By John Comben, Director of Consulting Services
From an ethical and regulatory perspective, Mansion House Consulting (MHC) recognises the threat posed to society and financial institutions by perpetrators of financial crime.
Over the past 3 years we have enhanced our Financial Crime capability in order to support our clients to meet regulatory obligations and where needed, provide expertise and resource to address challenges with subjects such as Client Due Diligence (CDD), Sanctions screening, developing Financial Crime Policy assessing risk and training staff.
MHC has expertise around the whole Financial Crime landscape. Our consultants have extensive business and anti financial crime expertise. This enables MHC to better support our clients by listening to them to understand their needs and provide our own insight as to how to tackle the challenges they face.
This article is intended to provide a flavour of what the 5th AML Directive means and is not intended to be an exhaustive review.
The European Union AML Directives provide a clear set of rules for member states supporting it’s Anti Money Laundering and Counter Terrorist Financing regime. EU members must translate Directives into their own legislation. Examples in the UK include Proceeds of Crime Act 2002 and Money Laundering Regulations 2017.
The 4th AML Directive covers many key areas largely in response to recommendations from the Financial Action Task Force (FATF), including (but not limited to):
- Adding tax related crimes as predicate offences
- Requirement for a risk based approach to Client Due Diligence
- Changes to how Politically Exposed Persons (PEPs) are treated (basically applying the same standards to domestic and foreign PEPs)
- Comprehensive coverage of gambling (including online gambling)
- Reduction of reportable cash payment threshold to €10,000
- Stronger powers to enforce sanctions
- Improved co-ordination of cross border financial crime cases
The 5th AML Directive (in place since 9th July 2018) came into force from 10th January 2020 and was largely driven by terrorist activities in 2016. It comes relatively shortly after the 4th AML Directive that came into force in June 2017, reflecting the need to continuously review and update regulation.
The UK has amended legislation to reflect the 5th Directive requirements (MLR17).
What’s new in the 5th Directive?
- Financial Intelligence Units (FIUs) now have greater access to information and improved co-operation between EU FIUs. An example is that FIUs can now have access to information on who owns virtual (crypto) currency.
- Virtual currencies to come under the scope of AML Directive, with a definition of what a crypto currency is (a digitised item with value, that can be exchanged, traded, accepted)
- Virtual currency exchanges are now designated as ‘obliged entities’ meaning they now fall under the same regulatory requirements as financial institutions. They must be registered with regulators, for the UK that would be the Financial Conduct Authority.
- Prepaid cards to have lower thresholds for customer identification/verification (down to €150)
- Prepaid card transaction limit to be reduced to €150 (when used in a shop) or €50 for online purchases
- Stronger checks on transacting with higher risk jurisdictions, particularly to identify beneficial owners
- Full public access to national beneficial ownership registers and cross referencing of such registers (national registers to be interconnected at EU level). Bringing clarity to who the real owners of companies are.
- Trusts must abide by regulations covering beneficial ownership and provide information to regulators and others with a legitimate requirement
- Businesses such as Art dealers (and other business types dealing in high value goods) come into scope, with a transactional threshold of €10,000. Due diligence will now need to be performed for both single and multiple transactions that reach or exceed the threshold.
Why are these steps important?
Measures to combat financial crime and terrorist financing are constantly evolving. Perpetrators of such activities are always on the lookout for ways to launder money for their own gain or fund illegal activities. All too often, national and international bodies are playing catch up in terms of regulations to address the risks/threats.
How will Brexit affect the UK re EU AML Directives?
That’s an unknown. As the UK prepares to exit the EU, it enters a transition period of 11 months where in effect nothing changes. After that, depending on trading and other agreements, the UK may not be obliged to follow EU regulations. However, in terms of financial crime and counter terrorist financing, it is likely that the UK Government would seek to maintain a tight regulatory environment and endorse recommendations from bodies such as FATF.