Matthias Verbeke - May 28, 2015
The Fourth EU Anti Money Laundering Directive (4thAMLD) is designed to update and improve the EU's Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) laws. This new directive is in line with the recommendations issued in 2012 by the Financial Action Task Force (FATF), the international global AML and CTF standard-setting body.
This 4thAMLD reinforces the 3rdAMLD which already requires that certain categories of persons and businesses apply AML and CFT Rules.
The 4thAMLD was voted on the 20th of April 2015 by the European Parliament.
Under the name obliged entities,the reader must understand, credit and financial institutions, natural and legal persons acting in the exercice of their professional activities as auditors, external accountants, notaries, legal professionals, trust, company services providers, estate agents, providers of gambling services and other professionals with trading in cash above 10.000 €.
Key proposed changes under 4thAMLD
The 4thAML sets out a number of proposals which will seek to drive changes in the way the obliged entities undertake their AML/CFT compliance obligations.
The following is a high level list of the key changes proposed under 4thAMLD:
Politically Exposed Persons
Under the 3d AMLD, the obliged entities are required to satisfy themselves as to whether a customer or a beneficial owner of a customer is a PEP, or a close associate or family member of a PEP. Where obliged entities discover a prospective or existing customer is a PEP, it is obligatory to apply an Enhanced Customer Due Diligence (Enhanced CDD) approach to the identification and verification of the identity of that customer. Under the 3d AMLD, PEPs were defined as persons residing in a place outside of the State.
The 4thAMLD is proposing to extending the scope of the PEP regime by making it a requirement that obliged entities determine whether domestic customers are PEPs. This rule in relation to PEPs is proposed to be softened somewhat by allowing obliged entities to take a risk based decision to limit the number of years that an individual can be considered a PEP.
Traceability of fund transfers
The 4thAMLD requires payment services provides to check that all requested information from the payer and the payee are now present during the transactions. The information on the payee was not requested before based on the 3d AMLD.
Simplified Due Diligence
Currently, designed persons are permitted to apply simplified CDD where the customer or product falls within certain categories, e.g. where the customer is a credit or financial institution or a company listed on a regulated market as defined in the Act.
Many obliged entities have sought to rely automatically on this exemption, known as the 'Specified Customer' or 'Specified Product' exemption without sufficiently examining the appropriateness of applying the exemption.
The 4thAMLD would require the obliged entities to first determine the level of risk posed by a customer before applying Simplified CDD.
Then the 4thAMLD proposes to introduce a more measured application of this exemption by placing the responsibility on the obliged entities to carry out a risk assessment notwithstanding the customer would, on the face of it, fall within the scope of the Simplified CDD client category.
Increased requirements on Obliged entities
1. The 4thAMLD proposes placing an increased focus on the resources which should be employed by obliged entities when seeking to comply with AML/CTF obligations. The 4thAMLD also recognises that it would not be appropriate to impose the same requirements on all obliged entities. Thus, Member States will have discretion to apply the following requirements where it is appropriate based on the size and nature of the obliged entities:
Large credit and financial institutions should already have a dedicated Money Laundering Reporting Officer (MLRO) and an Internal Audit function with responsibilities for testing the adequacy of AML policies and procedures.
2. The 4thAMLD proposes placing a number of requirements (which were previously only applicable to credit and financial institutions) on all Obliged entities:
Interestingly, the 4thAMLD currently provides that where obliged entities has a branch or majority-owned subsidiary in a third country which does not permit application of EU AML and CTF requirements, and where the obliged entities has, as a consequence, taken additional measures which have not proved sufficient to handle the risk of money laundering or terrorist financing, the competent authority of that Designated Person may request the Designated Person to close down its operations in the relevant third country.
The 4thAMLD specifies a number of administrative sanctions which it is proposed may be available to Member State competent authorities to penalise Obliged entities who fail in meeting their AML/CFT obligations. The following is an example of what is proposed pursuant to 4thAMLD
The above measures will apply to all obliged entities including lawyers, letting agents, casinos etc. Legislators are of the view that the range of administrative sanctions available to competent authorities in each Member State should be sufficiently broad to allow Member States take account of the differences between obliged entities, in particular between financial institutions and other entities, as regards their size, characteristics and areas of activity.
The 4thAMLD will allow Member States to impose sanctions not only against the Designated Person, but also against members of the management of the Designated Person or any other individual who is responsible for the breach.
Beneficial Ownership Information
Controversially, the 4thAMLD also includes proposals which would require registers to be created within each Member State to record details of the beneficial ownership of inter alia companies and trusts.
The original European Commission proposal was for companies, other legal entities and trusts to maintain information on beneficial ownership which would be available to obliged entities and competent authorities on request. There is increasing international recognition of the need for transparency behind the ownership of legal persons and arrangements, as the use of shell companies with opaque ownership structures are seen in some circles to be facilitating tax evasion and other covert activity.
The store information will contain:
There are already a number of publicly accessible business registers in the EU but with limited information on beneficial ownership. The new registers envisaged by the 4thAMLD in each Member State would be interconnected.
The proposal in relation to these registers also provides for certain guidelines including that only the obliged entities and competent authorities will be permitted access to the registers.
The new adopted legislation requires service providers to perform Due Diligence for transaction above 2000 €. In proven low risk circumstances, member states may exempt certain gambling services for some or all those obligations. Casinos will not benefit from exemptions.
Lists of Politically Exposed Persons
Obliged entities have primarily relied on databases, internet searches and declarations from customers as to whether new or existing non-resident customers are PEPs.
Obliged entities would not be entitled to rely exclusively on the lists and would still be responsible for making their own determination as to whether a customer is a PEP or a close associate or family associate of a PEP.
The 4thAMLD proposes that the European Commission issues a supranational risk assessment of the AML risks facing the EU and keeps it updated. The Commission's Risk Assessment would include an analysis of the most widespread means by which criminals launder illicit proceeds. Member States would individually be required to undertake an assessment of the AML risks in their jurisdiction. This assessment would then be shared with Obliged entities to assist them in, inter alia, identifying areas of greatest AML and CTF risk in their own businesses.
The expectation is that these risk assessments will be useful for Obliged entities in a number of ways:
The current AML legislation includes a requirement for Obliged entities to adopt policies and procedures to govern the way in which the organisation complies with its AML and CTF obligations. The 4thAMLD, when introduced, will necessitate these policies and procedures being updated.
Obliged entities which are large and/or have a cross jurisdictional aspect to their operations may have to consider employing greater AML resources in the form of compliance and internal audit personnel if they have not already done so and if it is deemed to be warranted by the perceived risk to their business posed by AML/CFT. The proposed changes under the 4thAMLD also necessitate re-training existing staff.
Obliged entities will also need to be aware of the range of additional sanctions available to competent authorities proposed under the 4thAMLD the potential for reputational damage if a failure in AML compliance is identified.
As the final text of the 4thAMLD is now adopted. The Member States will have up to two years to implement it into local law (Q1 2017). Obliged entities will need to take a close look at their internal AML procedures during that time to ensure they are in compliance at the end of the transitional period.