Swiss financial association publishes AML standards for digital assets, notes criminal, cyber risks
Thursday, November 29, 2018
Posted by: Brian Monroe
By Brian Monroe
November 29, 2018
Switzerland’s Capital Markets and Technology Association (CMTA) recently released what it considers a consensus among public and private sector bodies on how anti-money laundering (AML) standards should be interwoven into the crypto, or digital asset, sector, and the tech underpinning the field, distributed ledger technologies (DLT).
These standards are designed to clarify for both issuers of digital assets and financial intermediaries dealing with such issuers or digital assets measures to be taken in order to comply with the Swiss regulations against money laundering and the financing of terrorism.
The 52-page report borrows heavily from many of the AML processes going on right now at large, sophisticated banks and is informed by recent global data leaks, corruption investigations, money laundering scandals and cyber hacks, noting that firms involved in, for instance, initial coin offerings and the like should capture bank account and international bank account number (IBAN) and Distributed Ledger Account Number (DLAN) details to better risk assess entities.
In that same vein, the report urges crypto exchanges and other operations involved in moving digital assets to bore down to the actual individual involved in transactions and don’t let entities transact anonymously or hidden behind impenetrable ownership structures.
“Compliance with regulations against money laundering and the financing of terrorism is an overriding concern for the industry,” said Natacha Polli, chair of CMTA’s AML committee, in a statement.
“Up to now, the lack of standards and clear guidance has prevented both businesses and financial intermediaries from harnessing the full potential of DLT,” she said. “By adopting practice-oriented, industry-supported standards, the CMTA intends to unlock the huge potential that the blockchain technology represents for the financial sector.”
Some key snippets, including that some issuers should voluntarily adopt AML provisions:
Applicability of financial market laws and regulations
1 The Issuer shall clarify whether its business model, in particular the issuance and/or offering of Digital Assets (the "Offering"), triggers any regulatory approval, licensing or registration requirements, in particular:
· as a Financial Intermediary; or
· otherwise as a business subject to AMLA and/or financial market supervision in accordance with Art. 3 of the Federal Act on the Swiss Financial Market Supervisory Authority (FINMASA) under any of the applicable Swiss financial market laws (as defined in FINMASA).
FINMA circulars, published practice and guidelines shall be duly taken into account in this regard. 2
If the Issuer is a Financial Intermediary or is otherwise subject to AMLA:
· the Issuer may elect to apply the Standards in addition to its obligations under AMLA and its implementing provisions, in particular to implement a risk-based approach; and
· AMLA and its implementing regulations shall in any event prevail over the Standards. 3 If the Issuer is not subject to AMLA, the Issuer may elect to voluntarily apply the Standards in order to manage its reputational risks and/or satisfy the requirements of Financial Intermediaries with which the Issuer may wish to establish or maintain business relationships
The standards document also details some key definitions to help understand the technology and adopt AML provisions:
Distributed Ledger Technology (DLT): Technology recording and sharing data across multiple data stores (or ledgers). This technology allows for transactions and data to be recorded, shared, and synchronized across a distributed network of different network participants.
DL Analysis: Review of the transactions performed on a specific Distributed Ledger in relation to one or more DLANs (public addresses) with the purpose of, in particular, determining to the extent possible whether:
· such DLANs (public addresses) are known to be associated with transactions or DLANs (public addresses) that are thought to be used for illegal purposes;
· such DLANs (public addresses) are known to be associated with transactions on the Dark Web; · transactions relating to such DLANs (public addresses) are not (or less) traceable due to darkening/obscuring techniques (e.g., mixing, conjoining, u-turn transactions);
· such DLANs (public addresses) are known to be associated with miners or other entities and are therefore, as a result of the business activities of such miners or other entities, not (or less) traceable;
· such DLANs (public addresses) are known to be associated with money laundering, financing of terrorism or cybercrime (e.g., stolen Digital Assets); and/or
· such DLANs (public addresses) are to be associated with transactions relating to sanctioned countries or persons. A DL Analysis requires an appropriate clustering of DLANs (public addresses) by competent data scientists as well as powerful algorithms. The DL Analysis shall take into account the specificities of the protocol used by the relevant DLT.
“DLT is creating many opportunities for our economy,” said Fedor Poskriakov, the CMTA’s General Secretary, said in a statement. “With these AML standards, our association is laying the groundwork for future developments, and paving the way for a compliant tokenization of financial assets. It is a first step in this direction.”