The Fifth Money Laundering Directive (5AMLD) will come into force on January 10, 2020. Building on the regulatory regime applied under its predecessor, 4AMLD, 5AMLD reinforces the European Union’s AML/CFT regime to address a number of emergent and ongoing issues. The impact of 5AMLD will be far-reaching. In this article, we’ll discuss its key changes and hear from industry experts about why they matter.
“More regulation creates clarity – and clarity creates peace of mind”
Remigio Bonguliemi – Chief Compliance Officer, Trade.io
Although much of 5AMLD’s content updates the 4MLD, it makes a significant new legislative step in the treatment of virtual currencies. In more detail, 5AMLD introduces the following measures:
- A legal definition of cryptocurrency which may broadly be regarded as “a digital representation of value that can be digitally transferred, stored or traded and is accepted…as a medium of exchange.”
- Cryptocurrencies and cryptocurrency exchanges are considered “obliged entities”, and face the same CFT/AML regulations applied to financial institutions under 4AMLD. Practically, this involves an obligation to perform customer due diligence (CDD), and submit suspicious activity reports (SAR).
- 5AMLD actually goes further than 4AMLD in imposing reporting obligations by giving Financial Intelligence Units (FIU) the authority to obtain the addresses and identities of owners of virtual currency and, in so doing, to push back against the anonymity associated with the use of cryptocurrency.
- 5AMLD also introduces regulation for providers of cryptocurrency exchanges and wallets – which must now be registered with the competent authorities in their domestic locations, for example, Germany’s BaFin, or the UK’s Financial Conduct Authority.
The introduction of regulations paves the way for EU operators to introduce more cryptocurrency products and, crucially, to compete with Asian countries, which have already made legislative progress in integrating cryptocurrency with financial markets.
Remigio Bonguliemi, Chief Compliance Officer of Trade.io, points out that safety is key to increasing confidence in cryptocurrency: “If you’re launching centralized products, having regulations is incredibly helpful to be able to sleep at night and know that you’re not doing anything illegal.”
After 4AMLD cut the monthly transaction limit on anonymous prepaid cards to €250 (a measure to combat terrorist financing), 5AMLD sets an even lower limit of €150: this limit also applies to the amount that can be stored or topped-up on the cards. The 5AMLD limit means that firms will be required to carry out identity checks on customers using prepaid cards funded with more than €150. Similarly, anonymous remote or online transaction limits are reduced to €50.
Prepaid cards issued outside the EU are now prohibited unless they were issued in a territory enforcing legislation equivalent to the EU’s AML/CFT and KYC standards. Obliged entities must review the way they handle prepaid card payments and put mechanisms in place to identify (and refuse) transactions using cards from non-EU sources. This requirement may involve significant revision of existing systems and procedures.
Christopher Baines, the Head of Compliance at Pockit, said: “The directive is definitely a step in the right direction: it reduces the number of options for criminals.”
5AMLD expands the scope of legislation regarding other stores of value: art traders, for example, or those acting as intermediaries, now have AML/CFT reporting obligations and will have to perform due diligence procedures on customers. The directive specifically singles out high value works of art for the first time, by applying AML checks to transactions involving art which amount to €10,000 or more.That rule applies to single transactions or multiple linked transactions.
The scope of 5AMLD is not limited to art: now, transactions involving a range of high value goods are considered high risk – including oil, arms, precious metals, and tobacco. Notably, historical, cultural and archaeological artifacts are included in the regulation – a move to specifically target funding for terrorist groups such as ISIS.
In 2017, 4AMLD introduced a focus on ultimate beneficial ownership (UBO) for the purposes of risk mitigation and money laundering prevention. 5AMLD builds on those steps, introducing the following measures:
- UBO lists (drawn up under 4AMLD) are to be made publicly accessible within 18 months of 5AMLD’s implementation date.
- Trusts (or any similar arrangement) must observe beneficial ownership regulations and, like companies, must make that information available to authorities or others demonstrating legitimate interest.
- UBO national registers must be inter-connected at an EU level in order to facilitate cooperation and the exchange of information between member-state authorities.
- Member states are to strengthen their UBO verification mechanisms to ensure the information they carry is accurate and reliable.
- Member states must introduce separate UBO registers for bank accounts: unlike company UBO registers, these lists will not be publicly available and only accessible by authorities.
The requirement to register beneficial ownership and have that information publicly available is, according to Global Head of Business AML, at Banking Circle, Livia Benisty, “a vital first step in detecting some of the vast flows of illicit funds transmitted through the financial system, and places a handicap on the preferred instrument of money launderers globally.”
Companies that do business with customers from high-risk third countries are, under 5AMLD, required to perform enhanced due diligence measures specifically focused on addressing the deficiencies in those countries’ AML protections and the money laundering risks they present. The measures require firms to:
- Obtain information on customers and UBO, including establishing the purpose of proposed transactions and the source of UBO funding and wealth.
- Report transaction details with high-risk third countries to senior management and obtain approval prior to establishing or continuing those business relationships.
- Increase controls on specific business relationships and identify transactions that may need further scrutiny.
5AMLD requires EU member states to compile and publicly release a functional PEP list made up of prominent politically exposed public functions. This requirement extends to accredited international organizations: the EU will also release an EU-level version of the list.
Functional PEP lists are rare and so can require explanation. The list created by the EU member states under their 5AMLD compliance obligations will feature the positions that are considered politically exposed but will not name the person fulfilling the function (which, of course, will change periodically). These lists are designed to make it easier for smaller compliance teams, or those with lower volumes of customers, to identify the PEPs that they should be screening against and monitoring for ongoing changes to risk.
Keeping a list of people performing these functions up to date may involve significant administrative effort. As Joanna Jenkins, Chief Compliance Officer at Railsbank pointed out, since “data discrepancies could cause issues,” companies should take careful steps to ensure a sufficient level of compliance.
This article should be used as a guide and not taken as legal advice.
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