On 1 April 2022, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) published a report setting out its proposed amendments to the draft regulation on information accompanying transfers of funds and certain crypto-assets (recast).
The draft report puts forward the following key proposals:
With respect to wire transfers, the Transfer of Funds Regulation requires a payment service provider to ensure that transfers of funds are accompanied by complete information on the originator and the beneficiary and to verify the information on their customer only if the transfers of funds exceeds EUR 1000, individually or as part of small linked transfers which together would exceed EUR 1000, except where the funds to be transferred are received in cash or anonymous electronic money or there are reasonable grounds for suspecting money laundering or terrorist financing. Due to the specific characteristics and risk profile of crypto-assets, the information obligation should apply to crypto-assets transfers, regardless of the value of the transfer. There are clear indications that crypto-asset activities associated with criminal activities and terrorism financing are often transfers of small value. Furthermore, crypto-assets and related technologies enable criminals to split high value transfers into small amounts across multiple wallet addresses in order to avoid detection of AML/CFT monitoring systems and to carry out illicit activities via structured transactions to a scale and global reach not available to wire transfers. In the view of the co-rapporteurs, the removal of a de minimis threshold for crypto-asset transfers would facilitate, rather than complicate, compliance and risk management by cryptoasset service providers. This is particularly relevant in light of the difficulty to identify linked transfers executed via multiple apparently unrelated wallet addresses as well as the high volatility of the valuation of most crypto-assets.
The Regulation applies also to transfers from or to cryptoasset wallets based on a software or hardware not hosted by a third party, known as ‘unhosted wallets’, provided that a crypto-asset service provider or another obliged entity is involved. In such circumstances, however, there should be no transmission of information to the unhosted wallet. Information should be obtained by the crypto-asset service provider directly from its customer and should be held and made available to competent authorities.
In addition to obtaining accurate information on the originator and the beneficiary, crypto-asset service providers should also be expected to obtain information on the source and destination of crypto-assets involved in a transfer. In particular crypto-asset service providers should establish effective procedures to detect suspicious crypto-assets, in particular any link with illegal activities, including fraud, extortion, ransomware or darknet marketplaces, or whether the crypto-asset has passed through mixers or tumblers or other anonymizing services. This is especially important when dealing with transfers involving unhosted wallets or non-EU cryptoasset service providers not complying with the same travel rule obligations.
Crypto-asset service providers are expected to transmit required information also to cryptoasset service providers established outside the Union. However, before transmitting such information, crypto-asset service providers should identify their counterparty and assess whether they can reasonably be expected to comply with the travel rule and protect the confidentiality of personal information. Crypto-asset service providers should avoid interacting with illicit or untrustworthy actors.
In order to facilitate the identification of illicit actors that pose a great risk from a AML/CFT perspective, the European Banking Authority (EBA) should maintain a public register of noncompliant crypto-asset service providers, consisting of entities which cannot be linked to any recognised jurisdictions, do not apply any identification measures on their customer and offer anonymising services, given their role in undermining the effectiveness of AML/CFT systems and controls.
In order to speed up its adoption and ensure that crypto-asset service providers and other obliged entities put in place effective mechanisms to comply with the travel rule for combatting money laundering and terrorism financing, the current recast proposal should be decoupled from the rest of the new AML package and should be linked to the existing AMLD framework until the entry into force of the new regime, while preserving the alignment with the upcoming Regulation on Markets in Crypto-assets [MiCA]. The co-rapporteurs are convinced that an effective and strengthened framework to prevent the misuse of crypto-assets for money laundering and terrorist financing purposes is necessary to protect EU citizens from terrorism and organised crime, while contributing to the development of a safe, lawful and well-functioning space for users of crypto assets and crypto asset service providers across the Union. The co-rapporteurs call on Member States and EU competent authorities to ensure proper implementation and enforcement also in a view of avoiding unfair and unregulated competition, including from non-EU players. Finally, the co-rapporteurs emphasize the role the Union should play in promoting the implementation of the travel rule for crypto-asset transfers at global level as well as effective international cooperation to combat money laundering and terrorist financing.
The Transfer of Funds Regulation (EU) 2015/847 was adopted to enhance the traceability of transfers of funds by requiring payment service providers to ensure the transmission of information on the payer and the payee throughout the payment chain (the so called ‘travel rule’), with the view to prevent, detect and investigate possible misuse of funds for money laundering and terrorist financing. Until today, crypto-assets have remained outside the scope of this Regulation, which only applies to conventional funds, defined as “banknotes and coins, scriptural money and electronic money”, but not to transfers of crypto assets. This loophole enables the use of crypto-assets to facilitate, fund and hide criminal activities and launder proceeds, since illicit flows can move easily, anonymously, with less friction, higher speed and without any geographical limitations across jurisdictions, with a better chance of remaining unhindered and undetected. This results in a serious security threat to European citizens, damages the integrity of our financial system and undermines the reputation of the legitimate crypto-asset ecosystem as a whole, exposing both users and providers of services of crypto-assets to significant money laundering and terrorist financing risks. In October 2018 the Financial Action Task Force (FATF) revised its 2012 recommendations to ensure that they apply to virtual assets and crypto-asset service providers (CASPs). The amended FATF Recommendation 15 on new technologies requires that CASPs should be regulated for anti-money laundering and countering the financing of terrorism (AML/CFT), licensed or registered and subject to supervision. In June 2019, FATF adopted an Interpretive Note to Recommendation 15 (INR. 15) to further clarify how its requirements should apply in relation to crypto-assets. INR 15 makes it clear that the preventive measures set out in Recommendations 10 to 21 apply to CASPs. INR 15 also provides a qualification for the application of Recommendation 16 (the ‘travel rule’) for the transfers of crypto-assets. In particular, obliged entities should obtain and hold required originator and beneficiary information on crypto-asset transfers, verify such information in relation to their own customer, transmit it to the counterparty, while making it available on request to competent authorities. In July 2021, the European Commission presented a package of proposals to further improve the Union’s AML/CFT rules. The Co-Rapporteurs welcome the Commission proposal to recast the Funds Transfer Regulation as part of the package. The proposal intends to close an important loophole in the fight against money laundering and terrorist financing by extending the current regime applied to wire transfers to transfers of crypto-assets. Nevertheless, the co-rapporteurs believe that the proposal can be further strengthened and should better reflect the specific characteristics of crypto-assets. The co-rapporteurs are convinced that a strengthened Transfer of Funds Regulation will help protect EU citizens from crime and terrorism.
The result of the proposal would be to extend the obligations of financial institutions related to transfers of funds to crypto payments. The transparency and traceability obligations would apply to Crypto-Asset Service Providers, which would have to record their clients’ name, address, date of birth and account number, and the name of the intended recipient for each transfer.
The actors in crypto currency market view the planned changes as a threat to transparency. The concern from the crypto community is that crypto companies might have to refuse transactions with unhosted wallets, as they will have no possibility to verify their identity and if they did, the reporting and verification requirements could be seen as disproportionate.