What is the Fifth Money Laundering Directive?
The Fifth Money Laundering Directive, commonly known as ‘5MLD’, was an amendment to the Fourth Money Laundering Directive. The amendment aimed to improve transparency of financial transactions and eliminate the anonymity associated with cryptocurrencies to prevent fraudulent activity and combat terrorist financing. EU member states had to implement the 5MLD provisions into domestic legislation by the 10th of January 2020.
Is your firm affected by the 5MLD?
Most financial institutions are not affected by the amendment. However, there are particular types of firms the extended scope of 5MLD captures; crypto-asset exchange providers and custodian wallet providers, as well as certain letting agency businesses and art market participants acting as intermediaries.
What are the specific areas firms need to comply with?
Customer due diligence (CDD): The new 5MLD requirements include providing additional identification and verification obligations, a requirement to collect proof of registration on beneficial ownership registers (where relevant). Letting agency businesses and art market participants, as well as crypto-asset exchange providers and custodian wallet providers, are also required to apply these customer due diligence measures in conjunction with all other obligations under the amended 2017 Regulations. The 5MLD lowered the thresholds for electronic money and prepaid instruments like anonymous payment cards and further improves the transparency on beneficial owners.
Enhanced due diligence (EDD): A more harmonised approach was adopted across all EU member states including a requirement for firms to apply enhanced due diligence to business relationships or transactions involving high risk third countries. The 5MLD has expanded the triggers for EDD to include transactions relating to oil; precious metal; arms; tobacco products etc. have all become new risk factors to be considered.
Extended scope: The 5MLD scope extends to persons beyond those subject to the 2017 regulations including: Virtual currency providers and custodian wallet providers; Art traders (with a transaction of EUR10,000 or more) and estate agents who deal with letting transactions of EUR10,000 or more a month). Business entities that carry out intermediary services similar to accountants and tax advisors are also subject to money laundering regulations for the first time. These changes are intended to close perceived loopholes and to account for changes in behaviour from new technologies. In some areas, the 2019 Regulations take a wider approach than that of the 5MLD. For example, the 2019 Regulations provide a wider interpretation of “Cryptoassets” to capture exchange, security and utility tokens.
Express Trusts: UK express trusts and some non-EU express trusts are required to register with HMRC’s Trust Registration Service. The 2019 Regulations bring the beneficial ownership register into the public domain to improve transparency. The register of beneficial ownership was already introduced in the 2017 regulations for those with a legitimate interest however now the public can gain access. The 2019 Regulations now include the registration of beneficial owners of taxable trusts, including express trusts. Firms will also be required to update their records to accurately reflect the beneficial ownership of corporate clients. If there are any discrepancies in the details held by the firm and of those held by Companies House, then the new mandatory ‘discrepancy reporting requirement’ requires firms to report the differences to Companies House. An exception however does apply where the information is protected by legal professional privilege.
Registration obligations – what should Cryptoasset firms do?
All relevant entities were required to register with a supervisory body. The FCA is the appointed supervisory body for cryptoasset businesses. Therefore, any new cryptoasset business that are set up now, or post 10th January 2020 must be registered with the FCA before they commence any activity. For cryptocurrency businesses that were already in existence prior to the aforementioned date, the date of registration was extended to the 10th January 2021.
5MLD and Brexit
With the transition period scheduled to come to an end on the 31st of December 2020, there is much debate on the UK’s adoption of the EU’s legal and regulatory frameworks post-Brexit. Article 89 of the Political Declaration states the EU and UK agree “to support international efforts to prevent and fight against money laundering and terrorist financing, particularly through compliance with Financial Action Task Force standards and associated cooperation.”
Further amendments to global AML/CTF standards are expected in the near future. In December 2019, the EU promised to prioritise further reforms to the EU’s AML/CTF regime, coined as the Sixth Money Laundering Directive (6MLD). As a leading member of the FATF, the UK is likely to remain closely aligned with the EU’s plans of further legislation.