The 4th Anti-Money Laundering Directive (4MLD) was published in the Official Journal of the EU on 5 June 2015.
EU institutions have called for efforts to speed up the national implementation of the new rules in light of 2015’s terrorist attacks in Paris, Brussels and Copenhagen.
The changes will impose new burdens and responsibilities; if firms have not already begun assessing the impact of the rules, they should do so now.
This bulletin provides a summary of the main changes that firms can expect.
4MLD seeks to strengthen the anti-money laundering regime across the European Union. Largely a response to the Financial Action Task Force’s recommendations in February 2012, the Directive will replace the 3rd Money Laundering Directive (3MLD).
It was felt that parts of 3MLD were overly lenient and permissive; the 4th Money Laundering Directive looks to implement changes across Europe’s anti-money laundering regime to address the deficiencies identified and give effect to many of the FATF’s recommendations.
What are the main changes proposed?
Definition of “Beneficial Owner”
The 3MLD definition of the Beneficial Owner of a corporate entity focuses on the identification of a person owning or controlling more than 25% of the shares or voting rights in a legal entity.
The position will change slightly under 4MLD with the figure of 25% being only indicative of beneficial ownership.
The Directive also provides for the situation where, after having exhausted all possible means, no beneficial owner is identified or there is doubt as to the person identified.
In such a scenario, the senior managing officials of the corporate entity will be treated as beneficial owners.
Member States will have discretion to select a lower percentage.
Central registers of beneficial owners
4MLD looks to enhance corporate transparency, with Member States having to establish central registers containing current information on the beneficial ownership of corporate and legal entities.
The Directive makes clear however, that firms will not be able to rely exclusively on the central register information when undertaking customer due diligence (CDD) checks.
The information contained in the registers will be made available in all cases to competent authorities and financial intelligence units and to those entities subject to the Directive undertaking due diligence under the 4MLD framework.
It will also be available to any person or organisation able to demonstrate a “legitimate interest”.
This was not envisaged in the European Commission’s original proposal and is perhaps one of the more controversial provisions in the Directive, potentially paving the way for interested parties such as investigative journalists to gain access to the information.
Politically Exposed Persons
4MLD will see changes to the definition of a “Politically Exposed Person” (PEP), removing any distinction between domestic and foreign PEPs.
Firms will need to review clients and ensure that domestic persons holding prominent public functions are categorised as such.
This could include (but is not limited to):
- members of supreme courts
- high ranking military staff
- managers of state owned enterprises
The provisions will similarly apply to “close associates” and family members of PEPs.
4MLD also clarifies that PEPs will always be subject to enhanced due diligence and that senior management approval is required before establishing or continuing a business relationship.
Risk assessments of money laundering and terrorist financing are central to 4MLD, and will be required at firm, Member State and supranational level.
Firms will need to identify and assess risk, taking into account factors including customers, countries or geographic areas, products, services, transactions or delivery channels.
The documented risk assessment will need to be kept up-to-date and made available to regulators.
Firms will also be required to put in place policies, controls and procedures proportionate to their nature and size in order to mitigate and manage the risk of money laundering and terrorist financing.
Changes to simplified due diligence
3MLD took a more permissive approach to simplified due diligence, allowing blanket exemptions for certain entities, such as financial institutions and listed companies whose securities are admitted to trading on a regulated market.
While 4MLD still allows simplified due diligence, firms will be required to ascertain that the business relationship or transaction presents a lower degree of risk.
Annex II provides a non-exhaustive list of factors to be taken into account when determining a potentially lower risk situation.
Occasional transactions in cash
Although there remains a level of EUR 15,000 at which CDD is required, 4MLD reduces the threshold in relation to individuals dealing in goods for cash payments to EUR 10,000 or more.
This will apply whether the transaction is carried out in a single operation or in several operations which appear to be linked.
What happens now?
Member states have until 26 June 2017 to implement 4MLD into national law.
We can expect a period of consultation and the drafting of technical standards and guidelines.
4MLD will see some significant changes, particularly with regard to the introduction of central registers of ownership information, but there will also be some subtle changes and amendments to current rules and definitions that will require changes to procedures.
Firms should ensure they understand the changes and should carry out an initial impact assessment to be clear on how the new rules will affect their business.
Experience shows that money laundering processes can be cumbersome, and it is important that firms ensure they implement the new rules correctly; financial crime and anti-money laundering remain a focal point for the FCA and will continue to be so under 4MLD.
Complyport will be closely monitoring the developments in guidelines and technical standards at a European and domestic level throughout the implementation of the Directive.
We are on hand to advise firms in assessing the impact of the directive and in building procedures and policies that are 4MLD compliant.