Since the FCA assumed responsibility in early 2020 for the supervision of AML/CTF risks for any UK firms engaged in crypto-asset activity, the hurdle to obtain 5MLD registration has been set very high and very few firms have been successful so far. In view of this, we’ve set out five questions crypto firms should ask themselves prior to entering the registration application process, based on our observations from supporting applicants over the last three and a half years.
The FCA has steadfastly stressed its perception of the significant visible and invisible money laundering risks arising from any activity in the crypto asset class. As such, the regulatory body requires any UK firm wishing to engage (or continue to engage) in crypto-asset activity to undertake a rigorous registration application process.
Since the FCA started processing 5th Anti-Money Laundering Directive (5MLD) registration applications in January 2020, they have only accepted 43 applicants as registered firms for 5MLD supervision out of 326 received. In the past 12 months (to 1 October 2023), the FCA has only received 34 5MLD registration applications.
The four pathways adopted by the FCA for registration applications are registration, rejection, withdrawal and refusal. In the 12 months to 1 October 2023, the FCA required 66 applicant firms to withdraw their applications, i.e. 484% of those determined. The withdrawal option is generally accepted by applicant firms, as the alternative is refusal, which would create a negative precedent for any subsequent FCA applications.
In view of the difficulty applicant firms face in to obtaining FCA registration for 5MLD supervision, we recommend that prior to entering the application process, principals should ask themselves the following five questions.
1. Are your proposed crypto activities in scope for registration?
The following crypto activities being undertaken by a firm in the UK would require the FCA’s approval of a 5MLD registration application prior to commencing the activities:
- Exchanging, or making arrangements with a view to exchanging, crypto-assets for either fiat currency or another crypto-asset, or vice versa
- Operating a machine that uses automated processes to exchange money for crypto-assets or vice versa (e.g. an ATM)
- Providing custodian services for:
- Crypto-assets on behalf of your customers
- Private cryptographic keys to hold, store and transfer crypto-assets
- Carrying on the activity by way of business in the United Kingdom
This last point gives rise to a number of ancillary criteria that indicate whether or not the firm is in scope. As follows:
- Having a registered or head office in the UK where day-to-day management of these activities is carried out, irrespective of where (geographically) the crypto-asset activity is conducted
- Operating one or more ATMs in the UK
- Having any UK presence that is engaged in or facilitates crypto-asset activities
- The activity has a commercial element, e.g. issuing financial promotions
- The activity gives rise to a commercial benefit to the firm, whether direct or indirect
- What percentage of the firm’s overall income are represented by crypto activities
- The frequency with which the firm is undertaking the activity
2. Have you understood the FCA and JMLSG guidance on AML/CTF risks arising?
As part of the 5MLD application, an applicant firm will need to be able to demonstrate that it is fully conversant with the FCA’s guidance on the AML/CTF risks arising from its proposed business model. This includes its governance arrangements, thus requiring all members of the firm’s Board to have an in-depth understanding of the FCA guidance.
This is further enhanced by the requirement to have an in-depth understanding of parts I and II of the Joint Money Laundering Steering Group (JMLSG) guidance papers, where part II relates specifically to the AML/CTF risks arising from crypto activities.
3. Have you read and understood the FCA’s guidance on the 5MLD registration process?
The FCA’s expectations are that any applicants will have a full understanding of all the documentary requirements that form part of the registration application process, whether they are supporting or FCA templated.
As part of the FCA’s assessment of an application, the applicant needs to demonstrate that it is ready, willing and able to launch its business at the point of submission of the application. In the event that any of the documents the FCA considers to be of high importance are missing or have shortcomings, it is likely that the FCA will require the application to be withdrawn until the missing elements of or documents have been addressed.
In the case of major shortcomings in the documents submitted as part of the application pack, the FCA is likely to refuse to undertake an assessment thereof.
One document that will be key to the progression of the 5MLD registration application once submitted is the business-wide risk assessment (BWRA). This needs to be of sufficient quality, identifying and addressing all the risks identified within the Money Laundering Regulations (MLRs) themselves.
4. Have you identified an MLRO/Nominated Officer?
The FCA has set a very high bar for its assessment of the proposed MLRO/Nominated Officer as being ‘fit and proper’, or ‘trained and competent’, to undertake the role.
Candidates will need to demonstrate the following qualities (as per the FCA’s guidance in their feedback from March 2023): “relevant knowledge, experience and training as well as a level of authority, independence and sufficient access to resources and information, to enable them to monitor and manage compliance with policies, procedures and controls to carry out their roles and responsibilities under the MLRs.”
The guidance continues: “We will assess the fitness and propriety of the MLRO/Nominated Officer. This includes assessing whether they have acted and may be expected to act with probity. We will also assess whether the MLRO has adequate skills and experience to act in the role. We will refuse applications where the MLRO lacks fitness and propriety.
“The MLRO/Nominated Officer should have a sufficient understanding of crypto-asset-related technologies. They should also demonstrate that they have adequate skills and experience to manage the particular money laundering, terrorist finance and proliferation finance risks inherent within the applicant’s business model.”
In the case of crypto-assets this includes risks from related activities such as custody, exchange and initial coin offerings (ICOs).
5. Have you opened a corporate bank account for your firm’s flows in fiat currency?
One of the principal blockages to crypto firms being determined by the FCA as ready, willing and able to launch their business is the difficulty such firms are facing when trying to open corporate bank accounts.
Due to a limited risk appetite on the part of UK commercial banks to offer facilities to firms operating in the crypto-asset space, firms have either found it impossible or highly time- and resource-consuming to identify banks willing to open accounts. The timescales to go through the onboarding KYC/CDD processes are similarly onerous.
Once you have answered the questions above and wish to continue to undertake the FCA registration process to be supervised under 5MLD to undertake crypto activities in the UK, get in touch with our expert team to support you through the registration process.
Please contact either myself or Andrew Shrimpton (details below) for an initial exploratory discussion to establish what you’re seeking to achieve and how we can best assist you to realise your business ambitions in the crypto-asset space.