Just when you finished complying with the fourth money laundering directive (4MLD), along comes 5MLD! So, I've created a quick guide to what's changing and how you need to prepare.
The EU adopted the Fifth Money Laundering Directive (5MLD) back in April 2018 to further strengthen the response against money laundering and terrorism financing and it must be incorporated into legislation by member states by January 2020. And regardless of what happens on Brexit the UK has committed to fully adopt the provisions of 5MLD.
5MLD is an EU response to a series of terrorist attacks in Europe, large data leaks including the Panama Papers in 2017, the unprecedented rise in the use of cryptocurrencies and the ongoing intent by the EU to fully implement the FATF Recommendations by all its member states.
The Fourth Money Laundering Directive (4MLD) introduced more detailed provisions in relation to the risk based approach, beneficial owners and Politically Exposed Persons, and these provisions will remain when 5MLD comes into force.
Key additional requirements of 5MLD
- Inclusion of Virtual Assets (e.g. Crypto-currencies), Virtual Asset Service Providers (e.g. Digital Wallet Providers) and Art Dealers within the scope of the money laundering laws and regulations.
- More clarity around PEP risk management.
- A national beneficial owners’ register.
- Recognition of the trend from physical identification to digital identity and electronic verification.
- A common interpretation of what Enhanced Due Diligence means.
- Identification of prepaid card holders.
- Information sharing by Financial Intelligence Units.
Obviously firms do not need to comply with an EU Directive, as it’s the member states that are obliged to transpose the provisions of the Directive into national laws and regulations, providing a framework firms do have to comply with. But the changes are coming and it is only prudent to start planning for them.
What you should be doing to ensure 5MLD compliance
- As always your defence is only as good as the quality of your people, their awareness and their motivations. A crucial first step is to ensure that all staff throughout your organisation are fully aware of the changes affecting their daily work. It is equally important that the Board and Senior Management are appropriately briefed on the changes affecting their companies.
- The creation of a national beneficial owners’ register will make identifying and monitoring beneficial owners easier, but until we have clarity about the quality and exact scope of that register, companies should continue to manage beneficial owners as per the provision flowing out of 4MLD.
- Bringing VAs, VASPs and Art Dealers within the scope of obliged entities, existing obliged firms should carry out a risk assessment to see how their risk profile is changing if they are dealing with firms that have now become oblige entities.
- Obviously the Vas, VASPs and Art Dealers themselves need to implement the same AML/CTF policies, procedure and controls as traditionally regulated entities. This also includes ensuring that these firms’ staff and senior management are adequately trained.
- Firms will need to ensure that their PEP list is up to date and well maintained. They will need to be able to explain the criteria their PEP list providers are using when they compile their lists and how secondary identifiers (such as date of birth, date appointed to office or nationality) are used to reduce false positives.
- With the stipulation that electronic identification within the onboarding process should be used as much as possible, firms will need to articulate and manage a clear migration strategy towards this, whilst ensuring that their technological infrastructure can support this.
- Firms need to review their Enhanced Due Diligence processes to ensure these are aligned with the enhanced clarity provided within 5MLD.
- Additional provisions will need to be made in relation to the issuance of prepaid cards, in that holders of prepaid cards will need to be identified at a reduced threshold of 150 Euros, and for any remote transaction over 50 Euros. This sounds easy but this will very likely require comprehensive operational changes.
- FIUs will be given the authority to demand certain types of information on a firm’s clients even when a SAR has not been filed. This makes it crucially important that client account and transaction data are managed in such a way that a firm can respond to these requests in a timely manner.
And there is more to come. Recently, Standard Chartered and Unicredit were fined billions in the US for money laundering and sanction breaches. Latvia is stepping up financial reforms in the aftermath of the scandal at ABLV, a Latvian bank said to be linked to North Korea’s nuclear weapons program, to money laundering and Russian corruption.
And the MLD train is not stopping at number five either. With 5MLD being transposed into national legislation in a few months, the EU will step up even more with 6AMLD landing in December 2020… to be transposed by June 2021!
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