Introduction

The Fourth Anti-Money Laundering Regulation [849/2015] (MLD4) came into force on 23 June 2015 with the aim of strengthening the EU’s defences against money laundering and terrorist financing. It is aligned with the anti-money laundering (AML) and counter-terrorist financing (CTF) standards promulgated by the Financial Action Task Force (FATF) in February 2012, which are the recognised international standards. MLD4 will amend and replace MLD3 and must be implemented in all Member States by 26 June 2017.

The European Commission published a proposed Directive on 5 July 2016 to further reinforce EU rules on AML to counter terrorist financing and to increase transparency surrounding beneficial ownership. The proposed Directive is known as the Fifth Anti-Money Laundering Regulation (MLD5) and amends MLD4 with the aim of improving the current legislative framework by tackling new means of terrorist financing and is also part of a broader drive to boost tax transparency and tackle tax abuse.

The following provides a brief summary of the main provisions of MLD4 and the amendments made to MLD4 by MLD5.

What is money laundering?

Member States must ensure that money laundering and terrorist financing are prohibited. MLD4 defines money laundering as when a person intentionally:

  • converts or transfers property, knowing that such property is derived from criminal activity for the purpose of concealing or disguising the property’s illicit origins or of assisting any person involved in the activity to evade the legal consequences of their action;

  • conceals or disguises the true nature, source, location, disposition, movement, rights to or ownership of property which is derived from criminal activity;

  • acquires, possesses or uses property, knowing at the time of receipt, that such property is derived from criminal activity; or

  • participates in, associates to commit, attempts to commit, aids, abets, facilitates or counsels any of the above.

‘Criminal activity’ for the purposes of MLD4 includes terrorism, drug trafficking, fraud affecting EU financial interests, corruption and all offences punishable by at least 6 months’ imprisonment. MLD4 expressly refers to tax crimes within the definition of criminal activity (in line with FATF standards) and will therefore bring such crimes within the scope of the powers and authorities used to combat money laundering for the first time.

Who does MLD4 apply to?

MLD4 applies to the following firms, which are referred to as “obliged entities”:

  • financial institutions (which include MiFID firms, collective investment schemes, insurance companies and branches of financial institutions located in the EU);

  • credit institutions (as defined in Article 4(1) of the Capital Requirements Regulation (CRR));

  • auditors, external accountants and tax advisers;

  • trust or company service providers;

  • legal professionals, including notaries;

  • persons trading in goods where cash payments are made in amounts of €10,000 or more;

  • estate agents; and

  • providers of gambling services.

What amendments does MLD4 make to MLD3?

The key amendments being made to MLD3 can be summarised as follows:

(1) Customer Due Diligence

Obliged entities must carry out customer due diligence (CDD) when:

  1. establishing a business relationship (as defined in MLD4);

  2. carrying out an occasional transaction that either amounts to €15,000 or more or constitutes a wire transfer in excess of €1,000;

  3. there is a suspicion of money laundering or terrorist financing; or

  4. there are doubts about the veracity or adequacy of previously obtained customer due diligence.

CDD measures comprise:

  1. identifying the customer and verifying the customer’s identity on the basis of documents, date or information obtained from a reliable and independent source;

  2. identifying the beneficial owner;

  3. verifying that the any person purporting to act on behalf of the customer is authorised to do so and identifying and verifying that person’s identity;

  4. assessing and, as appropriate, obtaining information on the purpose and intended nature of the business relationship; and

  5. conducting ongoing monitoring of the business relationship, including ongoing scrutiny of transactions.

Obliged entities are required to apply each of the measures above; however, they may determine the extent of the CDD measures they carry out on a risk-sensitive basis in line with the risk-based approach initially introduced by MLD3 (as adopted and amended by MLD4). Firms must be able to demonstrate that their CDD measures are appropriate in the light of the money laundering and terrorist financing risks that have been identified.

If a Member State or obliged entity identifies lower risk areas, then it may carry out simplified due diligence (SDD). In certain high-risk situations, firms must apply enhanced due diligence (EDD) measures. MLD4 tightens the rules on SDD and, unlike MLD3, there are no exemptions from these rules. Instead, decisions on when and how to carry out SDD have to be justified on the basis of risk in line with the risk-based approach.

It should be noted that MLD4 allows reliance on others to carry out CDD, but the obliged entity remains ultimate responsibility for the CDD measures carried out in respect of each customer.

(2) Enhanced beneficial ownership information

MLD4 introduces new obligations on beneficial ownership in order to address a lack of clarity and transparency to the effect that:

  1. corporate and other legal entities established in Member States are required to obtain and hold adequate accurate and current information on their beneficial ownership, including details of the beneficial ownership held;

  2. beneficial ownership information must be held in a central register, which must be accessible to authorities, firms and any person or organisation who can demonstrate a ‘legitimate interest’ with respect to money laundering; and

  3. trustees are required to disclose their status when becoming a customer and are required to make beneficial ownership information similarly available, which will include the identity of the settlor, the trustee(s), the beneficiaries or class of beneficiaries and any other natural person exercising effective control over the trust.

‘Beneficial owner’ means any natural person who ultimately owns or controls the corporate or legal entity; a shareholding or ownership of 25% or more is an indication of direct ownership. In the event that no beneficial owner is identified in any particular case, an obliged entity is required to keep records of its actions taken to identify the beneficial owner.

(3) Expansion of categories of PEPs

MLD4 extends the scope of PEPs, or politically exposed persons, which are now defined as follows:

  • heads of state, heads of government, ministers and deputy or assistant ministers;

  • members of parliament and members of the governing bodies of political parties;

  • members of high-level courts whose decisions are not subject to further appeal (other than in exceptional circumstances);

  • members of courts of auditors or the boards of central banks;

  • high-ranking diplomats or officers in the armed forces;

  • members of the administrative, management or supervisory bodies of state-owned enterprises; and

  • directors, deputy directors and board members or equivalent of international organisations.

Obliged entities are required to carry out EDD in respect of PEPs, as individuals who hold or have held important public functions within the EU or internationally, particularly from countries where corruption is widespread, may expose the EU financial section to significant risks.

(4) Third country equivalence

MLD4 changes the focus of the existing MLD3 third-country equivalence regime (the white list) by focusing on non-equivalence (the blacklist).

Under MLD4, the European Commission will identify third country jurisdictions that have ‘strategic deficiencies’ in their national AML or CTF regimes that pose significant threats to the EU financial system, to be known as ‘high-risk third countries’. The Commission maintains a list of these high-risk third countries, the first such list being published on 14 July 2016, which is subject to review. On 28 November 2016, the Commission announced that it was removing Guyana from the list of high-risk third countries under MLD4, having concluded that Guyana should no longer be considered to be a third country with strategic AML and CTF deficiencies.

Harmonized minimum sanctions

It was noted that Member States currently have a diverse range of measures and sanctions for breaches of the money laundering regime, which could be detrimental to the efforts to combat money laundering and terrorist financing.

Under MLD4, Member States are required to impose appropriate measures and sanctions for breach and there should be a minimum standard in relation to certain provisions, including CDD, reporting obligations, record-keeping and internal controls.

Proposed changes to be introduced by MLD5

Beneficial ownership

MLD5 introduces the following amendments to MLD4 in relation to beneficial ownership in order to target tax avoidance and money laundering:

  1. full public access to beneficial ownership registers – Member States will be required to make public information relating to the beneficial ownership of certain business-related trusts and other types of legal arrangements having a similar structure or function. Access to such information in relation to trusts not carrying on business will only be available to persons and organisations that can demonstrate a legitimate interest. Further, the definition of beneficial owner is amended to provide that those beneficial owners who have a 10% ownership in certain companies that are at risk of being used for money laundering and tax evasion must be included in the registers. The threshold remains at 25% for all other companies;

  2. interconnection of national central registers – the proposal provides for the direct interconnection of the registers to facilitate co-operation between Member States. It will also allow the public to access the beneficial ownership information across the EU; and

  3. extending the information available to authorities – the European Commission has proposed that existing, as well as new, accounts should be subject to due diligence controls. This will prevent accounts that are potentially used for illicit activities from escaping detection. Passive companies and trusts, such as those highlighted in the Panama Papers, will also be subject to greater scrutiny and tighter rules.

The information must remain publicly available through the national central registers and through the system of interconnection of registers for 10 years after the company has been struck off from the register.

Terrorist financing

MLD5 introduces the following amendments to MLD4 to target terrorist financing:

  1. to harmonise the EU approach for obliged entities to apply EDD measures towards high-risk third countries;

  2. to designate virtual currency exchange platforms as obliged entities, thereby bringing them within scope of MLD4;

  3. to strengthen transparency measures applicable to prepaid instruments, such as prepaid cards, by lowering thresholds for identification from €250 to €150 and widening customer verification requirements;

  4. to enhance the powers of Member States’ Financial Intelligence Units by allowing them to request information from any obliged entity. (Financial Intelligence Units are responsible for collecting and analysing information about any suspicious transactions or any other information relating to money laundering and/or terrorist financing.); and

  5. to give such Units swift access to information on the holders of bank and payment accounts through centralised registers or electronic data retrieval systems.

Next Steps

Transposition dates

The transposition date and entry into force of MLD4 is 26 June 2017.

The Commission had proposed that MLD5 be transposed by Member States by 1 January 2017; however the Council Presidency has since amended the transposition date. The Council's negotiating mandate on MLD5 was agreed on 20 December 2016, with a view to enabling negotiations with the Parliament to start in early 2017.