The Directive (EU) 2018/843 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing ("AML 5")1 entered into force on July 9, 2018. EU Member States were required to transpose (i.e., implement into national legislation) AML 5 into national law by January 10, 2020.2
AML 5 further strengthens the EU's anti-money laundering and combatting the financing of terrorism ("AML-CFT") regime in multiple ways, including: increasing transparency regarding the beneficial ownership of companies; enhancing cooperation and information sharing between financial supervisory authorities; introducing stricter controls of transactions with customers located in high-risk third countries; restricting the anonymous use of virtual currencies; allowing for better identification of politically exposed persons ("PEPs") and extending the scope of sectors and firms subject to AML-CFT obligations.3
I Beneficial owners AML 5 requires EU Member States to ensure that national registers of beneficial ownership4 of legal persons (except trusts)5 established by the Fourth AML Directive6 are publicly accessible. Obliged entities are required to provide "adequate, accurate and up-to-date" information on their beneficial owners to ensure accuracy of beneficial ownership registers.7 Obliged entities should therefore ensure (through dedicated processes) the publicity, data quality and accessibility of beneficial ownership information of all their legal entities, within national beneficial ownership registers, consistent with national law.
II Cooperation and information sharing between regulators AML 5 also strengthens cooperation and information sharing between financial supervisors.8 It requires EU Member States to establish centralized bank account registers or retrieval systems, for identifying the holders of bank accounts and payment accounts. Such registers and systems would be available to Financial Intelligence Units ("FIUs") from the various EU Member States (such as Tracfin in France), to facilitate better cooperation with each other, as well as with other competent authorities.
III High-risk third countries AML 5 introduces a harmonized enhanced due-diligence regime when transacting with high-risk third countries, identified by the European Commission as demonstrating deficiencies in their AML-CFT framework.9 For any transactions with customers located in these countries, additional information on the customer, the beneficial owner and the nature of the business relationship, approval of senior management for business relationships, and enhanced monitoring of the business relationship, will be required.
In response to these provisions, obliged entities should establish appropriate compliance procedures and controls when dealing with customers located in high-risk third countries as defined by the European Commission.
IV Prepaid cards AML 5 lowers the threshold for which financial services providers have the obligation to identify transactions in electronic money with prepaid cards. The anonymous use of prepaid cards will only be permitted in the following two circumstances: (1) for customers making in-store purchases below EUR 150, lowering the previous threshold of EUR 250 and (2) when a customer makes an online transaction with a prepaid card below EUR 50.10
EU Member States are also required to ensure that anonymous prepaid cards issued outside the European Union are not used on European territory unless they meet requirements equivalent to those mentioned above.
V Enhanced identification of PEPs AML 5 also introduces a more efficient method of identifying PEPs through the publication of a consolidated list of prominent public functions by each EU Member State and accredited international organizations.11 Organizations subject to AML-CFT obligations must ensure that effective compliance procedures and controls are in place when engaging in transactions involving PEPs.
- custodian wallet providers;
- providers engaged in exchange services between virtual currencies and fiat currencies;
- art traders (when the amount of the transaction is superior or equal to EUR 10,000);
- auditors, external accountants and tax advisors as a principal professional activity; and
- estate agents acting as intermediaries in the letting of property (where the monthly rent exceeds EUR 10,000).
Given the extension of scope, entities should determine whether, based on their business activities and monetary thresholds, they may now be subject to the EU's AML-CFT regime.14
Conclusion Entities subject to AML-CFT obligations should review their compliance programs and strengthen their KYC policies in order to meet the standards imposed by national legislators in their respective countries. Failure to comply may result in enforcement actions and penalties imposed by competent authorities (i.e., national regulators, such as the ACPR in France) in the relevant EU Member State.
Finally, in-scope entities should also take note of new criminal law provisions related to money laundering and the financing of terrorism that complement AML 5. For additional information on these provisions, please refer to our previously issued client alert on Directive (EU) 2018/1673 on combating money laundering by criminal law.15