Introduction
The Fifth Money Laundering Directive (5MLD), the latest in the EU’s arsenal in combating financial crime, introduces key changes to the current anti-money laundering (AML) regime. The new rules are part of the European Commission’s (Commission) wider action plan for strengthening the fight against terrorist financing, which is a direct result of the 2015 terrorist attacks in Paris.
Member States have until 10 January 2020 to implement 5MLD into national law, on which date it will amend the Fourth Money Laundering Directive (4MLD).
This article discusses the key changes under 5MLD and how they may impact firms from a regulatory compliance perspective.
Extending the scope to additional service providers
To address the growing money laundering risks associated with cryptocurrencies, virtual currency exchange platforms (platforms used to exchange virtual for real currencies) and custodian wallet providers (services that provide virtual wallets from which payment in virtual currencies can be made or received) will be brought within the scope of 4MLD.
As ‘obliged entities’, these cryptocurrency service providers will be subject to the same obligations as other financial services firms to implement appropriate AML policies, systems and controls.
In practical terms, this means that they will be required to register with their national AML supervisor, conduct risk assessments and staff training, implement client due diligence (CDD) processes and have mechanisms to report suspicious transactions.
The scope of 4MLD has also been extended to include all forms of tax advisory services (in addition to auditors, external accountants and tax advisors), as well as letting agents and art dealers with respect to transactions that amount to EUR 10,000 or more.
Clarifying enhanced due diligence EDD measures for high-risk third countries
Under 4MLD, firms are required to apply mandatory EDD measures to countries which are designated by the Commission as having strategic deficiencies in their national AML and CTF regimes. The specific EDD measures carried out in relation to these high-risk third countries are currently determined at the national level. To reduce the risk of loopholes being created by Member States with lower EDD requirements, 5MLD clarifies and harmonises the EDD measures at EU level.
The EDD measures prescribed by 5MLD are:
- obtaining additional information on the customer and on the beneficial owner(s).
- obtaining additional information on the intended nature of the business relationship.
- obtaining information on the source of funds and source of wealth of the customer and of the beneficial owner(s).
- obtaining information on the reasons for the intended or performed transactions.
- obtaining the approval of senior management for establishing or continuing the business relationship.
- conducting enhanced monitoring of the business relationship by increasing the number and timing of controls applied.
- selecting patterns of transactions that need further examination.
The above checks are considered a minimum set of requirements to be applied by all firms when dealing with high-risk third countries. To ensure compliance, firms will need to assess the EU’s list of these designated countries and update their due diligence processes.
In addition to the above, 5MLD also introduces a list of countermeasures that firms may apply. These include the application of additional elements of EDD, introducing systematic reporting mechanisms and limiting business relationships or transactions with high-risk third countries.
Member States will also be allowed to restrict obliged entities from opening branches/subsidiaries in high-risk third countries, and to restrict the opening of branches in a Member State of an obliged entity based in a high-risk third country.
With respect to the identification of high-risk third countries, Members of the European Parliament (MEPs) recently passed a resolution calling for the establishment of a new methodology and for the Commission to apply a transparent process with clear and concrete benchmarks.
Improving the identification of Politically-Exposed Persons (PEPs)
PEPs are another high-risk category for which firms are required to apply EDD measures under the current AML regime. 5MLD introduces changes to help with the identification of PEPs.
PEPs are defined as individuals who are or have been entrusted with prominent public functions, including members of legislative bodies, government ministers, judges, high-ranking members of the armed forces and senior officials of state-owned enterprises.
Under MLD5, each Member State will have to issue a list setting out which functions qualify as “prominent public functions” according to its national laws and regulations. Similarly, the Commission will create and maintain an equivalent list of the functions that qualify as prominent public functions in EU-level institutions and bodies. It will also create a single consolidated list of all prominent public functions, which will be made public.
Firms will remain under their existing obligations to identify whether their customers (or beneficial owners of their customers) are PEPs, and to apply EDD accordingly.
Lowering the threshold requirement for CDD on prepaid cards.
The Commission aims to substantially reduce the risk of anonymous prepaid instruments (e.g. gift cards, travel cards) being misused for the purposes of money laundering and/or terrorist financing. 5MLD lowers the threshold requirement for CDD on prepaid card transactions from EUR 250 to EUR 150. The threshold for online transactions with a prepaid card is EUR 50.
Anonymous prepaid cards issued outside the EU will only be accepted if their issuance meets requirements equivalent to the EU AML regime.
Increasing transparency of beneficial ownership information
4MLD placed a requirement for corporates and taxable trusts to obtain and hold information on their beneficial ownership and to register this information with a central national register. This register is accessible to competent authorities, Financial Intelligence Units (FIUs) and obliged entities for CDD purposes.
5MLD expands the scope of the beneficial ownership register to include all trusts, regardless of whether they incur a tax consequence, and also to any legal arrangement that is similar to a trust. Member States have some discretion as to which trusts are included.
5MLD also widens access by making the beneficial ownership register publically available where legitimate interest can be shown. Access to beneficial ownership information in relation to a trust with a controlling interest in a non-EEA company can also be obtained if requested in writing.
Finally, the Commission aims to achieve a higher level of transparency through the interconnection of national registers and information sharing across the EU.
These changes mean that trustees in particular will need to consider the implications coming within scope of the EU’s AML regime. This could require substantial investment in terms of operations, systems, processes and time to enable trustees to obtain the relevant information, complete initial registrations, maintain accurate and up-to-date records and comply with ongoing reporting requirements.
A final word on cryptocurrencies
Much of the attention on 5MLD has been on the new regulations imposed on cryptocurrency service providers. The cryptocurrency market has grown exponentially, yet it still lacks a consistent legal or regulatory framework.
5MLD is significant because it marks a key development in global cryptocurrency regulation by introducing a uniform framework for regulators across the EU to adopt. It also provides clarity by introducing an official definition for “virtual currencies”, thus paving the way for further regulation.
It is worth noting that the Financial Action Task Force (FATF) standards for regulating the cryptocurrency market go further than those in 5MLD, and some Member States are taking them into account to develop a comprehensive regulatory approach.
First published on Thomson Reuters Regulatory Intelligence on September 27, 2019.
