Anti-Money Laundering, Funding of Terrorism and Virtual Financial Assets Regulations in Malta
Money laundering and terrorist financing
Anyone who has tried to open a new bank account, buy or sell a property, or invest assets with a firm is now familiar with the term "anti-money laundering", which is a catch-all phrase that to most of us only means filling in forms and providing documentation, but in fact is a set of laws which are intended to keep the world we live in safe from terrorists and our economies stable.
Allowing money laundering to flourish effectively means supporting terrorism, drugs and violence in our neighbourhoods. Businesses set up with the intent of cleaning dirty money have no qualms about undercutting their prices as long as they appear legitimate, while causing distress to genuine entrepreneurs. Such activities also often involve a degree of tax evasion, thereby denying the government financial resources which could otherwise be invested in the community in sectors such as infrastructure, health or education for the benefit of society at large.
The Prevention of Money Laundering and Funding of Terrorism Regulations in Malta
After a short stint as an FATF grey-listed country, Malta breathed a sigh of relief in 2022 at having been removed from the FATF grey list following genuine efforts to address shortcomings towards the end of 2021.
The general consensus among Maltese practitioners (after recovering from the shock of being grey-listed in the first place) was that if grey listing was what it took to wake up those who were not pulling their weight in the fight against money laundering and funding of terrorism, perhaps grey listing was a blessing in disguise for the jurisdiction.
Now, with the ship righted and wind in its sails, Malta can continue on its journey as a financial services centre of excellence within the European Union. The Prevention of Money Laundering Act (Chapter 373 of the Laws of Malta) together with the Prevention of Money Laundering and Funding of Terrorism Regulations (Subsidiary Legislation 373.01) and the Implementing Procedures issued by Malta's Financial Intelligence Analysis Unit (FIAU) are excellent pieces of legislation, in line with the highest standards and EU law. Moreover, the FIAU has also published sector-specific Implementing Procedures (IPs), to further guide subject persons or obliged entities on how they should comply with the law.
Among these sector-specific IPs are those aimed at the virtual financial assets (VFAs) sector.
Anti-money laundering, funding of terrorism and virtual financial assets
The need for sector-specific IPs is obvious given how VFAs increase the risk of money laundering and terrorist financing by being anonymous, immediate and by bypassing the need for a central authority which would police transactions.
The IPs for VFAs apply to persons regulated by Malta's VFA Act (Chapter 590 of the Laws of Malta), including VFA agents, VFA issuers and VFA service providers.
In Malta, subject persons who are not VFA service providers, but are required to handle VFAs while conducting relevant financial business or relevant activity, are also caught by these sector-specific IPs, with the net effect that the law is widely cast, to include:
- a person licensed under the Investment Services Act;
- collective investment schemes;
- providing services in Malta;
- liquidators;
- anyone providing VFA services in an incidental manner in the course of a professional activity, such as lawyers or company service providers.
The IPs for VFAs focus on risks which are particular to VFAs, being anonymity, immediacy, irrevocability and decentralisation. Subject persons are required to mitigate such risks by drawing up a Business Risk Assessment (BRA) which, amongst other things, accounts for the nature and risks of the VFA business and any improvements in this sector. The BRA shall be reviewed by subject persons bi-annually, or earlier where necessary.
VFA service providers are required to have their anti-money laundering and counter-funding of terrorism (AML/CFT) controls, policies, and procedures reviewed by an independent external third party. The independent review must be conducted at least every 18 months or whenever the VFA service provider's AML/CFT programme is improved or undergoes a major change.
The IPs for VFAs provide guidance as to how customer due diligence should be carried out, particularly regarding simplified customer due diligence in low-risk cases involving consumers trading with VFAs under EUR1,000.
Subject persons must also gather, record and keep on file transaction data which would consist of:
- wallet addresses involved in the transaction;
- identification details of the customer;
- full names of the parties involved;
- type and amount of the VFAs exchanged; and
- bank/wallet account details.
The IPs for VFAs guide subject persons on how to transact with different types of wallets, such as private wallets, custodian wallets and multi-signature wallets. Subject persons are to apply analytical tools to determine the content of the wallets and the history of the coins. The wallet addresses concerning the transaction must be screened for potentially harmful media in the public domain. Subject persons, in identifying their customer's source of funds, must also ascertain the origin of their coins by paying special attention to the customer's mining activities.
The IPs for VFAs include a list of red flags, trends, and case studies specific to VFAs to assist VFA service providers in better understanding what to look for when planning and implementing their AML/CFT programmes.
Conclusion
While in the VFA industry regulation is often frowned upon and seen as running counter to the very nature and scope of VFAs (ie, to be decentralised and democratic), when one keeps in mind the scope and purpose of anti-money laundering laws, and how important they are to our safety and the stability of our economies, it is easy to see why VFAs, like any other financial asset, should be subject to anti-money laundering and terrorist financing laws. In our opinion, regulation also gives VFAs a level of trustworthiness that will make them more mainstream.
Originally published by Chambers Doing Business In Malta 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
