In a previous post (Bitcoin and its legal nature) we brought up a topic that had not been talked about much, but that had special relevance for the establishment of companies in the Bitcoin ecosystem in Spain, we refer to Bitcoin and Prevention of Money Laundering.
[Note: This article concerns Spanish regulation.]
Cripto-índice:
Bitcoin and Prevention of Money Laundering
In the aforementioned post, we made an approach to the legal nature of Bitcoin based on the most relevant pronouncements issued by Public Authorities, both Spanish and European. After this exhaustive analysis, we came to the conclusion that it was not entirely clear that the activity of buying and selling and exchanging bitcoins was subject to Law 10/2010 of Prevention of Money Laundering (LPBC) [1].
Nevertheless, We conclude that there is, with all certainty, necessary compliance by financial entities with the Money Laundering regulations, and to the extent that the activity of exchange or sale of bitcoins affects their financial operations. (bank transfers to deposit payment in Euros, payment with cards, withdrawal of euros at ATMs, etc.), These operators or companies that carry out bitcoin trading and exchange activities must comply with the LPBC. and its development regulations.
In this sense, we have already had the first ruling from the Spanish courts. Specifically, it has been the ruling of the Provincial Court of Asturias (in Spanish), of February 6, 2015, who has spoken out for the first time on the matter.
Next, we are going to proceed to briefly summarize said ruling and focus on the points that most concern us in relation to the LPBC.
Analysis of the Judgment of the Provincial Court of Asturias
The aforementioned ruling concerns a company that provides services for the direct purchase of bitcoins (Meetpays, S.L.-hereinafter, Meetpays) and a credit institution (Caja Laboral Popular Cooperativa de Crédito -hereinafter, LaborBox). Both parties entered into an affiliation contract with the Visa and Mastercard card systems, for the installation of a Point of Sale Terminal (POS).
In the description of the facts, it can be seen that Meetpays is suing Caja Laboral, since the latter refused to fulfill the contract, basing their argument on the fact that said service «could be used to make payments in bitcoins around the world anonymously and for free and from your computer or mobile phone», being «impossible to verify the legitimacy and origin of the funds» in an activity «high risk, with the competent authorities concerned with this currency,» which could be used for «laundering money from drug trafficking and others.»
The ruling, in this sense, refers to the art. 16 of the LPBC, which imposes on financial entities special control and attention to any risk of money laundering that may arise from products or operations conducive to anonymity or the development of new technologies. The ruling continues by establishing that it is obvious that to avoid anonymity, as far as the aforementioned article is concerned, it is necessary to verify both the identity of the acquirer and the legitimacy and authenticity of the funds.
The ruling adds that by virtue of the provisions of the LPBC, it is necessary comply with a series of prevention measures, which may be normal, simplified y reinforced (This last type of measure is what should be applied in cases like the one we are analyzing, as we will see below).
On the other hand, the art. 7.3 of the same law adds that when the obligated subjects (in our case, the financial institution) cannot apply the diligence measures provided for by law, they will not establish business relationships or execute operations or terminate them. We are faced with an imperative mandate and, therefore, mandatory compliance.
In this line of argument, the ruling states that the origin of the funds (with which the bitcoins are obtained) in this case is not «darker than any online purchase using a credit card» but what, «What is not taken into account is that in this case the objective of the sale is the bitcoins.», remembering the risk that they could be used for money laundering from criminal activities.
For this reason, the ruling dismisses the lawsuit filed by Meetpay.
Compliance with the Money Laundering Prevention Law
This sentence, therefore, what it comes to show, is the need for those who operate in the sale and exchange of bitcoins in Spain to comply with the LPBC, at least voluntarily, despite the fact that it may not currently apply to them, since otherwise the Financial Entities could be failing to comply with Law 10/2010 by not being able to comply with the obligations to prevent money laundering in operations carried out with digital currencies or bitcoins.
If we add to this what is established in the article 16 of the LPBC, which imposes on financial entities special control and attention to any risk of money laundering that may arise from products or operations conducive to anonymity, or from the development of new technologies, it is essential on the part of these operators to implementation of internal control measures, approving the respective appropriate policies and procedures regarding due diligence, information, document conservation, internal control, risk assessment and management, as well as guarantees of compliance with communication obligations, in order to prevent and impede operations related to Money Laundering or the financing of terrorism.
In summary, the most appropriate thing would be for these operators to constitute an internal control body responsible for the application of said policies and procedures and an express customer admission policy. Likewise, (i) said policies and procedures should be reflected in the corresponding Money Laundering Prevention Manual which must be made available to the Executive Service for the Prevention of Money Laundering (SEPBLAC); (ii) Additionally, they should undergo an annual External Examination issued by an External Expert registered with the SEPBLAC, who must communicate annually to the same the effective completion of the exam and; (iii) finally, they must annually guarantee the delivery of training for employees on Money Laundering and terrorist financing.
Focusing on the ruling that is the subject of this post, we see how Caja Laboral is actually in the duty to identify the identity of any natural or legal persons who intend to establish business relationships or intervene in any operations (art. 3 of the LPBC) having to apply reinforced measures in high-risk cases, among which are foreign currency exchange, non-face-to-face measures and those conducive to anonymity and new technological developments.s.
However, we cannot fall into ignorance of what the Bitcoin protocol, or the Bitcoin digital currency, means.
Although, the FATF in its June 2014 report states that the Bitcoin is a risky product, which may be related to money laundering, the acquisition of bitcoins through credit cards, as the lower court ruling says: «This is no more obscure than any online purchase made with a credit card»
Indeed, in order to operate with a credit card, it is necessary to go through the entire Money Laundering Prevention process that any financial institution has implemented, identification of the owner through ID, deeds, powers of attorney, evaluation of the purpose or nature of the business relationship, express customer admission policy, etc. Said payment, therefore, It would receive a treatment similar to a payment via bank transfer, which is normally used in the purchase and sale of bitcoins.
Therefore, by the mere fact of using a credit card in the purchase and sale of bitcoins, we should not classify said operation as high risk or lack of compliance with due diligence measures. On the contrary, we can consider them as a payment instrument that is economically and temporally limited with certain restrictions on use, both in the amounts and in the periods in which we can make said payments, as well as in the authentication and fraud management operation.
Notwithstanding the above, what is certain is that the Meetpays operator has not justified compliance with the Laundering regulations in the acquisition of bitcoins or intermediation of the Bitcoin seller, and this could cause the financial institution to have certain misgivings when operating or providing services via POS, because it does not know the origin of the seller’s funds and therefore we can «conclude that art. 7.3 law 10/2010 empowered «the financial entity to cancel or terminate the contract as a preventive measure due to the doubts it raised about whether the full identification requirements required by Anti-Money Laundering regulations could be met.»
Conclusions
We can conclude therefore, that the compliance regarding Prevention of Money Laundering constitutes an element fundamental for all those operators who intend to carry out purchases, sales or exchanges of digital currencies or bitcoins, it being necessary to establish a Money Laundering prevention policy that, among others, includes the following policies or procedures:
- Study and analysis of risk in operations.
- Formal identification of the client and establishment of certain economic thresholds for operations or accumulation of operations in certain terms.
- Filtered against European and American lists of people and entities with financial sanctions.
- Analysis of the purpose or nature of the client’s business relationship.
- Drafting client admission policies.
- Continuous monitoring of the business relationship
- Implementation of technical Alert systems based on the type of client, intervener and amount of operations.
- Identification of operations susceptible to Money Laundering.
- Establishment of internal complaint channels and communication procedures before the SEPBLAC.
- Drafting of the corresponding Prevention Manual.
- Constitution of an internal control body.
- Annual audits carried out by external experts registered with SEPBLAC.
- Staff training.
In addition to the implementation of the Anti-Money Laundering policy, it will be necessary to include the necessary technological controls and limitations that Bitcoin technology demands for correct compliance with the Prevention of Money Laundering, such as:
- Registration and storage of IP Addresses/Date/time of connection.
- Double user authentication codes through mobile phones.
- Limitation of encrypted connections via TOR or similar, as well as those made through a proxy.
- Exclusion of risk countries, territories or jurisdictions.
- Limitations on the number of operations (day, week, month, year)
- Monitoring of user behavior in the protocol chain or block, in cases of suspicion or enhanced investigation procedures.
- Audits and investigations into the origin of user funds.
- Copy or photocopy of the DNI with online authentication, including the video call in cases of enhanced investigation procedures.
However, although the implementation of said policy is already being carried out by different Spanish operators guaranteeing compliance with the Prevention of Money Laundering regulations, the ignorance of the blockchain, and specifically the digital currency Bitcoin, is producing some adverse effects in its development and implementation in Spain and in the European Union.
Currently, we are encountering a systematic rejection by the departments of Compliance of financial entities, as well as by the Spanish regulatory and supervisory authorities, producing, without a doubt, a delay in its implementation and development.
If we add to this the sensationalism of the news about Bitcoin, which focuses on adverse events such as the appearance of the network Silk Road (well-known online market that used the TOR network for the encryption of communications, closed on October 2, 2013 by the FBI) that operated with bitcoins for the payment of goods and services classified as illicit such as drug and weapon trafficking (such as drugs and weapons), or the bankruptcy of the largest bitcoin exchanger Mt.Gox, or the collapse of its value, in November 2013, which went from costing 1,000 euros to 300 in September 2014. News that produces nothing more than distrust in the market or the image of a high-risk technology that could be used to commit Money Laundering.
At this point, we believe it is necessary to reflection both on the part of judges, legislators and supervisory authorities when facing a technological phenomenon of such dimensions as Bitcoin. Although it is true that Bitcoin, given its properties, has been able to have a certain opacity on some occasions (due to the speed of transactions or the absence of the need for an intermediary to operate), it is no less true that cash withdrawn from an ATM is even more opaque, if you will, since it cannot be traced once obtained.
In this regard, it is necessary to mention that Bitcoin transactions are not anonymous, since the underlying technology of Bitcoin (the chain of blocks or blockchain), acts as a open and transparent accounting book for anyone who needs it, allowing draw and study any transaction from its origin.
Precisely, it was thanks to the traceability of Bitcoin transactions that allowed the FBI to reach the alleged creator of the aforementioned network. Silk Road. And it was, also thanks to the traceability of Bitcoin transactions, that Carl Force and Shaun Bridges, two former US federal agents, who allegedly stole bitcoins during the investigation by which the aforementioned Silk Road platform was closed, were arrested.
In short, we can say that we are faced with a technology that, for the first time in history, could be able to track or identify when and where exchanges have occurred.
Therefore, given that every bitcoin exchange operation is necessarily registered and certified in the blockchain or public registry, it is possible track and analyze the origin of funds in terms of Prevention of Money Laundering, both by the competent Authorities and by the obligated subjects, an issue that today would be unthinkable with cash.
If we add to this the different possibilities that exist today for the identification or limitation in the execution of operations by bitcoin purchase and sale operators, we can say that we find a technology that, well applied, can perfectly comply with the prevention obligations regarding Money Laundering, and thus provide its legitimate users with all its benefits.
We find, therefore, the largest universal accounting book ever created, which serves as a means of payment, and in which it is not necessary to trust a third party, be it a company, bank or government, and which complies with the five attributes of money or gold; is scarce (the issuance of bitcoins is limited to 21 million BTC), divisible (a bitcoin can be divided up to a million times, this being a figure that can also be expanded by consensus), transportable (allows you to carry out transactions with anyone in the world in real time and for free), durable, recognizable y fungible.
In short, operations with Bitcoin bring many benefits to the market. benefits, since there is no intermediary, transactions with this cryptocurrency are less expensive and faster than in traditional payment networks. Bitcoin allows you to carry out everything from large operations to small payments or micropayments, and can reduce costs for small merchants, or the cost of transnational remittances, improve access to capital in the third world, and protect against capital controls and censorship. However, despite our regret, its decentralized nature provides opportunities for its criminal use, hence the challenge for the Society is to develop processes that mitigate such uses and allow it to deploy all the benefits that both the communication protocol and the cryptocurrency or digital currency itself hold for its legitimate users.
[1] Law 10/2010, of April 28, of prevention of money laundering and terrorist financing
This series of articles has been written collaboratively by Fernando Mª Ramos Suárez, Managing Partner of DPO&it law and for Alejandro Gómez de la Cruz Alcañiz, Tax Lawyer in KPMG. Fernando Mª Ramos Suárez DPO&it law Managing Partner IT Lawyer: External Expert in AML/CFT tt. @fernandomosTI www.dpoitlaw.com ___ Alejandro Gómez de la Cruz Alcañiz KPMG Tax Lawyer Cryptocurrency tax specialist tt. @lawandbitcoin www.lawandbitcoin.com
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