July 2018: Regulatory Update - 5th AMLD Final (3) RG

June 19, 2018 – NEW 5^th AML Directive Publication

The latest revision of the Anti-Money Laundering Directive (“5th AML Directive” or “5AMLD”) was agreed by the European Parliament in April 2018, and subsequently published by the Official Journal of the European Union on June 19, 2018 (Directive EU 2018/843). The Directive then entered into force on July 9, 2018 with the deadline for EU Member States to transpose these enhanced measures into their national AML Laws by January 10, 2020.

This latest revision adds weight to the Commission’s on-going battle to strengthen protocols in the fight against money laundering and terrorist financing. The changes and enhancements are largely a result of some defining moments having occurred over the past few years exposing the need for further development of the 4AMLD (EU Directive 2015/849 of the EU Parliament).

The Panama Paper scandal revealed a lack of transparency amongst EU Member States in relation to the ultimate beneficial owners of corporate entities, trusts, bank accounts and the terror attacks in France in 2017 meant that the European Commission and Parliament recognised the 4AMLD  did not sufficiently address the latest trends and the new  sophisticated methods being utilised for money laundering and terrorist financing.

Transparency is now covered in the new directive and the use of virtual currencies and pre-paid cards are now also  now specifically addressed in that payment amounts on prepaid cards are now restricted for purchases being made both online and in person. The updates attempt to align AML and CTF requirements and ensure they have the same standards.

The key enhancements are as follows;

1. Extension of the Directive’s Scope to address newly developing risks

• Virtual currency exchange platforms (“VCEPs”[1]) and Custodian Wallet Providers (“CWPs”[2]) are now within scope:
  • VCEP and CWP’s are required to verify the identity of their clients and apply the same Due Diligence measures as the financial institutions to prevent money laundering and financing terrorism.
  • They will also be subject to an obligation to implement preventative measures and report suspicious transactions.
  • A central register for virtual currencies users identities and wallet addresses has been introduced and is accessible by FIU. (This covers risks associated with trader placed transactions not using a VCEP and/or CWP).
  • Through the regulation of virtual currency providers, platforms and custodians, the 5AMLD facilitates the FIU in detecting suspicious activities and transactions.

The amended Directive now focuses on Virtual Currency risks and regulations. This is approach already being taken in the US, where Virtual Currency Exchange’s are subject to the Bank Secrecy Act and are required to register as Money Service Business (“MSB”) with FinCEN.

• Anonymous Prepaid cards
  • The misuse of prepaid cards will be tackled through the suppression of anonymity in online use, with the threshold now limited to €50 (previously €100). For in-shop use, the existing €250 threshold is being reduced to €150 for direct purchases.

• People now in Scope

Other professionals now in scope, and therefore subject to apply KYC and enhanced Due Diligence measures on their clients are:

• Traders or intermediaries trading works of art (where the value is higher than €10,000).
• Any person providing aid, assistance or advise on tax matters as profession.
• Estate agents acting as an intermediary in the letting of immovable properties (when the letting amount is higher than € 10,000per month).

2. Supervisory Authorities empowerment

• Enhanced powers for the relevant supervisory authorities and the EU financial intelligence units (FIU) have been introduced.
• EU FIUs will be able to request supplementary information from any obliged entity and have direct access to information held by them (without there having been a suspicious transaction report). This should ensure that the legislation in all Member States is aligned with international standards.

3. Enhanced Customer Due Diligence Measures

• Customer due diligence measures have been enhanced, with major focus on financial transactions involving high-risk third countries.
• A Predefined list of EDD measures is to be applied by obliged entities:
  • The Directive suggests that Member States may impose additional restrictions on conducting business relationships or transactions with counterparties from high risk countries. It could potentially require EU banks and financial institutions to review, amend and if necessary terminate banking relationships with institutions in high risk third countries.

4. Reinforced Transparency Measures

The revised Directive provides extended responsibility and reporting obligations, facilitating the collaboration between national FIUs and bank supervisors regarding the exchange of information.

• Ultimate Beneficial Owners (“UBO”) registers of EU Member states to be interconnected, facilitating transparency and collaboration in the fight against money laundering and terrorism financing.
• New UBO registers for legal entities are to become publicly accessible to allow competent authorities, FIUs and obliged entities to identify the beneficial owners in an simple and efficient way.
• Firms will be obliged to report any discrepancies between beneficial ownership information available in the central registers and beneficial ownership information available to them. In the case of reported discrepancies, Member States will be obliged to take appropriate action  to resolve the discrepancies in a timely manner and, if appropriate, a specific mention may be included in the central register in the meantime.
• Existence of a Centralised National Bank and payment account register, or a central data retrieval system, to allow identification of bank and payment’s account. The access is limited to the FIU and the national competent authority.
• Clarification on the definition of BO for trust: this now includes all legal and natural persons exercising ultimate control over the trust, directly or indirectly (trustees, settlor, beneficiary, protector).

Conclusion

This latest move certainly represents an important step forward in the harmonisation and coalition of EU Member states combatting the latest changing landscape and ever-growing list of methods utilised by criminals for money laundering and  the financing of terrorism.  However, as technology continues to evolve, notable gaps quickly appear and it is therefore no surprise that even after this announcement the e EU Commission are already beginning work on a 6^th AML Directive.

The 6^th Directive will address the nuances and discrepancies between different  EU Member States in the transposition of the directive into national laws. There will be a common definition to ensure consistency of adoption across all Member States in the future.

The differences in sanction measures applied to criminals for predicated offences will also be addressed. A strengthening in overall awareness and a monitoring program for obliged entities detecting criminal offences will be put in place.

[1] VCEP are providers engaged in exchange services between virtual currencies and fiat currencies” (i.e. cryptocurrency exchanges). Virtual currencies are defined as digital representation of value that is not issued or guaranteed by a Central Bank or Public Authority.

[2] CWP are defined by the Directive as an entity that provides accounts that are denominated in virtual currencies and via which payments in virtual currencies can be rendered and received. They store private cryptographic keys on behalf of its customers.

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