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How is the EU tackling financial crime?

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A brief exploration of the Fourth Anti-Money Laundering Directive

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The underlying objective of the Fourth Anti-Money Laundering Directive (AMLD 4) is to update and enhance the EU’s anti-money laundering (AML) and counter-terrorist Financing (CTF) laws.

The directive aims to ensure that Member States of the European Economic Area can efficiently be targeted towards the areas of higher risk, allow greater consistency of rules across the EU, simplify the cross border trade and implement the Financial Action Task Force (FATF) recommendations. After the enforcement of AMLD4, Member States will be given two years to transpose it into national legislation and it will have the status of a minimum harmonizing directive.

What are the most notable and key changes under the AMLD 4?

1. Beneficial owners: Simplification of beneficial ownership through public registers.
2. Due diligence: Removal of the automatic entitlement to apply simplified customer due diligence (SDD) when dealing with specified customers and products.
3. Risk assessments: Introduction of risk assessment at EU and national level.
4. Politically exposed persons (PEPs): Extension of PEP regime to cover domestic PEPs.

Beneficial ownership

Opaque and complex beneficial ownership structures historically have been used to facilitate a variety of different crimes including money laundering, terrorist financing, tax evasion and drug trafficking.

The government on 13 January 2015 mandated that UK companies and other legal entities should now be required to intensify the degree of accountability and transparency by identifying the beneficial ownership of companies and trusts. The policy will require companies to acquire and hold adequate, accurate and current information on beneficial ownership to be publically accessible via central public registers.

The new proposals define beneficial ownership as an individual who “ultimately owns or controls more than 25% of a company’s shares or voting rights, or who otherwise exercises control over a company or its management.” The government has taken the view that the public register should include the beneficial owner’s name, country of residence, nationality, month and year of birth and the extent of beneficial ownership held. This data will be readily accessible to tax authorities, financial intelligence divisions, banks, overseas law enforcement and other obliged professional bodies without restriction.

Furthermore, those who are able to demonstrate a ‘legitimate interest’ are also able to access this information; the directive however does not extend to define the ambit of this regulation. Article 29(9) however states that in exceptional circumstances an exemption to the access to the beneficial ownership information is possible on a case by case basis, for example if the access of information would expose the beneficial owner to the risk of fraud, kidnapping, blackmail, violence or intimidation or if the beneficial owner is a minor or otherwise incapable.

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There is much theoretical debate in respect of legitimate interest imposing significant burdens on the public, in that it is costly, time consuming and is perceived as being inconsistent to the notion of transparency. Whilst beneficial ownership shall be in accordance with data protection rules, it remains yet to be seen how well the exception will be applied in reality and how well it will protect peoples private data.

Scope

The EU regulations will capture a larger number of persons for transactions by reducing the reporting threshold for cash payments from €15,000 (£12,500) to €7,500 (£6,250). This will apply to tax crimes and traders of goods in addition to providers of gambling services.

Customer due diligence (CDD)

The government has abolished the automatic entitlement to apply SDD when dealing with specified customers and products. The EU’s view is that blanket exemptions were too permissive and lenient; it has therefore provided established and centralised recommendations pursuant to article 13(2) for coordinating and promulgating risk assessments for transactions and customer relationships. Member States shall now ensure that obliged entities shall ascertain that the customer relationships or a transaction presents a lower risk. Article 16(3) provides a non-exhaustive list of factors and types of evidence of higher risk ranging from private banking to geographical risk factors. Moreover, rigorous due diligence provisions now advise obliged entities to conduct enhanced due diligence (EDD) where there is a perception of greater risks.

Risk assessment

Obliged entities will now be required to be vigilant and take appropriate steps to undertake risk assessments taking into account numerous risk factors as outlined in article 8, including customers, countries, geographic areas, products, services, transactions or delivery channels. These assessments shall be documented, kept up to date and be made available to the relevant competent authorities and self-regulatory bodies concerned. Member States shall now ensure that obliged are properly able to mitigate and manage effectively AML and CTF to safeguard compliance with good business practice.

A more stringent monitoring and verification process would need to be enforced. Knowledgeable and reliable AML compliance teams would need to be hired and trained to manage the risks. Organisations need to question how this process will be automated and detected through technology and how these systems will be integrated across all offices. Furthermore, robust policies, controls and procedures would need to be implemented and regularly monitored to detect and deter money laundering. This may have a draconian and arduous impact on organizations who will incur extra costs to ensure compliance.

Politically exposed persons (PEPS)

Under the Anti-Money Laundering Directive 3 (AMLD 3) PEPs were defined as “persons residing in a place outside of the state”, the definition has now been extended to include domestic PEPs. The extension to include domestic PEPS arguably perpetrates onerous and disproportionate organizational burdens. The impact of this is that businesses will need to make amendments to their systems and controls so that domestic PEPs can be properly identified and revised policies enforced so that employees know what the EDD requirements are for such clients.

The AMLD 4 is unlikely to excessively effect regulated financial entities that are already compliant with AMLD 3 in that the required changes have already been implemented and the systems could easily be adapted to reflect the changes. The AMLD 4 is likely to have greater implications for governments and national supervisors.

Kiran Shazadi Din a graduate from the University of Sheffield. She holds a masters degree from BPP Law School, and has also completed the BPTC at the same university. This post was one of the standout entries we received for the BARBRI Global Financial Crime Blogging Prize.

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3 Comments

Anonymous

Just under a week too late

Anonymous

We don’t need to worry about this anymore, right?

Anonymous

Surely it can not be doing that well if it is now on it’s fourth attempt?

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