What are AML and CTF?
Anti-money laundering (AML) and counter terrorist financing (CTF) regulation represents one of the most important parts of legislation when it comes to finances and payment transactions. Fighting money laundering and terrorist financing contributes to global security, the financial system’s integrity, and sustainable growth. Laws to combat money laundering and the financing of terrorism are designed to prevent the financial market from being misused for these purposes.
The European Union adopted the first anti-money laundering Directive in 1990. It provides that obliged entities shall apply customer due diligence requirements when entering a business relationship (i.e., identifying and verifying clients’ identity, monitoring transactions, and reporting suspicious transactions).
Slovenian AML legislation
On 19 June 2018 the 5th anti-money laundering Directive (Directive (EU) 2018/843), which amended the 4th anti-money laundering Directive, was published in the Official Journal of the European Union. The Member States had to transpose this Directive by January 10th 2020.
Slovenia was one of the few EU countries which implemented the 4th AML directive in all aspects of crypto business. Therefore, the Slovenian AML law has been in force for all crypto-related businesses since 2016.
Eligma was founded one year later, in 2017, which we saw as an advantage. We made sure to build our entire GoCrypto solution on the foundation of AML and CTF regulations and standards, taking into consideration all amendments and additional demands from our regulators. When the obligatory 5th anti-money laundering Directive came into force in January 2020, Eligma’s business remained unaffected. The regulation has represented an integral part of who we are as a company from the very beginning.
Benefits of building an internal system
When we started creating our crypto payment network, we decided to build an internal AML system so that we could be certain that we are following all regulatory specifications and implementing them into our business model as effectively as possible. We wanted to nourish a close relationship with our clients while still having control over the entire AML workflow and we succeeded in achieving both. All our hard work in building this detailed structure keeps rewarding us every time new regulatory changes or additional demands come into place as we rarely need to change any of our procedures. It is clear that our AML system is one of the most effective systems out there and is providing excellent security against money laundering and financing of terrorism.
Building a comprehensive AML system from scratch is a challenging task that requires a lot of technical resources as well as in-depth blockchain and legal knowledge. Companies can always opt-in for one of the available 3rd party systems, but these tend to have a more general approach to be viable for a larger group of clients. However, every country has its own specific AML requirements which is why companies cannot benefit from a generic approach. Third-party tools usually only cover individual parts of AML regulation, e.g., KYC, client screening, transaction monitoring, etc. On the contrary, Eligma’s internal system has all these segments integrated and intertwined in a way that they function with the utmost efficiency, benefiting the company and its clients. While we also take advantage of certain 3rd party solutions, like blockchain monitoring, the backbone of our AML system was developed in-house.
Regulators and GoCrypto: a relationship built on trust
Slovenia is known to be one of the most crypto-ready countries in the world which is why it comes as no surprise that it has also been an early adopter of AML regulations in crypto businesses. Eligma is proud of its good relationships with Slovenian official regulators, the Bank of Slovenia, and the Office for Money Laundering Prevention. Our collaboration is built on mutual trust and sharing of reliable information and feedback. We are in constant conversation on how to improve current AML systems that would form proper standards in the world of crypto. The crypto industry is still in its early stages of development, and it desperately needs a firm legal foundation on which crypto businesses will be able to develop future technologies and practices.
Eligma has undergone numerous regulatory reviews, the last one being concluded in 2021. We are proud to say that during these reviews, regulators discovered no irregularities.
Our extensive technical knowledge has proved to be of much help to the compliance team on numerous occasions. Our internal solutions showcase best practices in the world of crypto business and help regulators set standards that all other crypto businesses should follow. The two-way collaboration with the regulators has been very fruitful for all parties involved.
Balance between regulation and the nature of crypto
Building an AML system requires an overwhelming amount of technical knowledge as well as regular employee training. All this is necessary to provide compliance and to be prepared to face any issues and challenges that might occur in the future.
The trickiest part of this is finding the balance between regulatory compliance and the very nature of blockchain technology. At its core, the crypto space seeks decentralization in all sense of the world, and imposing regulation is not being greeted positively.
It often occurs that crypto users have trouble understanding why they need to undergo all of these KYC and screening procedures. But even this is changing for the better as people are growing more and more aware that crypto payments or transactions require similar backend procedures as traditional banking ones in order to provide basic security levels. This is the only known solution so far, which provides a reliable and secure environment for all parties involved, protects against money laundering and financing of terrorism, and still includes all of the benefits that blockchain has to offer.
Eligma has been very successful in intertwining its strong technical and security mechanisms with the current regulatory requirements.
Failing to comply with AML
There have been numerous cases of crypto businesses failing to implement AML measures in their line of work. These well-known companies had to face legal charges, expensive fines, and public scrutiny. In such cases, the question arises: Why are these big technology companies failing to comply with AML regulations?
The answer is multi-layered. On the one hand, the development of AML systems is still very complex and requires a lot of time, knowledge, and resources. On the other hand, implementing regulatory measures can deter certain crypto enthusiasts from using the services of a company that had imposed them. Business models that do not impose strict regulations can be seen as more attractive to customers who believe in the true decentralization of crypto payments. It should also be mentioned that sometimes the lack of AML measures can simply be linked to a company’s illicit intentions.
The relevant AML regulation of course also has room for improvement. Regulators should work on better understanding the blockchain technology and use this knowledge to structure better guidelines for the crypto space. In fact, blockchain could offer a lot more security in the field of payment transactions, if regulators understood how to set up effective regulation while still honoring blockchain’s full potential.
GoCrypto is set for the long-term success
While some crypto companies are doing their best to avoid certain less popular AML requirements and reaping its benefits in the short run, Eligma is focusing its strategy on providing viable business solutions in the long run. We firmly believe that AML regulation will remain an integral part of any business, crypto not being an exception. By collaborating with regulators, we can ensure that the needs of crypto businesses are being heard and considered when setting up new and improved versions of the current AML legislation.
It is worth mentioning that in the year 2021, the crypto space was subject to €8 billion worth of crypto being laundered which represents only 0.5% or even less of money-laundering activities in the entire financial sector. The overall number will sweep you off your feet as the year 2021 saw from €800 billion to €2 trillion being used as part of illicit money laundering and financing of terrorism operations.
The numbers of unlawful use of crypto assets are low in comparison to the traditional finances which could be linked to several facts. Cryptocurrency payments have not yet gained mainstream adoption and are still seen by some as too complex to use. It is also true that on-chain transactions provide transparent data that cannot be altered or hidden. These transactions can help identify the real identity of users who try to use crypto to bring “dirty” money into the traditional banking system.
If a company truly understands how the blockchain functions it can use it to build a system that offers higher security, reliability, transparency, and efficiency than the traditional system.
Eligma has proven itself to be a true pioneer in the field of crypto payment solutions, which is why its flagship product GoCrypto has already gained the status of the fastest-growing crypto payment network in the world. Our company’s best practices serve as a successful learning model for regulators and other crypto businesses alike.
Luka Planinc, General Counsel at GoCrypto
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