Majority of crypto-asset firms unable to demonstrate that they met AML/CFT standards, according to FCA
Around 85 per cent of firms failed to meet the FCA’s minimum standards
The UK House of Commons Treasury Committee has published the Financial Conduct Authority’s (FCA) written follow-up to several questions asked during an oral evidence session on the crypto-asset industry.
The letter, which contributes to the Committee’s ongoing inquiry into the crypto-asset industry, explains that around 85 per cent of the crypto-asset firms that applied to register with the FCA “were unable to demonstrate they met the required, minimum standards.”
The FCA’s Executive Director of Markets Supervision, Policy and Competition provides further detail on the Committee’s question concerning the proportion of applications that have seen criminal activity when assessing crypto-asset firms through registration and the number of prosecutions in relation to information shared with law enforcement agencies.
The FCA explains that despite the high applicant rejection rate it only identified likely links to financial crime or direct links to organised crime in a small number of cases. Some of those cases that were referred to law enforcement are described as still ongoing. The FCA’s letter is keen to reiterate that just because a firm does not meet the required minimum standards does not mean that the it is involved or implicated in any criminal activity.
Since January 2020, firms involved in crypto-asset activities in the UK are required to register with the FCA as part of wider obligations to comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
In order to receive FCA authorisation all registered firms are required to have appropriate anti-money laundering and counter-terrorism financing (AML/CFT) systems and controls in place to counter the risk of being misused for financial crime.
The FCA comments that it identified “significant failures” at applicant firms relating to key financial crime controls such as customer due diligence, risk assessments, ongoing and transaction monitoring, governance and management information.
The regulator found that in many instances key personnel at applicant firms lacked the appropriate knowledge, skills and experience to carry out allocated roles and control risks effectively, and were unable to provide the necessary evidence to prove that they met the standards for registration.
During the Committee’s oral evidence session on 7 December 2022, the FCA explained that a significant proportion of applications from crypto-asset firms were of a poor standard, with only five per cent being progressed on the first attempt. Over 70 per cent of the total number of applications were withdrawn or failed.
Commenting on the FCA’s letter, Harriett Baldwin MP, Chair of the Treasury Committee, said: “We are in the middle of an inquiry into crypto regulation and these statistics have not disabused us of the impression that parts of this industry are a ‘Wild West’."
In addition to providing further clarity on crypto-asset firm registration, the FCA’s letter also provides more details in response to a question on the number of UK investors affected by the collapse of FTX and the scale of consumer harm.