The European Commission has published a proposal that, if made and brought into force, will amend the 4th Anti-money Laundering Directive (4AMLD) before the Member States are required to transpose it into their national laws.
To the surprise of many, and the horror of some, if the Commission’s proposals are accepted, it will have the power to formally propose the creation of “a central database registering [virtual currency] users’ identities and wallet addresses …”
Article 65 of the unamended 4AMLD provides that, “By 26 June 2019, the Commission shall draw up a report on the implementation of this Directive and submit it to the European Parliament and … Council“. This is normal: make a new law; check it’s working properly, and adjust it, if it’s not.
Article 1(22) of the proposed amending directive will extend this by adding, “The report shall be accompanied, if necessary, by appropriate proposals, including, where appropriate, with respect to virtual currencies, empowerments to set-up and maintain a central database registering users’ identities and wallet addresses accessible to [national Financial Intelligence Units (FIUs)], as well as self-declaration forms for the use of virtual currency users“. For reasons that might be entirely appropriate from an anti-money laundering (AML) perspective, this goes further than the ordinary “check and adjust, feedback loop”, because it gives the Commission the power and (perhaps) an implied obligation, not only to check and adjust the laws it’s proposing now, but to propose new laws later on, if it thinks it’s necessary to do so.
Unfortunately, it’s not clear whether the Commission has an EU-wide single database, or 28 national Member State databases, in mind. Its language suggests the former; but the amending Directive will only require national databases for bank and payment accounts, and there’s no clear and obvious reason for treating virtual currency accounts differently.
The recitals to the amending Directive seek to justify the creation of Member State databases for bank and payment accounts by arguing that, “Delayed access to information … on the identity of holders of bank and payment accounts hampers the detection of transfers of funds relating to terrorism. National data allowing the identification of bank and payments accounts belonging to one person is fragmented and … not accessible … in a timely manner. It is therefore essential to establish centralised automated mechanisms … in all Member States as an efficient means to get timely access to information on the identity of holders of bank and payment accounts, their proxy holders, and their beneficial owners … “
When it comes to virtual currency exchanges and wallet providers, the recitals explain that, “Providers of exchange services [and] custodian wallet providers … are under no obligation to identify suspicious activity. Terrorist groups are thus able to transfer money into the Union’s financial system or within virtual currency networks by concealing transfers or by benefiting from a certain degree of anonymity on those platforms. It is therefore essential to extend the scope of [the unamended 4AMLD] to include virtual currency exchange platforms and custodian wallet providers. Competent authorities should be able to monitor the use of virtual currencies. This would provide a balanced and proportional approach, safeguarding technical advances and the high degree of transparency attained in the field of alternative finance and social entrepreneurship … The credibility of virtual currencies will not rise if they are used for criminal purposes. In this context, anonymity will become more a hindrance than an asset for [the take up of] virtual currencies … and their potential benefits to spread. The inclusion of virtual exchange platforms and custodian wallet providers will not entirely address the issue of anonymity attached to virtual currency transactions, as a large part of the virtual currency environment will remain anonymous because users can also transact without exchange platforms or custodian wallet providers. To combat the risks related to the anonymity, national … FIUs … should be able to associate virtual currency addresses to the identity of the owner of virtual currencies. In addition, the possibility to allow users to self-declare to designated authorities on a voluntary basis should be further assessed“.
There’s bound to be some debate about whether this is really enough to warrant the stripping away of virtual currency transaction anonymity, where it exists.
It’s also not clear why the Commission thinks virtual currency users will self-declare the fact that they are using virtual currencies, whether they’re using them for legitimate purposes, or not.
The Commission argues that extending the 4AMLD to virtual / fiat currency exchanges and wallet providers “has no negative effects on the benefits and technological advances presented by the distributed ledger technology underlying virtual currencies” – a bold (and perhaps controversial) claim. It doesn’t say what it thinks the potential impact of the database(s) might be. It will have to do that later, if it wants them to be created.