The business of Vladimir Consulting Limited (VCL) involved trading in cryptocurrency such as bitcoin on peer-to-peer exchanges which provide a market place for sellers and buyers of cryptocurrency. The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) were amended with effect from 10 January 2020 to require cryptoasset exchange providers such as VCL to be registered with the FCA. VCL applied to the FCA in September 2020 and moved into a temporary registration regime pending the determination of its application.
In March 2022, the FCA refused VCL’s application (removing VCL from the list of firms with temporary registration). VCL referred the FCA’s decision to the Upper Tribunal and also applied to the Upper Tribunal for a direction that the effect of the FCA’s decision be suspended pending the outcome of the reference. By the time of the refusal, VCL was only trading in bitcoin on LocalBitcoins (the Exchange).
The FCA is required to refuse to register any applicant as a cryptoasset exchange provider if it is not a fit and proper person to carry on that business or if any officer, manager or beneficial owner of the applicant is not a fit and proper person. In making a determination, the FCA must have regard to certain factors including whether the applicant has consistently failed to comply with the MLRs. The FCA considered that VCL had consistently failed to comply with a number of requirements under the MLRs including the requirement to assess, and where appropriate obtain information on, the purpose and intended nature of a business relationship or occasional transaction.
When making a decision to suspend the effect of an FCA decision, the Upper Tribunal takes into account a number of matters including whether there is a case to answer and whether the suspension would prejudice the interests of persons intended to be protected (which required consideration of whether VCL would carry out its activities on a manner which was broadly compliant with the MLRs).
Compliance with MLRs
One of the matters in dispute between VCL and the FCA was whether VCL had a “business relationship” with its customers for the purposes of the MLRs which would require VCL to apply customer due diligence to all transactions (rather than to occasional transactions of €15,000 or more). VCL submitted that the MLRs required an assessment at the time contact with a customer was first established as to whether there was an element of duration to the relationship and that, at the time VCL’s customers first made contact, VCL had no expectation that this would be the case. VCL does not create customer accounts and has no contractual relationship with them but merely offers services on an ad hoc basis. In any event, VCL submitted that it did take steps to verify the identity and address of all customers and, in terms of assessing the purpose of transactions, VCL made a reasonable assumption that its customers viewed bitcoin as a store of value, like gold, and that the purpose of customers transacting in cryptocurrency was to increase (by purchasing) or crystallise (by selling) the value represented by the asset.
The FCA submitted that VCL did expect its relationships with most, if not all, of its customers to have an element of duration pointing out that a number of customers carried out repeat transactions and that VCL was wrong to make assumptions regarding the purpose of transactions but was required to establish each customer’s actual intention so as to be able to assess whether the customer posed a risk of money laundering.
The Upper Tribunal agreed with the FCA commenting that VCL was actively seeking to build customer loyalty and that VCL had a business relationship with at least some of its customers. The Upper Tribunal considered that VCL’s failure to ask for information about “the purpose and intended nature of the business relationship” gave rise to a significant concern that VCL had not complied with the MLRs which raised a serious case to answer. The Upper Tribunal also took into account that, having failed to identify business relationships, VCL would also have failed to carry out the ongoing monitoring of such relationships as required by the MLRs and was likely to have failed to properly apply the enhanced due diligence requirements.
An additional factor was VCL’s approach of placing considerable weight on a belief that other parties involved in the transactions (the banks and the Exchange) were regulated which it viewed as reducing its own money laundering risk. The Upper Tribunal agreed with the FCA that VCL had not fully understood its role as a “gatekeeper” and that, in the absence of a formal contract permitting reliance, it was required to apply the MLRs independently of the checks carried out by third parties.
VCL and the FCA also disagreed on other matters including VCL’s identification procedures, the need for adverse media screening and screening of politically exposed persons (PEPs). The Upper Tribunal placed little weight on these matters commenting that VCL’s approach to verifying identity documents may be broadly compliant with the MLRs and that there was no requirement in the MLRs to carry out an adverse media search or to use a commercial screening service.
Upper Tribunal’s Decision
Having balanced all the factors, the Upper Tribunal was not satisfied that VCL would carry on its business in a broadly compliant manner were the suspension application to be granted and so refused the application. The Upper Tribunal commented that VCL could withdraw the reference and could make a new application having taken specialist advice.
In terms of the FCA’s processes, VCL complained that the FCA had made its decision to refuse VCL’s application without having taken into account VCL’s representations. It appears that this may have been due to the fact that this was a case decided in accordance with the FCA’s executive procedure in which there is no requirement for applicants to be provided with the FCA’s response to representations. The Upper Tribunal commented that this practice was likely to lead to more references being made to it and the FCA’s previous practice of disclosing communications between the investigation and decision-making teams obviously assisted the subject of the decision in understanding why representations had not been accepted.
VCL also expressed disappointment to the Upper Tribunal regarding the failure of the FCA to take a more constructive approach. The Upper Tribunal commented that, where the FCA has taken a particular stance in relation to the application of its guidance to a new industry (such as cryptoasset exchanges) as appeared to be the case in relation to adverse media and PEP screening, it would be helpful if the FCA’s position were to be set out in advance “together with practical options so businesses acting in good faith can know whether they have met the requirements of the MLR as interpreted by the FCA”.