The Fifth Anti-Money Laundering Directive (5AML) and eIDAS may empower Europe to create the world’s first digital single market, according to Electronic IDentification CEO Iván Nabalón.
All EU member states had until January 10 to implement 5AML into their law or risk being dragged before the European Court of Justice. However, a handful of EU member states have still not implemented the regulation into their laws, which has postponed enforcement. The European Commission has acted quickly on this and is trying to speed up the countries still lagging behind. In February, the Commission distributed legal warnings to Cyprus, Hungary, the Netherlands, Portugal, Romania, Slovakia, Slovenia and Spain for not implementing the rules yet. If they fail to heed the warning and take remedial steps, they may end up being fined.
For Iván Nabalón, CEO at Electronic IDentification, the RegTech company, these delays are hurdles to overcome before his industry can leverage the business opportunities of 5AML. He believes that, once the directive is fully implemented across the EU, it will present innovative RegTech companies with the prospect of combining it with the Electronic Identification and Trust Services (eIDAS) regulation.
“[Implementation] is lower than we would like to see, but I think the market is, is eager to see these changes,” said Nabalón. “This is because the fifth directive introduces new things for the FinTechs and for creators and when they are regulated, they can operate openly and widely across Europe.”
The opportunities are closely linked to how these two regulations work. Starting with 5AML, the directive is a serious update to the 2017 4AML. It aims to plug some holes left by the former regulation and to keep up with emerging technologies such as cryptocurrencies, which feature heavily in the regulation. Essentially, digital currencies, crypto wallets and trading platforms are now subject to the same AML checks as other providers.
Some of the other highlights of 5AML include credit institutions and financial institutions are no longer able to keep anonymous accounts. Moreover, the threshold on anonymous prepaid cards is now €150, down from €250.
Similarly, eIDAS was first enforced in 2016. The legislation introduced principles for identity verification and electronic document authentication. The regulation also set out a common framework for cross-border recognition of electronic identification and consistent rules for digital verifications, ensuring the whole of Europe is using the same standards.
By AML5 and eIDAS working in tandem, Nabalón said it will create the concept of a “digital single market.” eIDAS creates regional identity document, which helps accelerate and streamline interactions between member states in all industries, particularly the movement and use of financial services by consumers. Combining 5AML, eIDAS, GDPR and PSD2, Europe is slowly creating a strong and secure ecosystem of cross-border collaboration.
“It means that we can operate as in Spain, and easily expand into Germany and France,” said Nabalón. “We can adapt to easily onboard new customers in every EU member state. It means that we can work as financial players in a market of 450 million citizens, bigger than in North America and this is a first system to build the digital single market, so it leaves a huge opportunity.”
Previously, financial firms wishing to operate within the EU had to meet the AML and know your customer (KYC) requirements of each individual country they wanted to operate in.
eDIAS and 5AML have helped to change this by establishing the standardised approach, easing the operation across Europe. While they may not realise it, consumers are going to benefit greatly from this new service, believed Nabalón. As the world is becoming a more digital, consumers want more streamlined online processes with as few burdensome tasks as possible.
A study from Forter recently claimed that nearly half of UK customers would likely abandon future purchases if they had to complete multi-step authentication processes, as outlined by PSD2’s strong customer authentication rules. While these steps are being introduced to better protect customers from fraud or criminal activity, clearly many people still prioritise efficient and easy processes.
Traditional due diligence and onboarding procedures are long and tiresome, requiring lots of documents and steps. Leveraging the opportunities of eIDAS, RegTech companies can provide an easy way of keeping compliance but without onerous onboarding workflows.
Electronic IDentification is one of these services. The startup offers a digital identification verification service which uses real-time video to ensure strong authentication of new customers. When a customer wants to open an account at a traditional financial institution, they have to go to the local branch to do so, this way ensures an account is not being created in a false identity. Obviously, a fully digital business cannot do this, so they need a digital solution which can meet the same level of authentication and legal compliance as a face-to-face interaction.
When verifying identity online, there are a number of deception tactics a KYC solution needs to be able to detect. These include fake IDs or people wearing masks of someone else. A new tactic is using deepfakes which leverage AI to highly video where one person’s face can realistically be superimposed upon someone else’s. This is where video identification services are able to shine, as a real-time video can be better equipped to uncover deceptive tactics compared to still images.
Electronic IDentification also helps to bolster the identification process by leveraging digital signatures. When sending a document online it is hard to ensure the correct person has seen it and signed off on it, but e-signature technology lets a user verify themselves and sign the document, increasing confidence in operations.
Money laundering is still a major problem for financial services. It is a tough task for companies to completely remove the risk of it happening. A study from Encompass Corporation claimed that there were 20 AML fines between 1 May 2019 and 31 August 2019, which totalled $325m.
Enthusiasm for companies dealing with AML and KYC problems is clearly seen by investor appetite. Between 2014 and Q1 2019 there was a total of $10.9bn invested into the RegTech sector, of which, over half went into startups offering solutions addressing these challenges.
The number of fines hitting the market and the development of new technologies, updates to regulations, like AML, are clearly needed. “We need to progress and progress faster than we have done so far,” said Nabalón. “It takes a lot of time to deliver a new regulation, enforce it and for it to transform the market locally. It is important to be faster when going live with a regulation.”
Regulators are clearly taking the initiative to move quickly with AML. There was a relatively quick turnaround for 5AML which was only enforced around two years after AML4. However, things have shifted into the next gear, with the 6AML already set for a December 2020 implementation.
“I think it’s a good point that the regulators are going faster to meet the new developments, for the introduction of digital currencies, FinTechs and neobanks,” concluded Nabalón. “I think they are updating the regulations, because they are trying to adopt and adapt to the new challenges in the market.”
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