The Fourth Anti-Money Laundering Directive (4MLD) was published on 5 June 2015, came into force on 25 June 2015 and was initially expected to be implemented by member states by 26 June 2017.
On 5 July 2016, the European Commission (EC) published a proposal for the amendment of the 4MLD and suggested its expedited transposition by 1 January 2017 (Article 67). The EC proposals included amendments regarding the definition of beneficial owner (article 3(6)), the provisions regarding beneficial ownership information for corporate and other legal entities (Article 30), as well as similar information for trusts and similar structures (Article 31).
HM Treasury Memorandum
On 5 September 2016, HM Treasury published a memorandum regarding the amendment of the 4MLD. HM Treasury generally welcomed the proposals suggested by the EC, but did raise certain concerns.
More specifically, HM Treasury has concerns about the proposed reduction of the registration threshold from 25% to 10% for some companies. HM Treasury argued that reducing the threshold would increase both the number of persons on the register and the costs to businesses. It could also create a mismatch of the Person with Significant Control thresholds on the register. The Government is concerned about the requirement to register the beneficial owners of all trusts and trust-like legal arrangements and to make this information widely accessible. It questioned the EC's argument that some trusts operate similarly to companies and should therefore enjoy the same treatment, stating that the private and family-oriented nature of most trusts raises privacy concerns.
Another source of concern for HM Treasury is the proposed introduction of automated centralised mechanisms for the identification of any natural or legal person holding or controlling payment or bank accounts. This would be a significant difference to the current system in the UK where the Financial Intelligence Unit accesses information on bank and payment accounts via credit reference agencies and through established contacts with account providers. The Government takes the view that the requirement to introduce a central data retrieval system is likely to be less onerous than the alternative option of compelling all financial institutions to report data on all bank accounts to a centralised mechanism. There may also be effects on the UK's Credit Rating Agencies.
Regarding the EC Impact Assessment of 7 April 2016 and the detailed EC Impact Assessment of 7 July 2016, the Government claims that they do not provide quantitative estimates of the costs to businesses or individuals of all of the proposals. It is suggested that the discussion of the impact of the measures on pre-paid instruments also lacks detail. HM Treasury is considering whether there are Justice and Home Affairs obligations that would trigger an opt-in.
Following the HM Treasury memorandum and within the timeframe promised by the Government, HM Treasury published its consultation on the implementation of 4MLD.
HM Treasury Consultation
On 15 September 2016, HM Treasury published a consultation paper on the transposition of the 4MLD and the revised Wire Transfer Regulation into UK national law.
The main points raised in the HM Treasury consultation are summarised below:
1.Scope of the 4MLD: Key changes include a lower threshold of 10,000 for cash transactions, and extending the scope to both making and receivingcash payments. There is an option for member states to exempt persons who engage in financial activity on an occasional or very limited basis, if these persons are not money remitters. Currently, HM Treasury applies the exemption to entities of a maximum annual turnover of 64,000. However, it now plans to raise the threshold to 100,000, leaving the single transaction threshold at 1,000.
2.Customer Due Diligence (CDD) Simplified CDD (SDD) Enhanced CDD (EDD): HM Treasury proposes the replacement of the existing list of products subject to a simplified CDD, as set out in Article 13 of the Money Laundering Regulations 2007 (MLRs), with the non-exhaustive list of factors contained in an Annex to the 4MLD that might seem appropriate for CDD. Respondents are invited to comment on what should trigger the application of CDD measures for existing customers and what are the relevant implications for "obliged entities" the term which the new provisions will apply to. HM Treasury asks for respondents' views on what the money laundering and terrorist finance risks associated with pooled client accounts would be, whether SDD should be permitted for them and what the effects of removing the ability to use SDD would be. Respondents are invited to comment on whether any products not listed in 4MLD or proposed by the European Supervisory Agencies guidance should be covered by enhanced CDD, and whether any products in other sectors should also be covered.
3.Reliance: Respondents are asked whether firms currently rely on third parties for CDD and if so, what are the costs of doing so. HM Treasury has also asked which entities in third countries could potentially be relied upon and for feedback on the meaning of certain 4MLD expressions, such as "member organisation" and "federation".
4.Assessment of risks and controls: The paper asks whether there should be a threshold above which firms must appoint a compliance officer, screen employees and have an internal audit function. It also asks what should be taken into account when screening employees. The paper also seeks views on how many of the controls firms are in fact already carrying out, and the likely cost of performing them.
5.Gambling providers: 4MLD applies in principle to all gambling providers. This is a significant change from the current requirements, which only apply to the holders of a casino operating licence. The paper explains the CDD measures which gambling providers will need to establish. The paper asks whether any gambling providers or activities should be classified as `proven' low-risk, and should therefore be exempt.
6.Electronic money: 4MLD gives member states the discretion to exempt some low-risk e-money products from parts of CDD. The paper notes that legislative change will be necessary, should the UK decide to use that discretion, and seeks views on the extent to which exemptions should be used.
7.Estate Agents: 4MLD extends the coverage of estate agents, for example to include lettings agents. The paper seeks views on the general application of CDD in estate agency business and on supervision of the sector.
8.Correspondent banking: The definition of correspondent banking set out in Article 3(8) 4MLD extends the definition provided by the Financial Action Task Force to include relationships between credit and financial institutions. HM Treasury took the view that the correspondent banking requirements under the MLRs are aligned with EDD measures set out in Article 19 of the 4MLD. No exemptions are offered to member states, and therefore the UK will fully transpose the requirements into UK law. Firms are expected to take a risk-based approach in their activities following the identification of a correspondent relationship, while EDD measures will reflect the risks posed by the relationship and in line with a firm's risk appetite.
9.Politically Exposed Persons (PEPs): 4MLD makes a significant change in broadening the definition of a PEP to include domestic PEPs (as well as PEPs outside the UK). HM Treasury considers that 4MLD allows firms to take a risk-based approach in order to identify whether a customer is a PEP and appropriately apply EDD measures set out in Article 20 of the 4MLD. HM Treasury states that appropriate industry guidance is required and notes concerns raised over the potential inconsistencies between the Joint Money Laundering Steering Group guidance and FCA's Financial Crime Guide.
10.Beneficial ownership: Following the introduction of the beneficial ownership register in UK's People with Significant Control (PSC) regime for UK entities, 4MLD introduces the beneficial ownership register for corporates. HM Treasury also plans to introduce a public register of company beneficial ownership for overseas companies who already own or buy property in the UK or who bid on UK central government contracts. HM Treasury will need to define the entities covered by the 4MLD requirement but not caught by the PSC regime.
The UK Government has already stated it will not share trust beneficial ownership information with private entities or individuals.
11.Reporting: HM Treasury recognises that the UK Suspicious Activity Reports regime needs further improvement but states that any changes must meet the stronger 4MLD requirements. It also seeks views on whether it should implement the option to require record retention for an additional five years once the normal retention period has expired.
12.Supervision: HM Treasury proposes that all supervisors should be given an express power to refuse to register or to cancel an existing registration under certain circumstances. It enquires about the powers of supervisors and the reasons for which a supervisor may cancel or refuse registration or add conditions to it.
13.Administrative sanctions: 4MLD sets out minimum sanctions that member states must impose on obliged entities when they breach the requirements. HM Treasury plans not to set an upper limit on the administrative fines it can impose and seeks views on this, and on whether it should consider additional sanctions and measures.
The consultation will remain open for comments until 10 November 2016. The final policy decisions made by the Government will be implemented through legislation and are expected to come into force by June 2017.