Colombia addresses the problem of money laundering in virtual assets and the blockchain

Technologies such as blockchain and virtual assets or cryptocurrencies are emerging as a new way to do business. But in Colombia, as in many countries, until recently there has been no regulatory regime around the use of these assets as a medium of exchange.

This regulatory gap has resulted in widespread suspicion about cryptocurrencies – not least, they are equated with money laundering and terrorist financing. Many companies have become suspicious of these payment alternatives. Financial institutions, for instance, go on alert when a client decides to exchange its cryptocurrencies for standard currency. When such clients make this a regular practice, they may find their bank accounts are blocked. This response, designed to prevent money laundering, has resulted in significant lost opportunity – not just for these financial institutions, but for the Colombian economy.

In hopes of creating an enforceable regulatory regime related to the prevention of money laundering via crypto-assets and the blockchain, several Colombian regulators– the Superintendence of Companies, the Information and Financial Analysis Unit (UIAF), the Superintendence of Finance and the Tax Authority – have united explicitly to regulate the prevention of money laundering when using virtual assets or participating in the virtual asset market. Seeking to incentivize legitimate use of crypto-assets and lower money laundering risks, the regulators have been working together to create a system that will allow businesses to identify the parties behind any crypto transaction– with the goals of incentivizing wider use of crypto-assets and lowering the risk that such assets are used to launder illicit profits and fund illicit activities.

The Superintendence of Companies, in line with the recommendations of the Financial Action Task Force (FATF), has proposed guidelines for a risk-based approach to virtual currencies with the release in December 2020 of Circular 100-000016.

This Circular sets out companies that are required to adopt a system of internal compliance and risk management in order to mitigate the risk of money laundering and terrorist financing in their operations. These are companies:

1. that perform any of the following activities: exchange, transfer, custody or administration of virtual assets or exchange between virtual assets and fiat currencies, among others
2. with such activities individually or jointly equal to or greater than COP$100 million (around US$23,000) and
3. as of December 31 of the preceding year, the company had total revenues equal to or greater than COP$3 billion (around US$680,000) or had total assets equal to or greater than COP$5 billion (around US$1.15 million).

Such companies must implement risk management systems to identify, assess and mitigate money laundering hazards related to the use of virtual assets, by implementing technological tools that not only try to determine who is behind the transactions, but also who is behind any e-wallet involved in the transaction; and to identify whether such parties are related to the dark net, to high-risk jurisdictions, to mixers (also called tumblers) that seek to anonymize the traceability of funds, to ransomware, to wallets that have been related to stolen funds, and to any other identifiable means of illicit financial activity in the virtual space.

In addition to the Circular, last year the UIAF issued Resolution No. 314 of 2021, through which the obliged companies mentioned above must additionally design a robust and very detailed reporting scheme of alerts, transactions and suspicious operations that must be filed with the UIAF.

Resolution No. 314 of 2021 imposes the obligation to report to the UIAF any company or individual that carries out, for itself or on behalf of any third party, one or more of the following activities or operations, regardless of the amount of currency involved:

1. any exchange between a virtual asset and fiat currency
2. any exchange between different types of virtual assets
3. custody or administration of virtual assets or instruments that allow control over virtual assets
4. participation in and provision of financial services related to an issuer’s virtual asset activity and
5. any service related to virtual assets.

Additionally, the regulation implies that the companies or individuals obliged to comply with the reports are not only the suppliers or exchangers of virtual assets but in general are any corporation or individual that provides services related to virtual assets.

All these parties must periodically report individual transactions exceeding US$150; multiple transactions exceeding US$450; or any absence of transactions with those characteristics and (iv) active and inactive clients.

This young compliance regulation on crypto assets is strict. For companies, compiling the required, detailed information directly reduces the risk of failing to identify any money laundering intentions or transactions.

However, the system is not yet being widely adopted. At present, Colombian financial entities are, to a great extent, still blocking the conversion of virtual assets to standard currencies. That is, at this point in time, not much has improved for those seeking to turn their crypto-assets into legal tender, and for those using cryptocurrencies legally to improve their business processes. Maybe the regulation is too young; further, the regulators to date have not conducted any real enforcement of crypto compliance behavior, creating a certain amount of uncertainty. And, at a foundational level, many companies, and in particular financial institutions, are risk averse regarding virtual assets.

A Superintendence of Finance pilot project currently under way, the Sandbox, aims to create an alternative for the deposit and withdrawal of virtual assets and their conversation to standard currencies and vice versa. The project seeks to create a virtual asset exchange platform linked to financial deposit products.

We hope that Colombia’s new regulatory regime for virtual asset compliance will lead to market openness for the negotiation of virtual assets. Such a move would recognize the efficiencies of the blockchain and would assert the country’s confidence that implementing tools to mitigate money laundering risks is a sound business move. Today it is possible to know who is behind any crypto transaction and understand the transaction itself. To comply with the new regime, companies simply have to strengthen the way they mitigate money laundering risks through disruptive virtual asset monitoring tools which already exist in the market.

Learn more about these new approaches and how to implement anti money laundering prevention systems by contacting either of the authors.