Generally, the financial infrastructure and systems of any country are highly regulated. Such a regulated environment ensures safe and secure transactions across the globe. But, that is not the case with the world of virtual assets.
There are little to no regulations in place for the cryptocurrency market. Some of the governments do not even encourage the use of cryptocurrency, let alone framing any legal protection rules. The absence of regulations is the key attraction for financial criminals to use it for layering of illicit funds.
The best feature of cryptocurrencies is they are global and accepted everywhere. You can use these virtual assets for cross-border transactions. Also, these are more autonomous because no intermediaries are involved.
These features of cryptocurrencies make them more attractive to financial criminals. It is easier, faster, and convenient to process these virtual assets across borders. Also, the crypto transfer transaction from one owner to another is not centralized, leading to higher risks.
The second stage of money laundering is layering. Financial criminals use a structured transaction to layer the illegal money. They enter into buying and selling transactions of cryptocurrency on crypto exchanges. They also transfer their virtual assets to other countries to move them away from the actual source.
The third stage is integration where illegal funds enter the financial system as legal money. Herein, money launderers sell cryptocurrencies to other buyers through over-the-counter brokers.
Generally, gambling sites accept cryptocurrencies as the mode of payment. They buy chips for gambling using illegal cryptocurrency. Then, they encash it using clean money.
The cryptocurrency transfer network is decentralized. Generally, people transfer cryptos to other people in countries that have no or weak AML regulations. Next, they buy other goods or services with those illegal virtual assets to convert them into clean money.
There exists cryptocurrency mixing services or tumbler that pools cryptocurrencies from many users. Then, the tumbler is split and distributed to each owner as per the proportion received. This is how crypto launderers put illegal money into the system, which may go to any participant of the tumbler.
Many private companies have installed cryptocurrency ATMs in many countries. On these ATMs, you can buy cryptocurrency using cash, or debit/credit cards. But, these ATMs have no regulatory structure or legislation controlling them.
Because of all these red flags, AML watchdogs must keep a focused eye on the world of cryptocurrency. They must identify the various money laundering risks and how they affect these virtual assets. And, most importantly, they need to find ways to eliminate or lessen these risks.
The UAE market is quite active in regulating the money laundering activities in cryptocurrency. The country does not ban crypto assets. But, it has implemented measures to protect them from financial criminals.
It has introduced the following regulations:
In September 2021, UAE adopted a regulatory framework for the protection of cryptocurrencies from ML risks. The law was adopted in the meeting of the National Committee for Combating Money Laundering and Financing of Terrorism and Illegal Organizations (NAMLCFTC).
The regulation developed initiatives to protect the infrastructure of virtual assets against ML risks. It also intends to adopt guidelines for the implementation of financial sanctions against criminals. The implementation responsibility lies on the Securities and Commodities Authority (SCA) and the Central Bank of UAE.
In November 2020, the SCA released Decision No. 23 of 2020 concerning Crypto Assets Activities Regulation. This law governs the listing, offering, trading, and issuing of digital assets in or from onshore UAE. The law defines the types of virtual assets included and excluded in this definition.
The regulation applies to marketplaces, ICOs, custodian services, exchanges, and crowdfunding platforms. It also includes the financial services related to these crypto assets. It differentiates between commodity tokens and security tokens. It also makes provisions for approval requirements for both.
SCA must license these crypto assets providers. For obtaining a license, they must follow the country’s AML/CFT, data protection, and cyber security compliance requirements and laws. Relevant regulators must incorporate these providers only in onshore UAE, DIFC, or ADGM.
Besides, there are provisions on cloud computing, data residency, and employees for these crypto-assets providers. Crypto assets can be offered to qualified investors who must file documents with SCA for approval. In the case of non-qualified investors, they must take approval from SCA before being offered crypto assets.
SCA also stresses the point that it considers all potential investors highly risky. This means conducting enhanced due diligence for all customers becomes essential. This includes checking ultimate beneficial ownership, geographical risks, sanctions, and political exposures.
The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) provided regulations for crypto assets. It amended the Financial Services and Markets Regulations (FSMRs) to factor in the regulation on operations of crypto-asset businesses. Under this legislation, FSRA regards crypto assets as commodities.
Accordingly, operators in the market of virtual assets (intermediaries or custodians) must take approval from FSRA. Once they get the approval, they will operate as a financial service permission holder. So, anyone operating in these virtual assets must comply with the same regulations as applicable to securities, derivatives, and funds in ADGM.
Thus, we see that the UAE government has made many provisions for protecting crypto assets from money laundering. But, money launderers are at a higher pace of exploiting technology for illegal activities. This surpasses even the pace at which technological innovations are happening in the crypto space.
Nonetheless, the global and national regulators are making good progress with relevant protection laws. The key lies in identifying the red flags at the right time. It is also crucial to hire AML consultants who can help you with achieving AML compliance in the UAE.
Our AML/CFT services are available for different industry sectors including banks, auditors, financial companies, insurers, jewelers, legal professionals, and others. We ensure personalized services based on your business requirements. We guarantee 100% compliance with AML/CFT laws within deadlines and budget.
