Virtual currencies and AML risks, the Italian Supervisors opinions (April 18th, 2015)

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(part of “AML in Italy” draft version)

Introduction: FATF, EBA and ECB positions

On June 27th, 2014 the Financial Action Task Force (FATF) published  “Virtual Currencies: Key Definitions and Potential AML/CFT Risks” (pdf, 545 K, 17 pp.) a research into the characteristics of virtual currencies aimed to make a preliminary assessment of the ML/TF risk associated with this payment method.
The FATF’s report has established a conceptual framework of key definitions for virtual currencies and formed a basis for further policy development.
According to FATF, virtual currency (VC) is a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status (i.e., when tendered to a creditor, is a valid and legal offer of payment) in any jurisdiction.
VC is not issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the virtual currency.
VC is distinct from e-money, which is a digital representation of fiat currency used to electronically transfer value denominated in fiat currency.
FATF wrote that virtual currencies, particularly Bitcoin, are the wave of the future for payment systems but they provide also a powerful new tool for criminals, terrorist financiers and other sanctions evaders to move and store illicit funds, out of the reach of law enforcement and other authorities.

On July 4th 2014, the European Banking Authority (EBA) published an “Opinion” (pdf, 620 K, 46 pp.) addressed to the EU Council, European Commission and European Parliament setting out the requirements that would be needed to regulate “virtual currencies”.
The Opinion is also addressed to national supervisory authorities and advises to discourage financial institutions from buying, holding or selling virtual currencies while no regulatory regime is in place.

Finally on February 2015, the European Central Bank (ECB) published “Virtual currency schemes – a further analysis” (pdf, 491 K, 37 pp.) which reiterates and confirms the general consideration of the previous ECB’s report on virtual currency schemes of 2012: although VC can have positive aspects in terms of financial innovation and the provision of additional payment alternatives for consumers, it is clear that they also entail risks.
According to ECB “the materialisation risks depends on the volume of VC issued, their connection to the real economy – including through supervised institutions involved with VC – their traded volume and user acceptance. For the moment, all these risk drivers have remained low, which implies that there is no material risk for any of the central bank’s tasks as yet. Nevertheless, a major incident involving VC and a subsequent loss of trust in them could also undermine users’ confidence in electronic payment instruments, in e-money and/or in specific payment solutions, such as those in place for e-commerce.”

The Italian AML Supevisory authorities opinions on virtual currencies

  • On January 30th 2015 the Bank of Italy issued a statement about Virtual Currencies  on its Supervisory Bullettin n.1: “Virtual currencies - Communication (Comunicazione sulle valute virtuali)”
  • On February 2nd 2015 the UIF (Unità di Informazioni Finanziarie), the Italian FIU, published its opinion: “Anomalous use of virtual currencies (Utilizzo anomalo di valute virtuali)”.

Virtual currencies - Communication of the Bank of Italy on January 30th, 2015

On January 30th 2015, the Bank of Italy published in its “Supervisory Bulletin” a warning relating to virtual currencies.
“The Bank of Italy discourages banks and other supervised institutions from purchasing, holding or selling virtual currencies,” writes the Financial Intermediaries Supervisory Authority.
On this issue Bankitalia “shares” the EBA (European Banking Authority) opinion which had already warned about the virtual currencies, issuing an opinion in July 2014.
“Therefore Bank of Italy addressees - banks, financial intermediaries and other persons subject to its supervision - are advised to carefully consider the risks indicated by the EBA and to consider that in the absence of an adequate legal framework and certainty about the legal nature of virtual currencies, those risks can expose to losses and affect, consequently, the consistency of the regulatory capital and the stability of intermediaries”.
Bankit also points out that “the real modus operandi of virtual currency can result in a violation of regulations which are punished by law”.
The Bitcoin is an electronic currency created in 2009 by a computer scientist known by the pseudonym Satoshi Nakamoto.
Bitcoin is based on completely anonymous encrypted transactions.
Bitcoin is not managed by any financial institutions and its value depends on the trust of its investors.
This crypto currency can be transferred via web to everyone who has a “bitcoin address”, saved in a computer in the form of “portfolio” or held by a third part which offices as a bank.
EBA in its report ha explained that although there are “some potential benefits, for example, quicker and easier transactions and financial inclusion too” at the moment in absence of well-defined rules “risks are higher than benefits even though in Europe it remains less significant.”

UIF, the Financial Intelligence Unit for Italy: “Anomalous use of virtual currencies” (January, 30th 2015)

On January 30th 2015 UIF, the Italian Financial Unit, published an opinion on so-called “virtual currencies”.
The UIF reminds financial operators that virtual currencies are not issued by central banks or by public authorities and do not constitute legal tender neither are comparable to electronic money.
There are more than 500 different types of virtual currencies; the most common is “Bitcoin”.
Virtual currencies are used especially in electronic commerce and for gambling especially online.
According to the UIF the use of virtual currencies may expose operators to the risk of money laundering and terrorist financing, as evidenced by international and European authorities, such as the Financial Action Task Force (FATF), the European Banking Authority (EBA) and the European Central Bank (ECB).
Transactions with virtual currencies take place mainly online, between subjects that can operate in different countries, often in countries or territories at risk.
These subjects are not easily detectable and anonymity is facilitated for those involved in the network and the real beneficiaries of transactions.
Suppliers of “virtual coin” activities such as use, exchange and storage of virtual currencies and their conversion from / into legal currencies are not, as such, recipients of money laundering legislation and therefore are not required to comply with the obligations on customer due diligence, data recording and suspicious transaction reporting.
This circumstance can make the virtual instrument attractive for those who intend to engage in criminal conduct and facilitate the activities of prevention and response.
The UIF reminds financial operators again that during 2014 the Unit received from addressees of anti-money laundering obligations some suspicious transaction reports regarding purchases or sales of virtual currencies considered opaque because of the “subjective profile” of the client, the nature of the parties who were often from abroad, or the modus operandi, for example, the use of cash or payment cards.
To avoid the infiltration of money laundering and terrorist financing into the legal economic and financial system, the addressees of the Legislative Decree no. 231/2007 must be careful to identify the operations involving virtual currencies and thus detect any suspicious elements.
In particular, financial intermediaries, especially when providing payment services must evaluate with great attention the operations of withdrawal and / or payment of cash and the movements of payment cards, connected with the buying and / or selling of virtual currencies carried out over a limited period of time and for large sums of money.
Gambling operators referred to in Article 14, d), e) and e-bis) of the decree against money laundering must pay particular attention to the operation carried out through virtual currencies.
Such operations must be examined in relation to the subjective profile of the customer, the involvement of countries or territories at risk and any additional information available.
Suspicious transactions related to the phenomenon described must be reported to the Financial Intelligence Unit as soon as possible, specifying the same phenomenon in the appropriate section of the report, in accordance with what is indicated in the instructions for the compilation of reports of suspicious transactions.
It is responsibility of the persons obliged to report suspicious transactions, as part of his organizational autonomy and in the manner deemed most appropriate, to raise awareness among staff and the team responsible for the evaluation of suspicious transactions, communicating the appropriate instructions.

Footnotes

  1. The nature and characteristics of virtual currencies that exist today are described analytically in the following documents available online: EBA Opinion on 'virtual currencies' of 4 July 2014; FATF Report, Virtual Currencies, published in June 2014; ECB -Virtual Currency Schemes October 2012.
  2. See EBA “Opinion on virtual currencies” of July 4th, 2014, cit., FATF Report, “Virtual Currencies”, cit., ECB “Virtual Currency Schemes”, cit .; in particular, the FATF document describes some criminal acts committed by exploiting virtual currencies, for example, in the United States, also part of the "deep web" (eg. Silk Road and Liberty Reserve).
  3. It means the countries or territories not included in anti-money laundering regime equivalent to those laid down in the relevant decree of the Ministry of Economy and Finance and, in any case, those indicated by competent international bodies (eg. The FATF, OECD) as exposed to risk of money laundering or terrorist financing or uncooperative in the exchange of information in tax matters.
  4. For active collaboration purpose see, in particular, FIU communication of 11 April 2013, scheme 2.

Annexes

  • Financial Action Task Force (FATF), “Virtual Currencies: Key Definitions and Potential AML/CFT Risks”, 27 June 2014  (pdf, 545 K, 17 pp.)
  • European Banking Authority (EBA), “Opinion on virtual currencies”, EBA/Op/2014/08, July 4th, 2014 (pdf, 620 K, 46 pp.)
  • European Central Bank (ECB), “Virtual currency schemes – a further analysis” (pdf, 491 K, 37 pp.)
  • Bank of Italy, Supervisory Bullettin n.1 2015, “Virtual currencies – Communication”, Italian, 30 January 2015 (pdf, 69 K, 2 pp.)
  • Bank of Italy, "Avvertenza sull’utilizzo delle cosiddette valute virtuali", Italian, 30 January 2015 (pdf, 180 K, 3 pp.)
  • UIF, Unità di Informazioni Finanziaria, “Anomalous use of virtual currencies”, Italian, On 2 February 2015 (pdf, 26 K, 2 pp.)

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