Money Laundering in an unregulated Virtual Market

The first months of term of the awaited Law n.º 58/2020, of 31st of August, that (already late)  transposed the Directive (EU) 2018/843 of the  European Parliament and Council, of 30th of May 2018, promoted deep legislative changes in the Portuguese legal framework. Enforced the modernization of the outdated prevention means of the use of the financial system for purposes of money laundering or terrorism funding and consolidated combat methods against money laundering through penal law.

Money Laundering: First steps

The law came into force on the 1st of September of 2020 and originated changes in diplomas of the most utter importance for financial activity in Portugal. The main focus in the Law n.º83/2017, of 18th of August, that established combat measures against money laundering and terrorism funding. At the same time the Law n.º89/2017, of 21st of August, approved the Legal System of the Central Registry of Effective Beneficiary.

The legislative surge of the Portuguese State took on as a main course of action the need to fill the existent legal gap over the theme money laundering. The urge to act on the prevention of money laundering was specially noted when regarding the use of cryptocurrency for purposes of laundering the proceeds of crime.

Money Laundering and cryptocurrency

Indeed the main gap and that could create the scenario for money laundering in an unregulated market is cryptocurrency. Before these legal exchanges European and National wise it was a completely unregulated market. The short time that it was needed to become known was not accompanied by the legislator and the conditions needed for non  regulated business were created, something that nowadays is not that easy.

Indeed, the rising popularity of cryptocurrency as a means of exchange and investment in the financial markets, in union with the lack of regulation of a new and attractive virtual system, was allowing to dilute the proceeds of crime in both the national and European financial system. Taking advantage of the anonymity granted by the digital platforms of virtual assets trading and promoting a money laundering scenario.

Legislator first steps 

The European Parliament and the Council directive 2018/843 from 30 of May of 2018 has defined as obliged entities only “providers of exchange services between virtual currencies and fiat currencies, and custodian wallet providers, are registered, that currency exchange and cheque cashing offices, and trust or company service providers are licensed or registered, and that providers of gambling services are regulated” in the point 29. The Portuguese Legislator went beyond on what it was the directive explanation with the intention of leaving no space to use cryptocurrency has a money laundering scheme.

The Portuguese legislator went beyond of what was imposed onto him by the Directive  by establishing as obligated, any entity that could work with cryptocurrency and facilitate the money laundering process.With new legal framework any financial and non-financial entity that carry out any activity with electronic currency, with the imposition of stricter identification and due diligence procedures and the obligation of prior registration of these entities to prevent money laundering.

Therefore, to prevent money laundering, the legislator decided some measures that should take place to prevent the usage of cryptocurrency as a money laundering scheme. He decided that an analysis should take place as an investigation of the occasional transactions that could be executed in virtual assets when the value exceeds € 1.000,00 (a thousand euros).

Money Laundering and the Portugal Bank

The Banco de Portugal is now the entity responsible for registering these entities, for ensuring compliance with the applicable legal and regulatory provisions on the prevention of money laundering and terrorism funding. And it is also responsible for making sure that the legal framework is abided and to create aplicable laws in matters of money laundering prevention and terrorism funding.

The sanction system is also within the Banco de Portugal responsibility. The sanctions can be of particularly serious administrative offenses which predict fines ranging from € 50,000.00 to €1,000,000.00 for legal persons or similar entities and from € 25,000.00 to € 1,000,000.00 for individuals.

Regarding the impact of the transposition of the directive on the Legal Framework of the Central Registry of Effective Beneficiary, the concept of effective beneficiary was broadened to include collective investment undertakings and trusts. It changed the regime applicable to the registry of the effective beneficiary RCBE, including it in the scope of updating duties and access rights, in compliance with the rules applicable to data protection.

Money Laundering and penal sanctions

In turn, the legal sanctioning of money laundering was subject to an expansion of the criminal type prescribed in the Penal Code through. On one hand, the explicit inclusion of new illicit facts common in underlying crimes regarding laundering, such as scam, computer fraud, terrorism, insider trading, market manipulation, among others. On the other hand, the broadening of the concept of advantages gained through these illicit facts.

Although around 5 months have passed since Law n.º58/2020, of 31st of August, came into force, its precise enforcement still has not allowed us to draw conclusions regarding its efficiency in the effective combat against money laundering an terrorism funding. We believe that the fast evolution of financial activities that use cryptocurrency will be this measure package’s stress test, which will allow to draw the true conclusions regarding its efficiency on money laundering.

The content of this information does not constitute any specific legal advice; the latter can only be given when faced with a specific case. Please contact us for any further clarification or information deemed necessary in what concerns the application of the law.