Assignment Answers Pdf Of International Financial System:E154V

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International anti-money laundering regulations: the role of beneficial ownership registers
and the impact on trusts
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International anti-money laundering regulations: the role of beneficial ownership registers
and the impact on trusts
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Introduction
Anti-money laundering laws have been established throughout the globe to stabilize the
international financial system and ensure the financing of terrorism can be ended. Money
laundering activities involve concealing the unlawful activities that are undertaken by corrupted
sources, such as smuggling, drug trafficking, etc. The proceeds from the criminal activities are
disguised through money laundering schemes and mechanisms, and the illicit origin of such
proceeds are concealed as aresult. Such funds may also be used for the purpose of supporting
terrorist organizations and activities. 1This makes the transparency of activities within
organizations essential for the purpose of ensuring money laundering practices and corrupt
practices within the organization can be detected easily.
Beneficial ownership registers also serve an important function in the successful implementation
of anti-money laundering mechanisms. The maintenance of such registers helps creates
transparency as ithelps define which natural person is responsible for controlling the legal entity,
such as acompany or atrust. 2Holding acontrolling ownership interest of alegal entity or having
alarge number of voting rights. Without the beneficial ownership register, there can be
numerous layers involved within the ownership structure which leads to the identity of the
beneficial owner being concealed. The anonymity of the beneficial owner can lead to various
illegal and corrupt activities taking place through the complex operations of the legal entity.
Practices of money laundering, financing of terrorism, and tax evasion practices may take place
through the means of the anonymous beneficial owner. The knowledge of the beneficial owner ’s
1Dennis Cox ,Handbook of anti-money laundering (John Wiley & Sons 2014) 2OECD and IDB, ABeneficial Ownership Implementation Toolkit (OECD, 2019) 1, 3
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identity and investments can help ensure the beneficial owner does not engage in misuse of their
income and earnings and also does not use the legal entity as ameans of concealing any unlawful
practices. The current paper will evaluate the anti-money laundering regulations within the
international domain and the role of beneficial ownership registers in the domain of anti-money
laundering regulations.
(a) Background and international cooperation developments in the fight against money
laundering
The international community has made the fight against money laundering apriority over the
years for the purpose of protecting the integrity of the international financial system and ensuring
any financial resources to terrorist groups and organizations are cut off through such efforts. 3
The need for anti-money laundering regulations was required as aresult of incidences such as the
Watergate Scandal, publicity of Switzerland as abank of secrecy for corrupt leaders throughout
the globe, and U.K. ’sCrown Dependencies and Overseas Territories being publicized as havens
for corporate secrecy. 4Switzerland had strengthened its bank secrecy laws in the 1930s so that
individuals may be able to hide their monetary assets if in fear of the Nazi regime. 5However,
these were misused by corrupt individuals and leaders and allowed individuals to easily engage
in practices such as task evasion. The creation of Offshore institutions in the 19 thcentury further
enabled money laundering on an international scale. New Jersey was one of the first regions to
offer organizations alower tax rate if they were established in the State but were doing business
3International Monetary Fund, ;Anti-Money Laundering/Combating the Financing of Terrorism –Topics ’(IMF, n.d.)
accessed 5May 2022 4Michael Levi, ‘Evaluating the Control of Money Laundering and Its Underlying Offences: the Search for
Meaningful Data ’(2020) 15 Asian Journal of Criminology 301 5WH Muller, Anti-money laundering –ashort history (John Wiley &Sons Ltd, 2007) 1,3
4
with another State. 6Major growth in the financial offshore industry began as aresult of World
War II. In order to be safe from the impact of the War, anumber of companies began transferring
their seats to the Netherland Antilles. 7Besides this, the rising stream of drug money was also
contributory to the global fight against money laundering.
The initial anti-money laundering structures began developing as aresult of the formation of the
Financial Action Task Force. The Task Force was established through the G-7 Summit that was
held in Paris in 1989. 8The primary purpose of the Task Force was to examine the national and
international landscape of anti money laundering (A.M.L.) regulations throughout the globe and
create measures that would be further necessary for the fight against money laundering. Crime,
Law and Social Change had published its longest article in 1991, that was around 40,000 words
long and was athorough review of the A.M.L. movement. 9The article noted that while the
movement of A.M.L. regulations was developing in apositive direction, cooperation between
banking and law enforcement bodies was necessary. Since then, extensive developments within
the A.M.L. regulations have taken place, and various political agents along with bankers are
required to co-opt with law enforcement bodies in order to ensure A.M.L. regulations are
effective. 10 The FATF published the Forty Recommendations in April 1990 that were also to act
as aplan of action for combatting money laundering. 11 A ‘Non-Cooperative Countries and
Territories ’list was also created by FATF, which would blacklist nations failing to adopt the
recommendations. Countries are required to pay special attention to any financial transactions
6Ibid7Ibid 4 8FATF, ‘History of the FATF ’(FATF-GAFI ,2022) accessed 5
May 2022 9Michael Levi, ‘Evaluating the Control of Money Laundering and Its Underlying Offences: the Search for
Meaningful Data ’(2020) 15 Asian Journal of Criminology 301 10Ibid11FATF, ‘History of the FATF ’(FATF-GAFI ,2022) accessed 5
May 2022
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that take place with individuals or companies based in the nations listed in the non-cooperative
list of the FATF. This also served as atool for convincing nations to adopt the FATF ’s
Recommendations and contribute to the global fight again money laundering. 12The International
Monetary Fund began contributing to international standards for A.M.L. legislations in response
to the abuse of Offshore Financial Centers in the 2000s. The development of the A.M.L. Report
on Standards and Codes (ROSC) was under development, and these development efforts were
intensified due to the September 11, 2001 attacks in the U.S.A. 13 For the purpose of managing
the issue of terrorist financing, the FATF also issued Eight Special Recommendations in October
2001. However, due to the continuous evolution of the various money laundering mechanisms
throughout the globe, the FATF had to revise their standards comprehensively. The international
standards in the fight against money laundering and terrorist financing were strengthened
through the publication of the Ninth Special Recommendations in October 2004 by FATF.
Further revised recommendations were published by FATF in 2012.
While various western overseas players, such as the U.S., U.K. and France, have played acrucial
role in the development of the A.M.L. regulatory framework, the Asian involvement in the
global fight against money laundering began in the 1990s when Japan became amember of the
Financial Action Task Force. 14 This was followed by Hong Kong, which joined the Task Force
in 1991 and Singapore became amember of the Task Force in 1992, while China became a
member of the Task Force as late as 2007. 15 While these members of the Task Force did not play
amajor role in its formation, they were important financial hubs, and thus their membership was
12WH Muller, Anti-money laundering –ashort history (John Wiley &Sons Ltd, 2007) 1,4 13International Monetary Fund, ;Anti-Money Laundering/Combating the Financing of Terrorism –Topics ’(IMF,
n.d.) accessed 5May 2022 14Michael Levi, ‘Evaluating the Control of Money Laundering and Its Underlying Offences: the Search for
Meaningful Data ’(2020) 15 Asian Journal of Criminology 301 15Ibid
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acrucial step in the international efforts toward combatting money laundering. In order to
monitor the implementation of FATF ’s40 Recommendations, peer reviews of each of the
member states are conducted to evaluate the extent of A.M.L. systems within the nations for the
purpose of protecting the integrity of the financial system of the member State. 16 The evaluations
are conducted on astrong level, and the reports are shared with various international financial
regulatory bodies, such as the World Bank, I.M.F., and the Offshore Group of Banking
Supervisors. Various private initiatives observing A.M.L. have also developed, such as the Basel
Committee on Banking Supervisions. The European Union has also passed five directives as of
2020 in relation to A.M.L. They have also set up aregulatory body similar to FATF known as
Moneyval. The first four initiatives focused on organized crimes besides drug trafficking,
extended the scope of A.M.L. regulations on the covered institutions, and covered various
significant definitions such as ‘politically exposed persons ’,etc. 17 The fifth directive also made
Beneficial Ownership Registers public and created regulations for increasing the transparency of
trusts.
Another development in the regime of money laundering has been the widespread use of
electronic transactions and the rise of digital currencies, such as Bitcoin. 18 Bitcoin was launched
in 2009 and is aform of cryptocurrency that enables secure and anonymous transactions within
the virtual space. This leads to cryptocurrencies being awidespread mechanism for engaging in
cyber crime. Criminals are able to easily obscure their steps by dealing in cryptocurrency based
transactions. Various nations either have minimal regulations related to cryptocurrencies or no
16WH Muller, Anti-money laundering –ashort history (John Wiley &Sons Ltd, 2007) 1,4 17Benj ámin Vill ányi, ‘Money Laundering: History, Regulations, and Techniques ’(2021) Oxford Research
Encyclopedias 18Benj ámin Vill ányi, ‘Money Laundering: History, Regulations, and Techniques ’(2021) Oxford Research
Encyclopedias
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regulations at all. This makes iteasier for criminals to engage in money laundering related frauds
through the use of digital currencies. 19 Cryptocurrencies follow the same three step process of
money laundering as physical currencies, comprising of placement, layering and integration. The
rapid rising of Initial Coin Offerings or I.C.O.s further complicates the detection of money
laundering transactions that occur through the means of digital currencies. 20 This area of digital
development is particularly challenging for implementing A.M.L. regulations, but various
mechanisms such as the implementation of ‘know your customer ’programs on cryptocurrency
exchanges are the initial steps towards identifying and tracking individuals using digital
transactions.
(b) The Financial Action Task Force 2012 Recommendations, standards and proposed
measures for the protection of the global financial system against money laundering,
terrorist financing and the financing of proliferation of weapons of mass destruction.
The FATF 2012 Recommendations have been issued for the purpose of strengthening the
worldwide safeguard and standards required for the protection of the integrity of the international
financial system. 21 The preventive measures were also laid out by FATF to eliminate money
laundering within the level of the three steps used by money launderers. 22 These
recommendations comprise of the various measures that national A.M.L. systems should have in
19Chad Albrecht et al., ‘The use of cryptocurrencies inthe money laundering process ’(2019) 22(2) Journal of
Money Laundering Control 210 ,216 20George Forgang, ‘Money Laundering Through Cryptocurrencies ’(2019) 40 Economic Crime Forensics Capstones
21FATF, ‘Media Narrative ’(FATF-GAFI ,2012) accessed 6May
202222Normah Omar and Zulaikha Amirah Johari, ‘An International Analysis of FATF Recommendations and Compliance
by DNFBPS ’(2015) 28 Procedia Economics and Finance 14
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place within their regulatory and criminal justice systems in order to manage instances of money
laundering efficiently. Recommendation 3requires the criminalization of money laundering as a
serious offence. The implementation of the recommendation is necessary because criminalization
allows national level agencies and law enforcement bodies to investigate and prosecute
individuals engaging in money laundering and predicate offences, thus achieving asuccessful
suppression of money laundering. 23 The 1988 Vienna Convention was the first international
regulation requiring member States to mandatorily criminalize conduct that was essentially equal
to money laundering. 24 The FATF also recommends criminalizing money laundering and related
activities as well as taking A.M.L. measures set in the Vienna Convention and the Palermo
Convention .25
In terms of preventive measures, one of the most important measures is that of ‘Customer Due
Diligence ’(C.D.D.). 26Financial institutions are required to identify and verify the customer ’s
identity using reliable data and sources of information for this purpose. Deficiencies within
customer due diligence mechanisms are one of the primary reasons for money laundering. 27
Efficient C.D.D. Mechanisms help create ahigh degree of transparency necessary for preventing
money laundering and financing of terrorism. 28 Cash transactions involving an excess amount or
upon the establishment of abusiness relationship with the financial institution. However, C.D.D.
must particularly be applied when there is asuspicion of potential money laundering activities
23Chat Le Nguyen, ‘Criminalisation of Money Laundering inthe International Anti-Money Laundering Regime and
its Adoption by Vietnam ’(2013) 14(1 )Australian Journal of Asian Law 101 24Ibid25FATF Recommendations 2012 ,recommendation 3; recommendation 4 26FATF Recommendations 2012 ,recommendation 10 27Chat Le Nguyen, ‘Criminalisation of Money Laundering inthe International Anti-Money Laundering Regime and
its Adoption by Vietnam ’(2013) 14(1 )Australian Journal of Asian Law 101 28IMF, ‘Anti-Money Laundering/Combating the Financing of Terrorism –Topics ’(International Monetary Fund, n.d.)
accessed 6May 2022
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with regards to acustomer of the institution. 29 The primary steps of the mechanism involve
identifying who the customer or beneficial owner is, verification of their identity, and
information on the purpose of the business relationship with the customer.
Additional mechanisms are also required to be implemented for politically exposed persons,
correspondent banking, money or value transfer services, etc. 30Additional measures are required
for these categories of individuals and transactions as they have ahigher likelihood of facilitating
money laundering within the State. Politically exposed persons (P.E.P.) hold significant authority
positions within the State, and the categories of such persons comprise of domestic P.E.P.,
foreign P.E.P., and international organization P.E.P. Irrespective of the category of such persons,
transactions of such individuals should be monitored as have the potential of being high risk in
nature. 31 Some of the indicators of potential money laundering or corrupt activities being
undertaken by the P.E.P. through the means of the political institution are high volume activities
involving sums of large transactions, multiple cash deposits in the account from third parties in a
short span of time, making of cash deposits within the State and taking out the deposits in high-
risk jurisdictions, etc. 32 For afinancial instutiton to be able to implement appropriate risk
management mechanisms for managing P.E.P.s and other high risk customers, the application of
C.D.D. mechanisms are extremely important. It can be noted that the successful implementation
of any of the recommendations of FATF ’s2012 recommendations requires the efficient
enforcement of various other interconnected recommendations as well.
Recommendations 22 and 23 lay focus on the designated non-financial businesses and
professions (DNFBPs) because criminals also tend to use non-financial businesses for engaging
29Ibid30FATF Recommendations 2012 ,recommendation 12-16 31AUSTRAC, Politically exposed persons (Australian Government, 2022). 32Ibid
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in money laundering activities. For example, real estate agents may invest in tourist complexes
as amechanism for disguising their illegitimate activities; lawyers may file fictitious lawsuits for
the purpose of obtaining judgments that aid in the legitimization of their funds, and dealers in
precious stones and metals may use diamonds and gold to engage in high-value deals throughout
the world, casinos may involve money launderers purchasing chips with the proceeds of their
illegal money. 33 This is why efficient monitoring systems in relation to DNFBPs should be
implemented by countries. Transparency of legal persons is required so that corrupt officials and
individuals do not establish companies or use legal entities to disguise their illegal proceeds and
funds. 34 To prevent the misuse of legal persons and arrangements, such as trusts and beneficial
owners, recommendations 24 and 25 should be enforced. Basic information related to the
directors of the companies, the establishment of the companies, beneficial owners of the
companies, etc. are required to create more transparency in relation to the transactions of the
companies. 35 The recommendations also provide valuable mechanisms for freezing and
confiscation of money obtained through corrupt transactions, such as those provided in
recommendation 38. States are required to have efficient laws for seizing and confiscating stolen
assets and the proceeds from laundered property while also ensuring that the rights of bona fide
third parties are protected, as stated in recommendation 4.36Various nations already have strong
legal frameworks for enabling confiscation, including confiscation, which is non-conviction
based. In practice, these frameworks may not be efficient as assets are usually hidden or moved
abroad by criminals. This is why strong international cooperation is necessary for the successful
33MENAFATF, Designated Non-Financial Businesses and Professions (DNFBPs) inrelation to AML/CFT (MENAFATF,
2008) 1,4 34FATF, Best practices Paper: The Use Of The FATF Recommendations To Combat Corruption (Financial Action Task
Force, 2013) 1,10 35Ibid36Ibid 12
11
implementation of A.M.L. mechanisms as provided in recommendations 36-40. Efficient and
timely international cooperation is one of the primary elements for ensuring the seizing of assets
is made possible
One of the primary issues in the successful implementation of the 40 recommendations in the
presence of informal and unregulated channels of financial transfers in developing as well as
under developing countries. The recommendations are mainly helpful for the legal A.M.L.
regimes of developed nations but may not be equally suitable for developing nations. 37While
financial access can be taken for granted in high-income nations, less than half the population of
developing nations create accounts in formal financial institutions making the A.M.L.
recommendations ineffective in such nations. These channels often create the highest risks for
terrorist financing and money laundering activities, as per aFATF report. 38 Developing countries
also have alower level of supervisory capacity and thus may find itdifficult to comply with the
FATF standards efficiently. Thus, the recommendations have afurther scope of development in
relation to the A.M.L. regimes that may be implemented in developing nations.
(c) Implementation of beneficial ownership registers in four different countries and the
impacts on trusts
Beneficial ownership extends beyond legal ownership, and such an individual has control over
the legal entity or person through various mechanisms, such as owing ablock of shares. 39 For
example, aLimited Liability Company is the legal owner of ajoint stock company can lead to
the identity of the beneficial owner being concealed, even though the beneficial owner would
37Michael Pisa, ‘Does the Financial Action Task Force (FATF) Help or Hinder Financial Inclusion? AStudy of FATF
Mutual Evaluation Reports ’(2019) 143 Center for Global Development 1,9 38Ibid39FATF, Transparency and Beneficial Owner (FATF, 2014) 1,8
12
have indirect control over the joint stock company through the means of the limited liability
company. 40 FATF recommendations 24 and 25 are related to the transparency of beneficial
ownership, while E.U. ’sfourth A.M.L. directive requires member states to enforce mechanisms
for registering beneficial owners of legal persons and certain trusts. 41
In the U.K., the Companies Act 2006 requires all companies that have been incorporated within
the legal jurisdiction of the U.K. to maintain aregister disclosing the identity of those persons
that have significant control over the company, also known as P.S.C.s. They may also have
control over ‘registered legal entities ’and meet the specified criteria for being registrable under
the Act. 42 The term P.S.C.s is equivalent to beneficial owners within the U.K., and the
Companies House holds as well as publishes the data of such persons in acompletely public
open data format. The Companies House has the data of more than 4million companies that are
associated with beneficial owners. 43 One of the primary concerns in the U.K. in relation to the
maintenance of abeneficial ownership register was in relation to the rights of data privacy and
data protection as granted under the General Data Protection Regulation .44 To manage this issue
efficiently, the U.K. Government publishes enough information that helps identify the beneficial
owner while also withholding the sensitive information of the beneficial owner, such as
information related to their residential address or the birthdate of the beneficial owner. Beneficial
owners also have the right to have their information removed from the register through an
application for the same and only if certain requirements are met by the P.S.C.s. Out of the
millions of beneficial owners registered in the U.K., only 300 of them have applied for the
40OECD and IDB ,ABeneficial Ownership Implementation Toolkit (OECD, 2019) 1,3 41Ibid 18 42Alexandra Habershon, Solvej Krause and Zosia Sztykowski, Chapter 9Beneficial Ownership Transparency (World
Bank, 2020) 1,261 43Ibid44Ibid
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removal of their information. 45This indicates the U.K. ’sefficiency in maintaining abalance
between data privacy concerns and publication of information related to the P.S.C.s. The register
for trusts was also introduced in the U.K. in 2017 but is not public in nature. In order to meet the
requirements set under E.U. ’sfourth directive, the U.K. has anon-public register of beneficial
ownership for trusts, and public members can only access this data by showcasing alegitimate
interest in the details, an example being ajournalist that may be covering the extent of corruption
within the nation. 46
Another country that has an efficient, beneficial ownership transparency mechanism is Slovakia.
It was one of the first nations to implement the system through enforcement of the Anti-Letterbox
Act 2017 .The mechanism in Slovakia for registration of beneficial owners is distinct as
compared to other nations because companies are not required to self-report on their beneficial
owners. Companies are required to register as apartner of the public sector. This is done through
authorized persons, such as notaries and banks. These authorized persons must also have a
registered place of business in the jurisdiction of Slovakia. Such authorized persons verify the
identity of the beneficial owners and submit aform to the registry confirming the same. 47
Authorized persons are further given the task of re-authenticating the identity of the beneficial
owners on an annual basis and are also required to officially submit any changes to the
information of the beneficial owner. This approach has been undertaken by Slovakia to manage
the costly and time-consuming process of verification of the identity of beneficial owners of
companies while also creating ajoint liability on the authorized persons in relation to the
misreporting of the identity of the beneficial owners. Furthermore, identities are further verified
45Ibid46Ali Shalchi and Federico Mor, Registers of beneficial ownership (House of Commons, 2022) 1,18 47Ibid 260
14
by providing free public access an right to question the veracity of adisclosure. If the court finds
such aclaim to be reasonable, itmay hold further proceedings regarding the identity of the
beneficial owner. 48 Thus, Slovakia ’sprimary approach to verification of beneficial owners shifts
the costs and liability to companies and authorized persons. Trusts and other equivalents are not
recognized under Slovakian law and thus remain unimpacted by the regulations relating to
beneficial ownership. 49
In Australia, all companies are required to maintain registers of their members as per the
Corporations Act 2001 .The registers of the company contain all the details of the members,
including facts related to the holding of company shares by the members and whether such
shares are beneficially held or not. 50 However, the identities of beneficial owners are not legally
required to be recorded. 51Members of the public may access the company register through an
application for being provided with acopy of the register or through inspecting the register at the
registered office of the company. All companies are also required to provide the details of their
company members to the ASIC, and proprietary companies are also required to inform the ASIC
of any changes to such details. 52 Furthermore, ASIC can also trace information related to the
ownership of the listed company by issuing aperson with atracing notice. The individual who
receives such anotice would have to be provided information about the relevant interest they
have in certain securities of the company. Furthermore, reporting entities must also take
sufficient steps to collect and verify information related to beneficial owners with regard to
48Ibid49Miriam Galandova, Martin Kriz and Peter Oravec, ‘Doing Business inSlovakia: Overview ’(Thomas Reuters, 2021)
accessed 7May 2022 50Australian Government, Increasing Transparency of the Beneficial Ownership of Companies (Commonwealth of
Australia, 2017) 1,3accessed 6May 2022 51Ibid52Ibid
15
certain customers as apart of the C.D.D. Programs enforced under the A.M.L. framework of
Australia. 53 Through such mechanisms, transparency of listed companies is increased in
Australia, but no proper system has been implemented to formalize the registration of beneficial
owners. In relation to trusts, reporting entities are required to obtain and verify similar
information related to beneficial owners as required in the case of corporations. 54
Greece has also implemented the maintenance of abeneficial ownership register. These are to be
maintained by the company itself. All legal entities that have their registered headquarters in
Greece are required to maintain such registers with accurate information about the beneficial
owners. Such information must be made available to competent authorities and obliged entities.
While such information is not mandatorily required to be made accessible to the general public,
the companies may have to provide itto the general public under certain conditions as well. 55
Competent authorities have full and unlimited right of access to the data related to the beneficial
owners of the registered entities. Furthermore, trustees of express trusts are also required to
maintain aSpecial Registry of Beneficial Ownership of Trusts. Such registers will contain all the
relevant information of the beneficial owners and should be maintained in acentral register. In
case of non-compliance, penalties and fines can be imposed on the legal entities. Thus, the
impact of beneficial ownership registration laws has been similar on trusts as on private
companies in Greece.
53Ibid 6 54Australian Government, ‘Beneficial Owners ’(AUSTRAC, 2021)
accessed 7May 2022 55Lambadarios Law, ‘The setting up of the Central Ultimate Beneficial Owner Register –Registrations shall start
taking place as of September 2019 ’(Lambadarioslaw, 2019) accessed 7May 2022
16
(d) Impact of A.M.L. Recommendations and E.U. Directives on cryptocurrencies and new
types of assets
Crypto currencies and other types of crypto assets are digital assets that are dependent on the
technology of disturbed ledger and cryptography. These are exchanged through the digital mode
or through digital tokens as defined by the Financial Stability Board. 56 FATF has defined ‘virtual
assets ’as aform of “digital representation ”of value that can be digitally transferred and used for
investment or payment purposes. 57FAFT ’sdefinition does not limit the definition of virtual
assets to those that rely on disturbed ledger technology. However, both definitions are inclusive
of majorly traded crypto currencies, such as Bitcoin. Though such currencies carry the potential
of making the mechanism of payments and financial transfers more efficient, they can also be
easily used for money laundering purposes due to alack of sufficient A.M.L. mechanisms
governing money laundering through such virtual and digital assets. 58 This is due to the high
speed of transactions, the ability of such transactions to be carried out on aglobal scale rapidly,
and the increased anonymity with which these transactions can be carried out. 59 Furthermore,
various crypto asset providers also design the currency to further prevent transparency regarding
the transactions, such as anonymity enhanced coins and mixing of services. 60 As per areport,
1.1% of all crypto currency transactions in 2019 were illegitimate, indicating the high extent to
which money laundering occurs through the means of crypto currency. 61
56Rodrigo Coelho, Jonathan Fishman and Denise Garcia Ocampo, Supervising cryptoassets for anti-money
laundering (Bank for International Settlements, 2021) 1,3 57Ibid58Ibid59Ibid60Ibid61Ibid
17
In the fifth A.M.L. directive of the E.U., adefinition of virtual currencies was established, and
only Switzerland has been at the forefront of A.M.L. mechanisms for managing crypto
currencies. While the fifth A.M.L. Directive has included crypto currencies in the scope of
A.M.L. regulations, itdoes not extensively focus on how V.A.s are to be monitored by the States.
62 While sufficient laws do not exist within the E.U. for governing crypto currencies and other
such similar virtual assets, new rules will comprise of mechanisms that make the traceability of
the crypto based transactions easier. Under such rules, the transfer of the assets will also contain
information related to the source of the asset and the beneficiaries related to the asset, and such
information will have to be made available to competent authorities. These rules would be
implemented in amanner that they would also be made available to un-hosted wallets making
the transfers individually identifiable. 63 Minimum thresholds will also not be applicable to such
transfers due to the speed and digital nature of the transfers of such assets. The European
Banking Authority will also be made in charge of creating apublic register of high-risk entities
involved in the use of crypto assets. While E.U. is on the verge of creating significant legislative
frameworks for managing crypto currencies, FATF has updated their guidance for managing
virtual asset service providers. In 2018, the FATF recommendations were modified, and itwas
explicitly stated that the guidelines are applicable to virtual assets as well. 64 Accordingly, as per
the amended recommendation 15, virtual asset providers must also be monitored by the relevant
monitoring authorities of the State for activities related to anti money laundering. Other
recommendations, such as mechanisms for C.D.D., record keeping, and reporting of suspicious
62Thomas A. Frick, ‘Virtual and cryptocurrencies —regulatory and anti-money laundering approaches inthe
European Union and inSwitzerland ’(2019) 20 ERA Forum 99 63EP, ‘Crypto assets: new rules to stop illicit flows inthe EU ’(European Parliament, 2022 )accessed 7May 2022 64FATF, Virtual Assets and Virtual Asset Providers (FATF, 2021)
18
transactions, must also be observed by the member states as per the recommendations. As per
FATF, various entities within the virtual asset (V.A.) provider sector can either pose alow risk
or high risk for money laundering activities and should be monitored accordingly. 65 The level of
risk must also be determined by nations as per the extent to which citizens can use V.A. for
engaging in global transactions. V.A.s that are transferred between different jurisdictions should
be monitored, in particular by local authorities, due to the high risk of money laundering that
they pose. As aresult, in high-risk cases, FATF also recommends prohibiting or minimizing V.A.
activities by non-obliged entities. 66 FATF requires that the same safeguards are applied on Vas as
they are applied to other forms of currencies. V.A. providers are also required to be monitored
effectively by competent authorities, and arange of disciplinary actions should be imposed
against V.A. providers in case they are not compliant with the A.M.L. framework of the State. 67
A majority of FATF members have efficiently complied with and implemented FATF standards
related to virtual assets. 35 out of the 54 reporting jurisdictions of FATF have successfully
enforced the standards within their national legislations. 68 However, alack of implementation of
these standards in non-FATF members defeats the purpose of the implementation of such
standards. It is evident that the E.U. and FATF have adopted different mechanisms for the
management of A.M.L. risks created by crypto currencies and virtual assets. Without the
development of sufficient mechanisms for the management of money laundering risks posed by
crypto currencies, money laundering and terrorism financing that takes place through digital
platforms cannot be controlled sufficiently. This is evident by the fact that 1.1% of all crypto
65Ibid66Ibid 21 67Ibid68Rodrigo Coelho, Jonathan Fishman and Denise Garcia Ocampo, Supervising cryptoassets for anti-money
laundering (Bank for International Settlements, 2021) 1,4
19
currency based transactions in 2019 have been estimated to be illegitimate. 69 One of the most
logical and rational views undertaken by jurisdictions is that of subjecting virtual asset services
providers to the same rules that are applicable on non-virtual asset service providers. 70 Any
exchange for V.A. for fiat currency is usually subjected to A.M.L. regulations within most
European jurisdictions as aresult. However, due to the lack of auniform regulatory mechanism
within the E.U., there are varying differences in major aspects related to the regulations
surrounding V.A. For example, the license requirements for V.A. services vary within E.U.
based jurisdictions, and the extent to which crypto to crypto exchanges are treated differently as
compared to crypto to fiat currency exchanges. 71 The problem with virtual currency payment
products and services is that due to their varying typology, itis impossible and impractical to
create C.D.D. Standards that can be universally applied. This may be the reason for the lack of
blanket guidance by regulators in relation to virtual currency payment products and services.
While both public and private sectors have progressed in the implementation of FATF standards
for monitoring and managing risks posed by V.A.s, apractical application of the
recommendations has been difficult due to the global scale at which such digital transactions
usually take place. 72 Some nations, such as U.K. and Switzerland, have progressed deeply in
relation to the regulation of V.A.s, which can serve as examples of how risks posed by V.A.s can
be managed efficiently on aglobal scale. For example, in the U.K., ‘Financial Intelligence Units ’
have been developed, while Switzerland has attached great importance to self-regulation. 73
Hence, FATF recommendations and E.U. Directives do not have astrong impact on the
69Rodrigo Coelho, Jonathan Fishman and Denise Garcia Ocampo, Supervising cryptoassets for anti-money
laundering (Bank for International Settlements, 2021) 1,3 70Josias N. Dewey, Block chain &Crypto currency Regulation 2021 (Global Legal Group, 2021, 3rded.) 1,115 71Ibid72Ibid 121 73Ibid
20
regulation of V.A.s currently, but the A.M.L. regime related to V.A.s is undergoing development
through the examples of various jurisdictions and their monitoring of V.A.s. FATF has provided
various guidelines for supervising and monitoring V.A.s, including providing an elaborate
definition of V.A.s. However, extensive international cooperation is still necessary for the
management of V.A.s.
Conclusion
In conclusion, A.M.L. regulations have developed significantly over the years. With the
establishment of international organizations, such as I.M.F. and FATF, an extensive focus has
been created on ensuring transparency related to financial assets is made possible on an
international level. Events such as the Watergate scandal and 9-11 attacks have been crucial in
shaping money laundering regulations throughout the globe. With the evolution of money
laundering schemes of criminals and terrorist organizations, A.M.L. regulations have also
developed, such as the mandate of Beneficial Ownership Registers by the FATF. However,
various case studies suggest that despite the developed nature of certain jurisdictions like
Australia, they have failed to implement efficient A.M.L. regulations such as beneficial
ownership registers. Other developments have been in relation to V.A.s. While FATF has
developed extensive guidelines for nations in the management of V.A.s and providers of V.A.s,
the E.U. is yet to develop strong A.M.L. regulations for controlling V.A.s. Overall, international
level cooperation is necessary for ensuring A.M.L. regulations are efficient throughout the globe
and are able to maintain the integrity of the international financial system.
21
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