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Fourth Anti-Money Laundering Directive: preparing for launch
Practical Law UK Articles 8-616-6194 (Approx. 5 pages)
Fourth Anti-Money Laundering Directive: preparing for launch
by Jennifer Hanley-Giersch, Berlin Risk Limited and John J. Byrne, Esq., the Association of Certified Anti-Money Laundering Specialists (ACAMS)
| Published on 25 Jun 2015 • European Union, United Kingdom |
Money laundering, and the increasing role that it plays in terrorist financing, is rarely out of the news. Financial institutions, law enforcement authorities and many governments around the world are working together to enhance existing anti-money laundering legislation. The Fourth Anti-Money Laundering Directive (2015/849/EU), which came into force on 25 June 2015, is the most significant of these legislative changes.
Money laundering, and the increasing role that it plays in terrorist financing, is rarely out of the news. The extent to which terrorist groups are able to mobilise support has risen significantly and many groups are clearly very well financed. In an effort to halt further advances, financial institutions, law enforcement authorities and many governments around the world are working together to enhance existing anti-money laundering (AML) legislation.
The Fourth Anti-Money Laundering Directive (2015/849/EU) (the Directive) is the most significant of these legislative changes to affect EU member states (see box "Serious Crime Act 2015"). It came into force on 25 June 2015 and member states must implement the required changes in their domestic legislation by 26 June 2017.
The key changes
The Directive repeals and replaces the Third Anti-Money Laundering Directive (2005/60/EC) and has been designed to tighten cross-border controls. Although ultimate accountability for AML activity within an institution will continue to be primarily the preserve of dedicated compliance officers, the Directive widens the extent of personal responsibility and liability for all professionals.
It addresses the risk-based approach to customer due diligence (CDD) controls with a required enhanced effort for higher risk customers. For example, obliged entities, such as banks, will need to take enhanced measures where the risks are greater, although they can take simplified measures where the risks are demonstrated to be smaller. Legal professionals will continue to need to ascertain the levels of risk presented and adapt procedures accordingly.
New rules require companies to identify individuals who have ultimate beneficial ownership and to maintain a beneficial ownership registry. For AML compliance purposes, a beneficial owner of a company has a minimum of 25% direct or indirect ownership. Beneficial ownership information will be held in a specified location and competent authorities and financial intelligence units (FIUs) will have unlimited access. In addition, depending on the relevant member state's individual policies, banks and other obliged entities will have access to the registry.
The Directive expands the definition of a politically exposed person (PEP) to include domestic, as well as foreign, PEPs and those within international organisations. The definition applies to individuals such as heads of state, government and parliament members, members of the judiciary and directors of state-owned enterprises.
The threshold to trigger AML procedures from cash payments is lowered from €15,000 to €7,500 and member states will be able to set their own thresholds even lower based on risk perception levels. Added to this, the scope of rules relating to the disclosure of all payments made in excess of €7,500 under the obliged entities rules is expanded beyond casinos to include the entire gambling sector.
The Directive also strengthens co-operation between national FIUs that are involved with the analysis and dissemination of information about suspected money laundering or terrorist financing. It reinforces national authorities' administrative sanctioning powers and requires them to co-operate on cross-border cases.
The minimum pecuniary fine is €1 million. However, where breaches involve credit or financial level institutions, the minimum fine will rise to a punitive €5 million, or the equivalent in sanctions.
New risk-based approach
The Directive brings in a new, enhanced risk-based approach, coupled with multilevel interconnected risk assessment requirements set at the member state, institutional and customer levels. This is in contrast to the previous approach of allowing individual member states the flexibility to decide whether the relevant rules could be simplified in accordance with the perceived risk. Member states will, therefore, need to adopt evidence-based measures when implementing the Directive, supplemented with a minimum list of factors to be developed by the European Supervisory Authorities (ESAs).
The new risk-based approach and the need to adapt existing systems are at the core of the implementation challenges facing institutions. For example, enhanced due diligence procedures are required that go beyond existing CDD, but which approach should apply and under what circumstances? On what basis will the new, more risk-based and evidence-based decision-making requirements be made? New methods, information sources and monitoring approaches will inevitably be required, which will necessitate the development of more sophisticated and flexible risk assessment tools.
Practical challenges
From a practical standpoint, one of the biggest changes in complying with the Directive will be the process optimisation required to meet the new, stricter CDD requirements. Those organisations that have already implemented the February 2012 recommendations set out in the Financial Action Task Force international standards on combating money laundering will most likely only need to make some minor adjustments to adequately implement the changes required by the Directive. The most significant of these will be implementing the risk assessments required by policy regulators.
Conversely, if an organisation's processes are more in keeping with the requirements of the Third Anti-Money Laundering Directive, major reforms will be required, in particular with regard to the broader criteria of PEPs, lower threshold for reporting cash transactions and the addition of a beneficial ownership registry for all connected individuals associated with a company.
An opportunity for redesign
The Directive creates an opportunity for organisations to include the US Foreign Account Tax Compliance Act (FATCA) requirements for high-risk clients in an all-round amended framework based on a comprehensive, risk-based approach and redesigned CDD procedures. The challenge will be to cater simultaneously for the increased and predominantly rules-based requirements of FATCA while, at the same time, making provisions for the risk-based CDD requirements in the Directive. Assuming that both can be mastered, organisations will be able to benefit from both increased efficiencies and improved compliance processes.
Jennifer Hanley-Giersch is the managing partner of Berlin Risk Limited and John J. Byrne, Esq. is the executive vice president of the Association of Certified Anti-Money Laundering Specialists (ACAMS).
Serious Crime Act 2015
The Serious Crime Act 2015 (2015 Act) received Royal Assent on 3 March 2015. It is designed to send a clear signal to discourage corrupt and complicit professionals who provide the materials, services, infrastructure, information and other support needed by organised crime groups.
The 2015 Act contains an important new offence of participating in the criminal activities of an organised crime group. This carries a maximum custodial sentence of five years and is specifically targeted at professional advisers who may provide support indirectly, at arm's length. There is interaction and interplay between the requirements of the Fourth Anti-Money Laundering Directive (2015/849/EU) (the Directive) and the implications of the 2015 Act; that is, legal professionals could unwittingly be involved in the provision of materials, services, infrastructure, information and other support to facilitate organised crime if they fail to adhere to the requirements of the Directive.