Virtual currencies subject to new money laundering and terrorism financing laws

Technological development has always been a blessing for the global economy. Continuous technological progress and increasingly prevalent digitization have lead to implementing new solutions and have provided mechanisms for numerous systemic enhancements. Despite the obvious advantages of such developments, they may also be the breeding ground for various forms of digital crime.

New technologies may also serve the purpose of money laundering and financing terrorism. Virtual currencies have been gaining popularity for some time now. Despite a number of entirely legal applications, they may also be used for criminal purposes. Virtual currencies (crypto currencies) have been harnessed to create – within “darknet” – a black financial market used for advocating economic crime. The global dark market by the name of Silk Road, masterminded by Ross Ulbricht, may serve as an example.  The platform, functioning since 2011, has served nearly 150,000 buyers and 4,000 sellers, chiefly from the United States. It follows from the latest Chainalysis report (published on 15 January 2021) that in 2019, criminal activity accounted for 2.1% of the entire crypto currency transactions volume, which translates into USD 21.4 billion worth of transfers. In 2020, the share of illicit activity in the entire crypto currency operations has shrunk by a mere 0.34%, i.e. USD 10.0 billion in transaction volume. One of the reasons for the slight decline in criminal activity is that overall business operations have nearly tripled in the years 2019-2020.

Bitcoin is still the most popular virtual currency in terms of the user base. Its specificity boils down to lacking information about the individuals or entities involved in crypto currency transactions.  However, blockchain transaction records provide certain information and ever more efficient tools for tracking bitcoin transfers and potential irregularities appear on the market.

The need to exert more control over crypto currency transactions has forced the legal system to react accordingly. On 12 January 2021, the Council of Ministers adopted a draft Act Amending the Money Laundering and Terrorism Financing Act and Certain other Acts, put forward by the Minister of Finance, Funds and Regional Policy (the “Draft”). Its purpose is to implement the EU regulations (Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the “AMLD”). The underlying assumption of the Draft is to increase the transparency of information pertaining to financial flows and, consequently, to reinforce the position of public order authorities whose operations focus on counteracting money laundering. The Draft adds to the catalogue of entities obliged to meet the requirements and to fulfil the obligations arising from the Act the entities pursuing crypto currency exchange operations. The Draft somewhat assumes that the same money laundering requirements will apply to virtual currency exchanges and to banks or investment funds, whose operations must comply with the money laundering and terrorism financing laws. Chapter 11a, which the Draft introduces, reflects the requirements arising from amended Article 47(1) AMLD introduced to the domestic legal framework. According to the above provision, Member States must ensure that entities rendering currency exchange services and handling virtual currencies must be subject to mandatory registration.

Mandatory registration and qualification

Virtual currencies operations are considered regulated operations as provided for in the Business Enterprises Law Act of 6 March 2018 and, as per the Draft, they may only be pursued upon prior entry in the virtual currencies operations register (the “Register”). In order to register, an entrepreneur must first file an electronic request. According to the new regulations, a competent authority will process the Registry entry within 14 days following the request receipt date. The Draft assumes that the Register will feature basic identification data of entrepreneurs operating in the virtual currencies business, scope of services rendered by such entity and information regarding suspending or terminating their operations. Pursuant to Article 129 of the Draft, individuals conducting virtual currencies business operations will be obliged to demonstrate knowledge and experience in that regard. The Draft author claims that the requirement will be considered met if such individual has completed a training or a course in the legal and practical issues related to operating in the realm of virtual currencies, and has demonstrated at least one year’s worth of experience conducting activities involving virtual currencies. The fact of meeting the above requirements must be corroborated by appropriate documentation, while the authority competent to handle the matters of the virtual currencies operations register will be the minister for public finances.

Sanctions provided for

According to the proposed amendments, the possibility of imposing sanctions on unregistered entities conducting virtual currencies operations will contribute to more extensive control of compliance with the obligations arising from the Draft. The Draft provides for a possibility of imposing a fine of up to PLN 100,000. These provisions are of a guaranteeing nature and they introduce greater discipline and transparency in the virtual currency industry.

European Commission’s reaction

The European Commission’s objective is to ensure that the current EU money laundering and terrorism financing laws are comprehensively and properly implemented. The experience so far has shown the Commission’s “zero tolerance” attitude, as it has instigated numerous proceedings against the Member States which have even partially failed to comply with the AMLD implementation requirement.  The interpretation of the EU and domestic laws appears to be very stringent. That said, it was the intention of the Polish Draft’s author to develop a Draft which – apart from fulfilling the main objective, i.e. transposing the AMLD requirements to the Polish legal framework – will at the same time reflect the Directive’s editorial layout and conceptual grid to the furthest extent possible.

Author:

Marcin Wnukowski, Partner at Squire Patton Boggs

Karolina Łasowska, Associate at Squire Patton Boggs

Justyna Świnka, Lawyer at Squire Patton Boggs

Last Updated on March 24, 2021 by Karolina Ampulska