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The intensity of regulatory scrutiny of AML and crypto-assets in the UK

As envisaged in its 2019/20 Business Plan, the Financial Conduct Authority (FCA) is consulting on proposals to extend its financial crime reporting obligation to additional firms irrespective of their total annual revenue. The proposed extension would cover all crypto-asset exchange and custodian wallet providers, as well as all electronic money institutions, Multilateral Trading Facilities (MTFs) and Organised Trading Facilities (OTFs).

Under the proposed requirements each firm must provide information to the FCA on the location of its customers, the jurisdictions in which it has business and which of those jurisdictions it considers high risk. In addition, firms must disclose the resources it allocated to tackling financial crime and the number of suspicious activity reports it files with the National Crime Agency. An approximate 4500 additional firms would report annually.

Emerging trends

FCA’s intensification of AML measures

Although the proposals are a limited step in overseeing crypto-asset businesses, the development reflects the FCA’s increasing focus on anti-money laundering (AML). Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, has stated that “Financial crime and money–laundering failures are areas of focussed priority for us”, indicating that the regulator is now conducting “‘dual track’ AML investigations, i.e investigations into suspected breaches of the Money-Laundering Regulations that might give rise to either criminal or civil proceedings”. In light of the FCA’s scrutiny of this area, AML has replaced market misconduct as driving the largest fines from regulators. Since 2017 the FCA has twice fined banks over £100 million in relation to AML failings.

Greater oversight of crypto-asset businesses

The consultation can be seen as part of a wider trend of increased regulatory focus on crypto-assets, in part due to the risks that could be used for money laundering but also as a result of the potential for increased usage of crypto-assets as a result of the global pandemic and changes in customer behaviours. At this stage the FCA is seeking to gather the data, explaining that the objective of the proposals is to obtain firm-specific information with a view to assessing its supervisory approach, conducting trend analysis and identifying emerging risks in and across sectors.

The intensified examination may place the FCA in a position to explore imposing additional requirements on crypto-asset exchange providers. The consultation paper makes clear that the FCA may require additional reporting obligations of crypto-asset businesses in the future, although the regulator would complete further consultations before extending disclosure requirements beyond the scope of the current proposals.

The intensified oversight should also be seen in the context of EU-wide measures. Across the EU, states were required to implement the 5th EU Money Laundering Directive earlier this year. The implementing UK regulations will expand the AML regulated sector to capture crypto-asset exchanges and custodian wallet providers, requiring these sectors to conduct KYC due diligence and undertake monitoring to identify suspicious transactions. Crypto-asset businesses carrying out regulated activities in the UK are also required to register with the FCA with transitional provisions applying for existing providers.

Next steps

Businesses that may be affected by the additional reporting obligations, including crypto-asset exchanges and custodian wallet providers will need to prepare for implementation of the proposals and consider responding to the consultation to raise any concerns. The deadline to provide comments to the consultation is 23 November 2020.

Given that the FCA has warned that other rules may apply to regulated firms and senior managers using unregulated crypto-assets, these firms and senior managers will also need to consider how to mitigate the regulatory and financial crime risks of crypto-asset businesses given the direction of regulatory travel.

The original version of this post can be found on the UK finance website


europe, anti money laundering, cryptocurrency, investigations, corporate crime, fintech, financial crime