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EU Adopts Regulations Increasing Transparency in Virtual Currency Trading to Combat Money Laundering, Tax Evasion, and Terrorism Financing

After over a year of negotiations, the European Parliament and its executive arm, the European Council, recently agreed to an amendment to the Fourth Anti-Money Laundering Directive to include measures targeting exchange platforms for virtual currencies, such as Bitcoin, as well as prepaid cards.  These new regulations will require an increase in transparency by the trusts and trading companies to reveal the holders of virtual currency to thwart potential money laundering, tax evasion, and anonymous funding of terrorism. Primary among these regulations is a requirement to provide beneficial ownership information to authorities and “any persons that can demonstrate a legitimate interest” to access data on the beneficial owners of trusts.

This focus on beneficial ownership in regards to virtual currency is entirely consistent with the general AML regulatory efforts in the United States and around the globe over the last few years, which have emphasized heavily the need to identify the beneficial owners of financial accountsreal estate and other assets in order to attain a more transparent financial system.

The regulation adopted by the European Parliament and European Council also comes as Bitcoin’s prices surged over 1,700 percent since the start of 2017.  This outstanding growth has increased main stream interest in the virtual currency while also sounding alarm bells as some fear that Bitcoin is a bubble bound to burst.  A key part of the amendment is that access to beneficial ownership information should be provided to authorities and “any persons that can demonstrate a legitimate interest.” 

As the use of digital currency because more pervasive, the interest in regulating Bitcoin and digital currency has been quickly intensifying. The last year has seen numerous regulatory and enforcement actions regarding virtual currency, as we have previously blogged.

Beneficial Ownership of Virtual Currency Holdings

The preamble to the amendment to the Directive notes providers of “exchange services between virtual currencies and fiat currencies (that is to say coins, banknotes, and electronic money of a country that is designated as a legal tender and is accepted as a medium of exchange in the issuing country) as well as custodian wallet providers are under no obligation to identify suspicious activity.” Terrorist groups thus may take advantage of the general anonymity of such trades to conceal the transactions funding their activities. Therefore, the European Parliament determined an increase in transparency is necessary to aid national Financial Intelligence Units (“FIUs”) in monitoring these exchanges and obtaining information about the identity of owners of virtual currencies in certain circumstances.

Specifically, the amendment recognizes E.U. Member States are currently required to ensure that corporations or legal entities organized under their laws “obtain and hold adequate, accurate and current information about beneficial ownership.” The amendment adds virtual currency exchange platforms and custodian wallet providers to the list of obligated entities regulated by the Directive as set forth in Article 2 and calls on E.U. Member States to enact measures for granting access to request for beneficial ownership information held by trusts and other financials arrangements.

The amendment advises that when determining the level of transparency of beneficial ownership information, “Member States should have due regard to the protection of fundamental rights of individuals” including “the right to privacy and personal data.” However, the key takeaway is that access to beneficial ownership information should be provided to authorities and “any persons that can demonstrate a legitimate interest.” The term “legitimate interest” shall be defined by the E.U. Member States, which are directed to “take into account preventative work in the field of anti-money laundering, terrorist financing, and associate predicate offenses.”

These measures also direct E.U. Member States to allow the public to access beneficial ownership information in a “coherent and coordinated way, through central registers in which beneficial ownership information is set out, by establishing a rule of public access” with the hope that enhanced public scrutiny will contribute to preventing the misuse of legal entities for money laundering, tax evasion, and terrorist activities.

Prepaid Cards

The European Parliament expressed similar concerns regarding the money laundering and terrorist financing risks posed by the anonymity provided to users of prepaid cards.  While recognizing the legitimate uses of prepaid cards, the amendment warns that such prepaid cards are easily used in “financing terrorist attacks and logistics.” Therefore, to curb the use of prepaid cards in terrorist financing the European Parliament and Council restricted the use of prepaid cards and require identifying customers in the case of a remote payment transaction exceeding the amount of €50.

These measures were first proposed following the terrorist attacks in Paris and Belgium in 2015 and 2016. These measures were resisted by lawmakers from Britain, Malta, Cyprus, Luxembourg and Ireland who voiced concerns over the implications such regulations could have on the economy.  Now that the amendment has been approved, it must be formally adopted by Member States and turned into national laws within 18 months.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VII, Number 354


About this Author

Jessica Case Watt, Ballard Spahr, Deleware attorney, Commercial Litigation, Mortgage Banking, Securities Enforcement and Corporate Governance Litigation

Jessica Case Watt is an associate in the Litigation department. Ms. Watt practices complex commercial litigation, with experience in cases involving breach of contract, fraud, and disputes related to lending and finance agreements. She has experience representing commercial lenders in pursuing foreclosure actions to judgment and sale in the State of Delaware.

Ms. Watt practices corporate litigation, including matters of corporate control, corporate governance, statutory and contractual disputes, statutory demands for inspection of corporate books and records, and breach of fiduciary...