The Fourth Anti-Money Laundering Directive came into force on 26 June 2015, and must be transposed by Member States into their national legislation by 26 June 2017. It will modify and extend customer due diligence requirements and reinforce the “risk-based” approach to money laundering risks.
At the same time, the UK government’s consultation on the impact of the current regulations, as part of its wider intention to remove unnecessary obstacles to business productivity, has now closed.
Key changes under the directive
Customer Due Diligence
The Fourth Directive has extended customer due diligence (“CDD”) requirements to include:
- CDD on cash transactions over €10,000 (a reduction in the limit from the current level of €15,000).
- CDD by providers of gambling services where customers wish to place a stake or collect winnings of at least €2,000.
- A wider definition of politically-exposed persons (“PEPs”). It is no longer limited to persons outside the UK. Domestic people with high level appointments in the UK, foreign PEPs, and senior officials in international organisations will all be classified as PEPs, and enhanced due diligence checks will be required.
Of most interest to our clients, simplified CDD will no longer be automatically applicable for certain types of customers. Instead, the decision about whether to use simplified CDD will have to be taken in accordance with a risk assessment.
Regulated firms will be allowed to use simplified CDD where:
- The firm has identified an area of low money laundering risk; and
- The transaction within that area is considered low risk.
To assess the risk-level of a transaction, the Fourth Directive provides a non-exhaustive list of factors which must be taken into account and which may provide evidence of lower-risk situations. If a firm is able to identify certain factors as relevant to its transaction, it may be able to use a simplified CDD procedure.
The list includes:
- Customer risk factors e.g. dealing with a public company listed on a stock exchange and subject to disclosure requirements;
- Product, service, transaction or delivery channel risk factors e.g. insurance policies and pension schemes; and
- Geographical risk factors e.g. non-EU countries with different standard anti-money laundering systems.
To assist with the assessment of risk, the European Supervisory Authorities are required, by 26 June 2017, to issue guidelines on the factors to consider and the steps to take where simplified CDD measures are appropriate.
Register of beneficial ownership
Member States will be required to ensure that information about the beneficial owners of businesses is stored on a central register. This register will contain the names, dates of birth, nationality, country of residence and the nature and extent of the beneficial owners’ interests in the transaction.
While the UK already requires certain companies to keep limited information on registers, this requirement for an accessible register of beneficial ownership is a potentially significant extension of that regime.
The registers will be accessible to ‘authorities’, ‘obliged entities’ (e.g. banks carrying out CDD on customers), and ‘others’. These ‘others’ will include anyone who can demonstrate a “legitimate interest” in gaining access to the information.
This will likely provide a useful source of information for businesses carrying out CDD on their customers.
Where firms have a branch or a majority-owned subsidiary outside the EU and the anti-money laundering laws are less strict in that country than in the EU, the firm will still be required to apply the higher standard of EU anti-money laundering rules in that third country.
UK sector review on money laundering
Despite the above, on 28 August 2015 the Department for Business, Innovation and Skills launched a review calling for evidence from companies on the impact of the current anti- money laundering regulations. The call for evidence closed on 23 October 2015, and is part of a larger program of “cutting red-tape”. The review encourages businesses to provide evidence of where the existing money laundering regulations are ineffective or over-complicated.
The consultation on the burdens of anti-money laundering rules appears to go against the grain of the Fourth Directive, highlighting the tension between protection against money laundering and terrorist financing and the productivity of businesses. However, the UK government will have no choice but to implement the Fourth Directive by the above specified deadline.
While the Directive will not be implemented until 2017, it is worth considering now how your business will adapt to the following:
- You will no longer be able to apply simplified CDD measures automatically in respect of certain customers. You will need to carry out an appropriate risk assessment first, taking into account factors such as type of customer, type of business and geographical location.
- You will potentially be able to make use of a register of beneficial ownership to assist you in carrying out CDD of your customers.
- Your reporting obligations will not change in relation to money laundering suspicions. Remember that the obligations apply if you know or suspect, or have reasonable grounds for knowing or suspecting, that another person is engaged in money laundering, and that the threshold for ‘genuine suspicion’ is a low one.
- You will be at risk of committing a criminal offence if you in any way “tip off” a person that you know or suspect to be engaging in money laundering.