recital 29:
As it may not be possible in criminal investigations to identify the data required or the individuals involved in a transaction until many months, or even years, after the original transfer of funds or transfer of crypto-assets , and in order to be able to have access to essential evidence in the context of investigations, it is appropriate to require payment service providers or crypto-asset service providers to keep records of information on the payer and the payee or the originator and the beneficiary for a period of time for the purposes of preventing, detecting and investigating money laundering and terrorist financing. That period should be limited to five years, after which all personal data should be deleted unless national law provides otherwise.
Notabene’s assessment: Many in the crypto industry have been long awaiting what the verdict on GDPR would be regarding the Travel Rule in the EU. The EU states that going forward, CASPs will need to implement a GDPR-compliant secure data storage solution, making it clear that AML/CFT measures supersede this.
3. Personally Identifiable Information obligations accompanying transfers of crypto-assets are in line with FATF
OBLIGATIONS ON THE CRYPTO-ASSET SERVICE PROVIDER OF THE ORIGINATOR
Information accompanying transfers of crypto-assets
1. The crypto-asset service provider of the originator shall ensure that transfers of cryptoassets are accompanied by the following information on the originator:
(a) the name of the originator;
(b) the account number of the originator, where an account is used to process the transaction;
(c) the originator’s address, official personal document number, customer identification
number or date and place of birth.
2. The crypto-asset service provider of the originator shall ensure that transfers of cryptoassets are accompanied by the following information on the beneficiary:
(a) the name of the beneficiary;
(b) the beneficiary’s account number, where such an account exists and is used to process the transaction.
Notabene’s assessment: By adhering to FATF suggested guidelines, it is easier for CASPs (or VASPs) to have unified rules as they comply cross-jurisdictionally.
4. Stakeholders consulted by the EU express concern about the walled garden of compliance.
Stakeholder input on the Action Plan was broadly positive. However, some European UnionVASP representatives claimed that the absence of a standardised global, open source and free, technical solution for the travel rule could lead to the exclusion of small actors from the crypto-assets market, with only important players being able to afford compliance with the rules.
Notabene’s assessment: Several working groups noted the possible exclusion of small players in the crypto-assets market if compliance is too complex and too expensive to roll out. If only a few exchanges can afford compliance or if messaging protocols are not free and open, a walled-garden scenario would cause a few “important” players to operate. At the same time, the rest may be hit with fines and must close.
5. The threshold is set at EUR 1000, but Travel Rule requirements still apply for lower thresholds (albeit with less PII shared)
The EU has set a threshold of EUR 1000, in line with FATF recommended guidelines. Above that, originator CASPs need to share originator identifying information beyond just name (i.e., physical address, official personal document number, customer identification number, or date and place of birth). The EU does call out transactions that may be part of structuring - whereby the asset appears to be linked to other transfers that amount to EUR 1000. The travel rule also applies to them.
2015/847 recital 16:
In order not to impair the efficiency of payment systems and crypto-asset transfer services, and in order to balance the risk of driving transactions underground as a result of overly strict identification requirements against the potential terrorist threat posed by small transfers of funds or crypto-assets, the obligation to check whether information on the payer or the payee, or, for transfers of crypto-assets, the originator and the beneficiary, is accurate should, in the case of transfers of funds where verification has not yet taken place, be imposed only in respect of individual transfers of funds or crypto-assets that exceed EUR 1000, unless the transfer appears to be linked to other transfers of funds or transfers of cryptoassets which together would exceed EUR 1000, the funds or crypto-assets have been received or paid out in cash or in anonymous electronic money, or where there are reasonable grounds for suspecting money laundering or terrorist financing.
The EU also calls out in Article 15 that the travel rule applies below the EUR 1000, but with only originator and beneficiary names shared.
By way of derogation from Article 14(1), transfers of crypto-assets not exceeding EUR1 000 that do not appear to be linked to other transfers of crypto-assets which, together with the transfer in question, exceed EUR 1 000, shall be accompanied by at least the following information:(a) the names of the originator and of the beneficiary;(b) the account number of the originator and of the beneficiary or, where Article 14(3)applies, the insurance that the crypto-asset transaction can be individually identified;
Notabene’s assessment: The European Commission has no desire to create overly strict requirements that impede the flow of transactions. But by requiring Travel Rule below the threshold, they are boldly signaling the importance of the Travel Rule to CASPs and asking them to take a more comprehensive or holistic approach to travel rule implementation.
6. Transfers of crypto assets from the EU to outside the EU should include a Legal Entity Identifier (LEI)
2015/847 recital 19 (adapted):
In order to allow the authorities responsible for combating money laundering or terrorist financing in third countries to trace the source of funds or crypto-assets used for those purposes, transfers of funds or transfer of crypto-assets from theUnion to outside the Union should carry complete information on the payer and the payee. Complete information on the payer and the payee should include the LegalEntity Identifier (LEI) when this information is provided by the payer to the payer’s service provider, since that would allow for better identification of the parties involved in a transfer of funds and could easily be included in existing payment message formats such as the one developed by the International Organisation for Standardisation for electronic data interchange between financial institutions.
Notabene’s assessment: Many in the crypto industry had pushed for the adoption of LEIs in the FATF guidance. While suggested as an identifier, the FATF did not introduce them as a requirement. We see the EU requirement as an excellent first step in accepting a more unified, global identification system for legal entities that will reduce diligence costs for CASPs for cross-border transfers.
7. Beneficiary CASPs should have effective risk-based procedures that apply where a transfer lacks the required information
2015/847 recital 22 (adapted):
As regards transfers of crypto-assets, the crypto-asset service provider of the beneficiary should implement effective procedures to detect whether the information on the originator is missing or incomplete. These procedures should include, where appropriate, monitoring after or during the transfers, in order to detect whether the required information on the originator or the beneficiary is missing. It should not be required that the information is attached directly to the transfer of crypto-assets itself, as long as it is submitted immediately and securely, and available upon request to appropriate authorities.
Article 12 calls for the beneficiary CASP to reject a transfer if it is missing data.
Transfers of funds with missing information on the payer or the payee
1. The intermediary payment service provider shall establish effective risk-based procedures for determining whether to execute, reject or suspend a transfer of funds lacking the required payer and payee information and for taking the appropriate follow up action.
Additionally, the proposal goes on to say, “If a CASP continues to submit transfers with incomplete data, the counterparty CASP could take steps to reject any future transfers of funds or terminate the business relationship.” Beneficiary CASPs must implement adequate procedures to detect whether the originator information is missing or complete.
2015/847 recital 23 (new):
Given the potential threat of money laundering and terrorist financing presented by anonymous transfers, it is appropriate to require payment service providers to request information on the payer and the payee. In line with the risk-based approach developed by FATF, it is appropriate to identify areas of higher and lower risk, with a view to better targeting the risk of money laundering and terrorist financing. Accordingly, the crypto-asset service provider of the beneficiary, the payment service provider of the payee and the intermediary payment service provider should have effective risk-based procedures that apply where a transfer of funds lacks the required information on the payer or the payee, or where a transfer of crypto-assets lacks the required information on the originator or the beneficiary, in order to allow them to decide whether to execute, reject or suspend that transfer and to determine the appropriate follow-up action to take.
Notabene’s assessment: A risk-based approach to compliance is urged and recommended for CASPs. This is good news for companies who can take a more nuanced approach to travel rule, especially during the sunrise period when many counterparty institutions may not respond quickly.
8. Member states should lay down sanctions to encourage compliance
2015/847 recital 30:
In order to improve compliance with this Regulation, and in accordance with theCommission Communication of 9 December 2010 entitled ‘Reinforcing sanctioning regimes in the financial services sector’, the power to adopt supervisory measures and the sanctioning powers of competent authorities should be enhanced. Administrative sanctions and measures should be provided for and, given the importance of the fight against money laundering and terrorist financing, Member States should lay down sanctions and measures that are effective, proportionate and dissuasive. Member States should notify the Commission and the Joint Committee of EBA, EIOPA and ESMA(the ‘ESAs’) thereof.
The proposal goes on to state that legal persons can be held liable for breaches:
Chapter 5: Sanctions and monitoring:
5. Member States shall ensure that legal persons can be held liable for the breaches referred to in Article 2318 committed for their benefit by any person acting individually or aspart of an organ of that legal person, and having a leading position within the legal person based on any of the following:(a) power to represent the legal person;(b) authority to take decisions on behalf of the legal person; or(c) authority to exercise control within the legal person.
Competent authorities may impose administrative sanctions and measures in collaboration with other authorities.
Chapter 5: Sanctions and monitoring:
7. Competent authorities shall exercise their powers to impose administrative sanctions and measures in accordance with this Regulation in any of the following ways:EN 41 EN(a) directly;(b) in collaboration with other authorities;(c) under their responsibility by delegation to such other authorities;(d) by application to the competent judicial authorities.In the exercise of their powers to impose administrative sanctions and measures, competent authorities shall cooperate closely in order to ensure that those administrative sanctions or measures produce the desired results and coordinate their action when dealing with cross-border cases
Member States shall ensure that their administrative sanctions and measures include at least those laid down by Articles 40(2), 40(3) and 41(1)59(2) and (3) [...] in the event of the following breaches of this Regulation:
(a) repeated or systematic failure by a payment service provider to include the required information on the payer or the payee, in breach of Article 4, 5 or 6 or by a crypto-asset service provider to include the required information on the originator and beneficiary, in breach of Articles 14 and 15;
(b) repeated, systematic or serious failure by a payment service provider or crypto-asset service provider to retain records, in breach of Article 2116;
(c) failure by a payment service provider to implement effective risk-based procedures, in breach of Articles 8 or 12 or by a crypto-asset service provider to implement effective risk-based procedures, in breach of Article 17;
(d) serious failure by an intermediary payment service provider to comply with Article 11 or 12.
Notabene’s assessment: While there will be a centralized body for AML/CFT revision at the EU level, enforcement (e.g., sanctions) still gets performed at the member state level. We’re interested to see how effective this approach will be for EU member states.
9. This regulation does not apply to p2p transfers
Electronic money tokens, as defined in Article 3(1), point 4 of Regulation shall be treated as crypto-assets under this Regulation. This Regulation shall not apply to person-to-person transfer of crypto-assets.
Notabene’s assessment: While P2P is not affected, the EU does not comment on transactions between CASPs and noncustodial or unhosted wallets. This is good news for now, though certain member states have rolled out their own requirements (e.g., Netherlands).
10. The originator CASP should provide appropriate customer PII within three working days of receiving a request from the beneficiary CASP
Article 5: Transfers within the European Union:
2. Notwithstanding paragraph 1, the payment service provider of the payer shall, within three working days of receiving a request for information from the payment service provider of the payee or from the intermediary payment service provider, make available the
(a) for transfers of funds exceeding EUR 1000, whether those transfers are carried
out in a single transaction or in several transactions which appear to be linked, the
information on the payer or the payee in accordance with Article 4;
(b) for transfers of funds not exceeding EUR 1000 that do not appear to be linked
to other transfers of funds which, together with the transfer in question, exceed EUR
1000, at least:
(i) the names of the payer and of the payee; and
(ii) the payment account numbers of the payer and of the payee or, where Article 4(3) applies, the unique transaction identifier