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Upper Tribunal not satisfied that cryptoasset exchange provider would comply with Money Laundering Regulations

Posted on 25 July 2022

The Upper Tribunal published its judgment in Vladamir Consulting Limited v FCA last week, the second decision to be released on the topic of cryptoasset exchange.

Vladimir Consulting Limited (VCL) had been a cryptoasset exchange provider (CEP) who bought and sold cryptocurrency on LocalBitcoins, a P2P exchange. After The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) were amended in January 2020, VCL applied to be registered as a CEP with the FCA, per Regulation 57. During this time, VCL was temporarily registered to allow it to operate as a CEP. The FCA issued a Decision Notice refusing the application and consequently, VCL's temporary registration ceased to have effect.

VCL made a Reference to the Upper Tribunal by way of an appeal against the Decision Notice and applied for a direction that the effect of the Decision Notice be suspended pending the determination of the Reference (the Suspension Application).   

Based on Rule 5 (5) of The Tribunal Procedure (Upper Tribunal) Rules 2008 and the judgment in Sussex Independent Financial Advisers Limited v FCA [2019] UKUT 228 (TCC), the Tribunal stated that "the essential question is whether we can be satisfied that if the Suspension Application is granted VCL would, pending the determination of its Reference, carry out its activities in a manner which was broadly compliant with the MLRs."  

The Tribunal therefore considered each of the issues raised by the FCA where the FCA argued that VCL had consistently failed to comply with requirements of the MLRs. Notable points that the Tribunal placed weight on included:

  1. VCL had failed to understand the term “business relationship” under Regulation 4(1). VCL argued it did not establish a business relationship with any customer; instead, each transaction was on an “occasional” basis.

    The Tribunal agreed with the FCA. VCL was actively seeking to build customer loyalty and had succeeded in the sense that it had over 100 repeat customers in a three-month period.
  2. VCL had failed to comply with CDD measures under Regulation 28(2)(c).

    The Tribunal agreed. VCL’s failure to ask for information about the purpose and intended nature of the business relationship gave rise to a significant concern. There were also three linked factors that increased the weight of this issue (see paragraph 71 of the judgment).
  3. VCL had relied on AML checks carried out by others despite not having contracts with those businesses (as required by Regulation 39).

    The Tribunal found that VCL failed to understand that all regulated entities are “gatekeepers” of the AML regime. VCL did not have contractual relationships with the banks or with LocalBitcoins. VCL relied heavily on its belief that these businesses were regulated and viewed this as reducing its own money laundering risks. This was not an approach permitted by the MLRs.
  4. The FCA also decided that Mr Vladimir Shadrunov, the only director and employee of VCL, did not have “adequate skills and experience” and so was not “a fit and proper person to carry on the business of a cryptoasset exchange provider” as required by Regulation 58A (2). As the only director and employee of the company, VCL also did not have adequate skills and experience.

    The Tribunal agreed. His understanding of the meaning of “business relationship” and his assumptions as to the purpose of customers’ transactions indicated that he did not as yet have sufficient experience of the MLRs. This was exemplified by the linked factors outlined at paragraph 71.

Carrying out the above balancing exercise, the Tribunal was not satisfied that VCL would carry on its business in a broadly compliant manner were it to grant the Suspension Application and therefore was not satisfied that allowing VCL to continue to carry on its activities pending the determination of the Reference would not prejudice those who are intended to be protected by the FCA's Decision Notice.

Waqar Shah, Partner Said:

"This is the second case in six months dealing with the FCA registration of a CEP, following the decision in Gidiplus Limited v FCA. There has been a recent explosion of interest in the crypto space. As this nascent sector continues to grow, there will be teething issues across the legal industry ranging from taxation rules to regulatory frameworks. The compliance of CEPs with money laundering rules is just another chapter in the shift towards a crypto world".   

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