When the European Parliament introduced the risk-based approach 4th Anti-Money Laundering Directive (4MLD) in June 2017, it was a response to the threat of money laundering and fundamentally changed the way businesses handled such criminal activity within the European Union.
Just 10 months later, the EU announced the 5th AML Directive (5MLD) in April 2018 with the core aim being to address modern-day money laundering concerns that were not covered in the 4MLD and building on regulations currently in place. The main changes are to increase transparency around beneficial ownership information and trusts and direct access to this information.
According to a report by the UK National Crime Agency, over ‘£131 million was denied to criminals as a result of DAML (Defence Against Anti Money Laundering) requests in 2018-19’.
4MLD required obliged entities to provide evidence that they have undertaken appropriate levels of customer due diligence (CDD) not just when on-boarding a customer, but throughout the whole customer journey.
In the 5MLD there is an extension of sectors that will now become obliged entities and in scope of the updated regulations.
There are some professional service providers such as law firms, company service providers, accountants and estate agents who were previously out of scope but will now be included. Any newly obliged entities will have to implement robust AML processes and policies to comply with the new money laundering regulations as of January 2020.
Likewise, if any other sectors now find they are now transacting with a higher risk sector they will need to carry out a risk assessment and ensure they conduct appropriate Customer Due Diligence (CCD).
The below list is a guideline on who needs to comply with 5MLD, these could include (but are not limited to):
· Banks and credit institutions.
· Stock brokers and investment firms.
· Insurance companies and insurance intermediaries.
· Auditors, accountants, book-keepers, tax advisors.
· Property dealers and estate agents.
· Trust or company formation and management.
· Legal services.
· Companies trading in goods for cash of at least £13,000.
· Auction platforms.
· Crypto currency trading platforms and brokerages.
· Art dealers with cash transactions.
*Each business should check if they fall into the scope of having to comply with 5MLD, the above should be seen as guideline only.
Virtual currencies, also known as cryptocurrencies have been a well-known offender to the aid of money laundering for quite some time and are going to be further scrutinised in the 5th AML Directive. 5MLD is trying to define the grey area of what cryptocurrencies are, and have introduced a legal definition for it;
a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency, and does not possess a legal status of currency or money, but is accepted by natural or legal persons, as a means of exchange, and which can be transferred, stored and traded electronically.
Cryptocurrencies currently work without any government legislation and the government’s aim is to stop cryptocurrencies being utilised for criminal activity and money laundering by having legislation in place to stop any money being transferred undetected. Under the 5MLD, any changes set up will need to have government approval where previously this wasn’t a legal requirement.
The European commission has identified cryptocurrency exchanges and custodian wallet providers as the key players controlling access to cryptocurrencies. It will make a significant new legislation step in how virtual currency exchanges and custodian wallet providers are treated. The introduction of the 5th EU Directive would make cryptocurrency exchanges and custodian wallet providers considered under the 4th AML Directive’s definition of “obliged entities”, meaning customer due diligence and the same preventative obligations surrounding that will be required for cryptocurrencies as other firms under the 4th AML Directive.
The 5MLD also regulates the cryptocurrencies themselves. They must now be registered with their local authority, such as the Financial Conduct Authority (FCA) in the UK and BaFin in Germany.
Following suit from cryptocurrencies, prepaid cards are also seeing a crackdown. The 4MLD introduced a €250 monthly transaction limit on prepaid cards before any due diligence had to be carried out, the 5MLD has lowered this further to €150. If a single transaction hits the full €150 limit, the card owner will be screened against PEPs and Sanctions. The maximum amount for online transactions on a card is €50.
This has primarily been put in place to stop criminals using multiple pre-paid cards and transferring money around without any due diligence being carried out. The EU are hoping the lower limit will discourage money launderers from using pre-paid cards to break the law.
Additionally, prepaid cards issued outside the EU are now prohibited unless they were issued in a territory enforcing legislation equivalent to the EU’s AML/CFT and KYC standards. Organisations and entities that are obliged to comply with these regulations must review their procedures for dealing with prepaid card payments, and put criteria and mechanisms in place throughout their systems to identify (and refuse) transactions using cards from non-EU sources. They must also know the due diligence needed to be carried out on EU prepaid cards once €150 has been hit in a single transaction.
The EU parliament are also keen to prevent money being laundered through the purchase of high value goods, placing legal obligations on these dealers to guard themselves against being used for money laundering or terrorist financing purposes.
High Value goods dealers now have AML/CFT reporting obligations placed on them and will have to perform due diligence procedures on customers. All dealers will have to apply Customer Due Diligence (CDD) to all cash transactions of €10,000 or more in a single transaction or a series of linked transactions. Due diligence must include ID verification (photo ID) plus a recent utility bill as proof of address. These documents then need to be kept on file with the Sales Order for inspection by an Authorised Officer of the Anti-Money Laundering Compliance Unit (AMLCU).
All documentation relating to transactions must be retained for a period of 5 years.
Beneficial Ownership had a prime focus under 4MLD, where it required that member states each maintain a central register of beneficial owners or corporate and other legal entities; and the new directive will build on those steps. To mitigate risk and money laundering prevention, under 5MLD UBO lists drawn up under 4MLD are to be made publically accessible in the effort of transparency, and requires that any obliged entity entering into a new business relationship with a UBO obtains either proof that they are registered or an excerpt of the register. Any member of the public can now access beneficial ownership information held in the register for corporate and other legal entities without having to demonstrate legitimate interests.
All member states that have to comply need to strengthen their UBO verification mechanisms to ensure the information they carry is as up to date and reliable as possible. Additionally, obliged entities and competent authorities could also be required to report any discrepancies they come across on UBO lists.
The 4MLD empowered the European Commission to identify ‘high risk third countries’ with strategic deficiencies in their national anti-money laundering and counter financing of terrorism regimes that pose significant threats to the financial system of the European Union. It was brought into play to create a consistent approach to dealing with high risk countries.
For 5MLD, the criteria has broadened for the European Commission in assessing high risk third countries. As a result of the listing, banks and other entities covered by EU anti-money laundering rules will be required to apply increased due diligence checks on any person or entity, especially based within these high risk third countries. This is to better identify any suspicious money flows.
Increased measures would include:
Companies should be aware of which jurisdictions are on the list maintained by the Office for Financial Sanctions Implementation.
Similar to creating UBO lists and making them accessible, 5MLD will enforce PEP lists for EU member states. All states must compile and publically release a functional PEP list, detailing the exact functions that qualify as prominent public functions. Additionally, prominent functions of any international organisations hosted by the member state will need to be included. However, the list will not name specific people fulfilling those roles as this could be constantly changing. This is designed to keep admin to a minimum and aid smaller compliance teams when doing due diligence. All lists must be accurate and conform to FATF guidelines for global consistency.
This requirement will also extend to accredited international organisations, and the EU will also release an EU-level version of the list. Enhanced due diligence measures will still be required if a PEP is identified.
The content on this page is provided for general information only and is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content on this page.