J5 Investigations and Regulatory Updates

The Joint Chiefs of Global Tax Enforcement, also known as the J5, has been at the forefront of the fight against financial crime, particularly in light of the COVID-19 pandemic, through a number of arrests and regulatory updates.

The J5 was formed in July 2018 by the Australian Criminal Intelligence Commission (ACIC) and Australian Taxation Office (ATO), the Canada Revenue Agency (CRA), the Dutch Fiscal Intelligence and Investigation Service (FIOD), Her Majesty’s Revenue & Customs (HMRC), and Internal Revenue Service Criminal Investigation (IRS-CI). The aim of the group is to combat international financial crimes including tax evasion and money laundering, particularly through the use of cryptocurrencies. The J5 works in cooperation with the Organisation for Economic Co-operation and Development (OECD) in order to encourage international cooperation in the fight against these crimes.

In February 2020, the J5 issued a statement reporting two arrests made in the Netherlands in relation to investigations into money laundering using cryptocurrencies. The Dutch FIOD made the first arrest in relation to suspicions of money laundering of 2.1 million euro, after the suspect made large transactions using a crypto credit card which he could not explain considering his income and assets. The second arrest was made in relation to suspected laundering of 100,000 euro through the crypto service provider Bextmixer.io. The FIOD had already seized data in May 2019 related to Bextmixer.io, which was shared with the J5 in November 2019.

Fraud schemes involving cryptocurrency related to the COVID-19 pandemic have also been on the rise, with the FBI warning against schemes such as blackmail attempts, work from home scams, products related to non-existent treatments or equipment and investment scams. Money fraudulently obtained through such schemes is then laundered using cryptocurrency. In this light, the J5 has taken further steps to eliminate these threats.

Apart from the arrests, some of the members of the J5 have also updated their laws to specifically prevent financial crime through the use of cryptocurrency. All member countries of the J5 i.e. Australia, Canada, the Netherlands, the United Kingdom and the United States have anti-money laundering and counter terrorist financing (AML/CFT) legislation in place, with some members having recently updated their laws in this regard.

The United Kingdom and the Netherlands have transposed the fifth Anti-Money Laundering Directive (5AMLD) into national law in January 2020 and April 2020 respectively. The provisions of 5AMLD bring cryptocurrencies and cryptocurrency exchanges within the remit of AML/CFT legislation, and also impose new regulations on cryptocurrency service providers and exchanges.

Some of the most major changes are taking place in Canada. The Financial Transactions and Reports Analysis Center of Canada (FINTRAC) is responsible for ensuring compliance with AML/CFT regulations in Canada. In June 2019, FINTRAC’s compliance mandate was extended to oversee cryptocurrency exchanges which will be required to register as money service businesses as of June 2020. FINTRAC’s aim for 2020-2021, as highlighted in its Departmental Plan, is the implementation of new regulations with regard to “virtual currencies, customer identification, beneficial ownership and foreign money services businesses”. Some of the changes to the AML/CFT framework will include new reporting requirements on virtual currency transactions and extending registration requirements to foreign businesses operating in virtual currencies.

Meanwhile, new cryptocurrency regulations are expected to be implemented in the U.S. following the publication of the National Strategy for Combating Terrorist and Other Illicit Financing by the U.S. Department of the Treasury on the 6th February 2020. Future developments will likely include the extension of the existing AML/CFT framework to all transactions in digital assets. The threshold for anonymous transactions might also be lowered from $3,000 particularly due to the increasing popularity of digital asset transactions. The Internal Revenue Service (IRS) has also issued an updated income tax form whereby taxpayers must declare whether they received, sold, sent, exchanged or otherwise acquired any financial interest in any virtual currency at any time in 2019.

Research suggests link between cryptocurrency regulation and market reactions

The Federal Reserve Bank of Dallas has recently issued a working paper on Cryptocurrency Market Reactions to Regulatory News, written by Raphael Auer and Stijn Claessens from the Bank for International Settlements. The research suggests that different types of regulatory updates have specific effects on the market reaction to cryptocurrency. General bans on cryptocurrencies, their classification under securities law, and news on anti-money laundering and combating the financing of terrorism have adverse market effects and lead to price drops.

On the other hand, the implementation of clear regulatory frameworks which are specifically designed for cryptocurrencies is linked to price surges. The research suggests that the introduction of new tailored regulation leads to favourable market conditions including an increase in transaction volumes due to heightened legal certainty.

On the 3rd April 2020, the BIS issued a report on Covid-19, cash and the future of payment which encouraged digital payments and Central Bank Digital Currencies (CBDCs) in light of growing concerns that Covid-19 could be transmitted through cash, credit cards and PIN pads. Thus, there is strong potential for the development of contactless digital payments.

 

 

 

Alexia Pollacco

Alexia Pollacco

Alexia is currently studying for a Bachelor of Laws degree at the University of Malta and will be graduating in 2021. Prior to joining Blockchain Advisory, she undertook a legal internship within the maritime sector of a local authority. Although her career is still at an early stage, the main legal sectors which interest her are transport and financial services.