CEO & Founder of Fedi, former CEO of the first UK Bitcoin exchange
Obi Nwosu, former CEO of Coinfloor, a regulated bitcoin exchange in the UK and Europe. Mr. Nwosu advocated for and worked with regulators, including the House of Commons Treasury Committee. He also advised the Metropolitan police, the Bank of England, HM Revenue & Customs, and the intelligence services in the UK. Coinfloor worked closely with regulatory advisors across Europe. Mr. Nwosu will describe the reason why civil society and politically-persecuted groups were unintentionally marginalised because of the way the existing AML/CFT regulations and directives work within the UK and in the EU.
Testimonial of Obi Nwosu:
My name is Obi Nwosu. From 2013 to 2021, I was the CEO of a UK-based Bitcoin exchange, Coinfloor, which had over 70% market share in the UK at one point. I was also the CEO of one of the first regulated Bitcoin exchanges in mainland Europe. During my tenure, we provided advice and education to various financial and intelligence institutions in the UK, such as the FCA, the Bank of England, and the Metropolitan Police, on how to use cryptocurrency to counter terrorist financing and reduce money laundering.
As someone with significant experience in both the cryptocurrency and regulated financial services industries, I want to emphasise that regulated financial institutions are committed to preventing terrorist financing and money laundering, as well as supporting human rights defenders and members of civil society. However, the current AML/CTF regulations often force them to inadvertently exclude, de-bank, or de-platform members of civil society.
This happens for four main reasons:
- The “Know Your Customer” (KYC) and “risk-based approach” to client onboarding
- The “Travel rule”
- The “Tipping off” rule
- The “fitness and proprietary” standards
I’ll explain how and why this occurs below and make recommendations on what can be done to avoid this.
1 – KYC, which stands for “know your customer,” is a process that financial institutions must carry out to verify the identity of their clients. The process is necessary because it helps institutions to identify and prevent the use of financial services by terrorists and money launderers.
While the KYC process is essential, it can be challenging for financial institutions to carry out the related risk-based approach without excluding innocent users. This approach requires institutions to assess the risk level of each new customer and determine if they are likely to engage in terrorist financing or money laundering. The assessment is often subjective, and there is no set formula to follow.
One of the major challenges faced by financial institutions is false information being spread about their clients, particularly those opposing, or targeted by, dictators and dictatorial regimes. This misinformation is often spread at a low cost through media channels and picked up by automated systems designed to check for adverse media about customers.
When negative news is flagged, financial institutions are required to spend time and money translating and fact-checking the information to decide whether to onboard the customer or not. This process can be time-consuming and costly, making it challenging for institutions to onboard the customers targeted by these regimes. In some cases, financial institutions may choose to de-bank or de-platform the customer instead of onboarding them, as it may be the more cost-effective solution.
In summary, while KYC is necessary, the related risk-based approach can be challenging for financial institutions. False information being spread about clients, particularly those opposing dictators and dictatorial regimes, adds to the difficulty of the KYC process. Financial institutions must balance the cost of onboarding a new customer with the potential risk they may pose to their business.
2 – The travel rule is a regulation that requires financial institutions, including those in the cryptocurrency space, to share KYC (know your customer) information with other financial institutions when their customers transfer funds. This is meant to prevent money laundering and terrorist financing by allowing the movement of funds to be traced through the global financial system. However, in countries where dictatorships exist, the banking sector is often captured by the regime. Therefore, any shared information with banks in those countries can be used and abused by those regimes. If an organisation, such as a human rights defender group, raises money in the West to help people living under a dictatorship, transferring that money through the banking system would reveal the organisation’s bank details, which can put the recipients of the money in grave danger, as they may be monitored, imprisoned, tortured, or killed. The travel rule prevents members of civil society from using the banking system to safely send money to recipients living in countries under dictatorships or totalitarian regimes, which represents more than half the people on the planet. Even if a sending bank chose not to provide the information, it would not help because the non-compliance would stand out and potentially put the recipients at risk.
3 – Tipping off refers to the requirements of financial institutions and their compliance departments, customer service departments, senior leadership team, and anyone who interfaces with customers to not explain or share their risk based approach rules and thresholds with affected customers. The reason why you would want to do this is clear from a money laundering/terrorist financing perspective.
If you were to explain the logic by which you decided to off-board a customer, then a group of money launderers or terrorist financiers could work out the logic you use to game the system so that they can always circumvent your controls by staying within the limits, rendering the risk based approach impotent. The problem with this is that dictatorships and authoritarian regimes know this. They know that if they keep spreading adverse media about someone, they will be off-boarded, and that when they are off-boarded or de-platformed, they will have no recourse. The financial institution is not able to explain the logic that they used to off-board them because that would be an example of tipping off, which would go against financial services regulation.
The problem here is that if you have been off-boarded incorrectly, complaining does not help. Part of the risk-based approach is often whether or not people are very forceful in how they deal with customer service agents. This is often suggested as a criterion financial institutions should take into account when deciding whether to onboard a customer. A customer who is often forceful with the customer service department, complains or pushes too much can be further identified as a high risk for money laundering. So not only do you have no recourse, but if you try to complain, that makes it even less likely that you will get an account or service.
4 – As a former industry professional with nearly a decade of experience, I can attest to the importance of the fitness and propriety requirements in the regulated financial services industry. Fitness ensures that professionals know the law and regulation and that they are able to identify and act upon suspicious activity for the protection of customers and to reduce the risk of terrorist financing. However, the punishment for not behaving in a fit and proper manner can be extreme, including being stripped of your title and being unable to practise in the industry again. Propriety is also a subjective measure, which can lead to a risk-averse culture and a higher level of customers being off-boarded. Industry professionals are often silent about discrepancies or exploitable elements within anti-money laundering and terrorist financing rules due to fear of any potential negative impact on their careers. As a former industry professional, I feel it is important to speak up about these discrepancies when my former industry colleagues can not.
Financial institutions are facing a complex challenge when it comes to providing services to members of civil society, activists, human rights defenders, and NGOs. In order to comply with regulations and protect against financial crime, institutions must implement KYC (know your customer) procedures and a risk-based approach to identify and mitigate risk and not “tip off” highlighted clients about their internal risk thresholds. They may also be required to screen for adverse media, and comply with the “travel rule” which mandates the sharing of certain customer information between financial institutions during transactions.
However, for some individuals and organisations seeking to be clients of these financial institutions, these requirements can result in being de-banked or de-platformed, with no recourse or allies within the industry to speak out against unfair treatment. This not only affects them, but also the thousands or even millions of people they support and represent, particularly those in marginalised parts of society or in other parts of the world who rely on them for financial support and aid.
As a result, these individuals turn to cryptocurrencies like Bitcoin and stablecoins as a last resort when they have no other banking options or cannot trust other banking options. They use these cryptocurrencies to send money to their loved ones, colleagues, or the people they are trying to
help in destination countries without them being targeted by dictatorial regimes. The recipients can then convert the cryptocurrencies back into local currency and use them to further their objectives, such as getting food, water, and medicine or mounting a defence against the sitting dictatorships.
To address this issue, we requests two things:
Firstly, provisions should be put in place to enable members of civil society to seek recourse if they have been de-banked or de-platformed. This should be mandated by the government, and potentially a third-party ombudsman could be appointed to determine the reasons for the banks’ actions and whether the person can be replatformed. This needs to be government mandated as the financial services institution has no financial incentive to do this otherwise and every incentive – both financial and regulatory – not to.
Secondly, members of civil society should be allowed to use services like Bitcoin and stablecoins and not be de-platformed or de-banked purely because they use these services. This is because these services act as the bank of last resort when there are few or no other banking services available and even with the first provision, the travel rule still precludes the use of the banking system in many cases.