Speed Read: What is in store following the recent adoption of the Fifth Anti-Money Laundering Directive by the Council of the European Union? This piece focusses on the proposals under 5MLD and their impact on the UK’s anti-money laundering and terrorist financing framework.
Less than a year since the UK’s introduction into domestic law of the Fourth Money Laundering Directive (2015/849) (‘4MLD’) minds are turning to the transposition of the next one. The Fifth Money Laundering Directive (2016/0208(COD)) (‘5MLD’) amends 4MLD and forms part of the broader action plan at EU-level following terrorist attacks in Europe in 2016.
In December 2017, the Council of Europe, the European Parliament and the European Commission reached political agreement on a new anti-money laundering directive. On 14 May 2018, the Council of the European Union adopted 5MLD, which in essence, seeks to strengthen EU rules aimed at preventing money laundering and terrorist financing.
5MLD will enter into force 20 days after its publication in the Official Journal of the European Union and thus trigger the 18-month time limit imposed for EU Member States to transpose 5MLD into national law.
5MLD, in amending 4MLD, comprises the following:
- Provisions aimed at increasing access to information on beneficial ownership, improving transparency of information on the ownership of companies and trusts;
- Provisions which address the identified risks linked to pre-paid cards and virtual currencies through increased customer identification and verification thresholds, policies and procedures;
- Provisions which enhance cooperation between member state Financial Intelligence Units (‘FIUs’); and
- Provisions aimed at improving checks on transactions involving high-risk (non-EEA) third countries.
Separately, 5MLD will extend the definition of “estate agents” to include letting agents but only in relation to transactions for which the rent amounts to €10,000.00 or more.
Interestingly, an amendment which would have allowed Member States to exclude domestic Politically Exposed Persons (‘PEPs’) from enhanced due diligence requirements, imposed by 4MLD, was proposed by the Council but ultimately not included in the final 5MLD. Instead, a published report on this issue is anticipated from the European Commission in 2019.
1. Beneficial Ownership and Registers
4MLD already established obligations with respect to the identification of beneficial owners of legal entities and other legal arrangements including the retention of that information. 5MLD goes one step further by granting access to the information and requiring member states to set up central mechanisms to identify holders and beneficial owners. Although 5MLD does not go as far as to create a general right of public access to the Register of Trusts, it does require the establishment of a legal framework to be adopted, based on the “legitimate interest” test, for granting public access to information on the beneficial ownership. This requirement will have important legal implications for the UK. Such a legal framework does not currently exist with respect to the register held by HM Revenue and Customs.
The UK, along with other Member States, is already under an obligation to ensure that corporate and legal entities, such as a trust, obtain and hold adequate, accurate and current information on their beneficial ownership. 5MLD re-asserts this obligation. 5MLD also amends 4MLD such that where out-dated or inaccurate information is contained in the register, Member States are required to impose “effective, proportionate and dissuasive measures or sanctions.”
As has been highlighted recently, and as noted by the House of Commons Scrutiny Committee discussed below, questions still remain about the manner in which information on beneficial ownership of companies and trusts registered in the UK is verified by Companies House and HM Revenue and Customs. Although this is an area which has receive government and media attention in the past months (with the changes to the Scottish Limited Partnerships regime), until verification of the information contained in these registered is detailed by Government, it is likely to continue to draw criticism from media and relevant commentators and remain an avenue for potential abuse by money launderers. After all, accurate and up-to-date information on beneficial ownership is fundamental to ensuring transparency in ownership and putting an end to individuals hiding behind corporate structures and trusts.
In short, 5MLD’s amendment provisions in relation to beneficial ownership and the requirement of Member States to have public registers of companies’ and trust beneficial ownership information is further evidence of a trend toward transparency and may serve to further add pressure on offshore jurisdictions to follow suit.
2. Enhanced Cooperation between FIUs
With respect to enhanced cooperation between FIUs, 5MLD makes specific provision for FIUs to have access to information contained within centralised national bank and payment account registers. The Commission is required to facilitate the interconnection of these registers, with the goal being the creation of an information retrieval system which will operate at the Member State level which provides for the prompt identification of account holders. The data retrieval system will be accessible by national FIUs and other deemed competent authorities and anticipated to be operative by early 2021.
3. New Technologies (Virtual Currencies and Pre-paid Instruments)
5MLD amends the list of obliged entities listed in 4MLD such that virtual currency exchange platforms and custodian wallet providers will now fall in the scope of EU anti-money laundering and counter terrorist financing directives. Providers of these new technologies will have to implement preventative measures (such as customer due diligence controls) to mitigate identified money laundering and terrorist financing risks. These amending provisions formally bring the cryptocurrency and virtual currency sector out of the unregulated market and place firm requirements on companies operating in this space to apply preventative measures.
5MLD also attempts to tackle the anonymity associated with the use of pre-paid instruments, such as re-loadable cards. Although it is recognised that these pre-paid instruments do have many legitimate uses that contribute to social and financial inclusion. However, the anonymity associated with these pre-paid instruments lends itself well to the financing of terrorism. As such, 5MLD reduces the threshold amount requiring due diligence, which has been extended, to be applied to pre-paid cards or e-money instruments from €250 to €150. Moreover, if a pre-paid card is issued in a third country, EU Member States are banned from allowing their use unless the pre-paid card meets EU requirements.
4. High-Risk Third Countries
5MLD empowers the Commission to adopt delegated acts identifying high-risk third countries which take into account strategic deficiencies in the countries legal and institutional anti-money laundering and counter terrorist financing framework, the powers and procedures of the third countries competent authorities for the purposes of combatting money laundering and terrorist financing and the effectiveness of the third countries in addressing risks associated with money laundering and terrorist financing.
5MLD goes further and provides that, where applicable, Member States shall apply one of a number of measures with regard to high-risk third countries in compliance with the EU’s international obligations. These measures include refusing the establishment of a subsidiary or branch or representative office of obliged entities from the high-risk third country concerned or prohibited obliged entities from establishing branches, subsidiaries or representative offices in that identified country. Alternatively, increased supervision or increased external audit measures can be applied to obliged entities offices, subsidiaries or financial groups entities or subsidiaries located in the high-risk third country.
Moreover, 5MLD requirements Member States to require obliged entities to apply further specified enhanced customer due diligence measures with respect to business relationships or transactions involving high-risk third countries.
For the UK regulated sector, the list of high-risk third countries will prove a helpful resource to business in maintaining, reviewing and updated internal Risk Assessments and relevant policies and procedures. Although the Commissions list of non-EU countries with identified deficient money laundering regimes is not new, the controversy of who is, and is not, contained in the list will likely remain.
Response to 5MLD: House of Commons Scrutiny
In its twelfth report of 2017-2019, the House of Commons European Scrutiny Committee provided a summary of 5MLD, proposed timeline of transposition and conclusions regarding its requirements. The following features of the Committee’s assessment are interesting to note.
First, the Committee’s assessment of 5MLD as “legally and politically important” reflects the recent government rhetoric of cracking down on the laundering of ill-gotten gains through the UK financial system and prevention of its use for the financing of terrorism.
Second, with respect to increased access to beneficial ownership information, the Committee was informed by the UK Economic Secretary to the Treasury that 5MLD “meets many of the UK’s negotiating priorities, including avoiding public access to our register of trust beneficial ownership; ensuring appropriate criteria against which high-risk third countries will be assessed; and requiring EU Member States to follow our leadership in establishing public registers of company beneficial ownership.”
Third, with respect to transposition timeline the Committees report anticipates that “most, if not all, of [5MLD] will have to be transposed in the UK as a matter of law.” The Committee notes that a post-Brexit transitional arrangement which would see the UK stay in the Single Market would mean that the UK would have to continue to apply EU law for the duration of the transitional arrangement period as if it were still an EU Member State. Thus, although the transposition of 5MLD would fall after the schedule date of exit in March 2019, UK affected business and the regulated sector should continue to monitor developments in this area and anticipate further domestic regulatory changes to comply with 5MLD.
Lastly, as mentioned, the House of Commons has flagged the issue of how information is managed by Companies House and HM Revenue and Customs. This is an important issue and one that needs to be addressed before any further requirements are placed on the regulated sector or other individuals with respect to beneficial ownership information.
What will 5MLD mean for the UK? Overall, these amendments do not represent a wholesale change for the anti-money laundering and counter-terrorist financing framework. However, its introduction will necessitate a review and updating of internal policies and procedures. 5MLD is essentially here to fill in the gaps identified during the two years of negotiation and discussion of 4MLD. Whilst practitioners and businesses wait for 5MLD to materialise it may be that further gaps will be identified, prompting a discussion of a 6MLD and wider concerns about having to play constant regulatory catch up.