What is the 4MLD?
The 4MLD was published in the European Union (EU) Official Journal on 5 June 2015 to give effect to updated standards set by the Financial Action Task Force (FATF), an inter-governmental body which promotes standards to combat money laundering and terrorist financing.
On 15 September 2016, Her Majesty’s Treasury (HMT) published a consultation on the transposition of the 4MLD into UK law.
In July 2016, in the wake of recent terrorist attacks and the Panama Papers revelations, the European Commission adopted a proposal to amend the 4MLD in an attempt to further enhance the EU’s anti-money laundering/counter-terrorist financing (AML/CTF) framework. These proposed amendments to the 4MLD are still subject to negotiation by the EU Member States. As such, the current HMT consultation does not address these proposed amendments and is very much focused upon the original 4MLD agreed in June 2015.
In addition to the 4MLD, the EU has also published the new Fund Transfer Regulation (FTR) which updates the rules on information on payers and payees accompanying transfers of funds where at least one of the payment service providers involved in the transfer of funds is established in the EU. The FTR will repeal and replace the current Wire Transfer Regulations.
It is proposed that the current Money Laundering Regulations 2007 (MLR 2007) and the Transfer of Funds (Information on the Payer) Regulations 2007 will both be revoked and replaced with a new piece of legislation – the Money Laundering and Transfer of Funds (Information on the Payer) Regulations 2017.
When will the 4MLD come into force?
Member States are required to bring into force the relevant provisions by 26 June 2017.
The recent proposed amendments to the 4MLD propose to bring forward the transposition date to 1 January 2017, however this has given rise to concerns being expressed by a number of Member States and regulatory bodies (particularly in the context of virtual currency exchange platforms which will fall within scope of the AML regime for the first time and for which there is no current AML supervisory regime).
The UK Government is currently working towards a transposition date of 26 June 2017.
What are the key changes subject to consultation?
Simplified due diligence (SDD)
Currently the MLR 2007 enable regulated institutions to conduct SDD in specific circumstances (for example, where a customer is a company whose securities are listed on a regulated market or where specific products are offered). The UK government proposes to remove the list of customers and products that can be subject to SDD and instead require all regulated institutions to apply SDD only where a business relationship or transaction is determined to be of low risk, taking into account factors which are listed at Annex II of the 4MLD - which include customer risk factors, product, service or delivery channel risk factors and geographical risk factors. This means that, where regulated institutions wish to apply, SDD justification will be required and should be documented.
Politically Exposed Persons (PEPs)
Currently the MLR 2007 define a PEP as a person who is, or who has been (in the last 12 months), entrusted with a prominent public function in (1) a state other than the UK, (2) an EU institution or (3) an international body. All PEPs must be subject to enhanced due diligence (EDD).
The 4MLD removes the distinction between domestic and foreign PEPs. As such, EDD measures will be applicable to a wider scope of PEPs. This has caused some concern and the UK government has enacted s. 30 of the Bank of England and Financial Services Act 2016 which requires the Financial Conduct Authority to issue guidance on the requirement to take a proportional and risk based approach to conducting transactions with each category of PEP. The guidance must specify categories of persons which are to be included and excluded within any new definition of a PEP. The HMT consultation specifically seeks views on the expansion of PEP status to UK members of parliament and the governing bodies of political parties.
The 4MLD requires all Member States to ensure that a central register is kept of all information relating to beneficial ownership of all legal entities incorporated within them. In light of this, the UK government amended the Companies Act 2006 to require all UK companies (except those exempted due to being listed on a recognised stock exchange) to establish and maintain a People with Significant Control (PSC) Register, which records details of all entities and individuals who meet the definition of an ultimate beneficial owner (UBO). Every company is required to update their register with Companies House on an annual basis. The aim of the PSC register is to increase transparency in respect of ownership and control.
The UK government is also proposing to establish a public register of beneficial ownership of all foreign companies who own or purchase property within the UK and proposes certain approaches to trusts within the consultation.
Extension of “fit and proper” test to Money Service Business (MSB) agents
Many MSBs operate by way of an agent network. Currently agents of MSBs are not subject to a “fit and proper” assessment and the government is seeking views as part of the consultation as to whether the “fit and proper” test should be expanded so that agents are included within scope.
What does this mean for you?
HMT’s consultation closes on 10 November 2016. Regulated firms should consider its content and, where appropriate, consider responding to the specific questions raised. Engaging in the consultation process now will allow firms to gain an understanding of how the proposed changes to the current legislation will affect their business, enabling them to conduct a gap analysis and update risk assessments in order to ensure that they are ready for compliance once the 4MLD is brought into effect.