As the 6th Anti-Money Laundering Directive is implemented across the European Union, the money remittance industry must adapt to new compliance challenges.
The European Union’s 6th Anti-Money Laundering Directive (6AMLD) will be transposed into law for all member states by 3 December 2020. The highlight of the new directive is the harmonization of money laundering as a criminal offense in the domestic legislation of all EU member states. That harmonization is achieved primarily by the outlining of 22 money laundering predicate offenses, including 2 new offenses: cyber-crime and environmental crime.
Beyond the harmonization of predicate offenses, 6AMLD also:
- Expands the definition of money laundering to include aiding and abetting.
- Extends criminal liability from individuals to include legal persons such as companies.
- Increases the minimum prison sentence for money laundering to 4 years.
- Introduces information sharing requirements between jurisdictions.
The scope of 6AMLD means that banks and other financial service providers must consider their compliance efforts carefully, especially given the prospect of extended liability for crimes that occur within their companies. However, the introduction of 6AMLD and the compliance challenges that it entails may be more acute for financial services providers operating in certain industries: in this article, we will examine the 6AMLD compliance challenges that firms in the money remittance industry face, and how the directive may affect ongoing AML/CFT efforts.
6AMLD was preceded by the 5th Anti-Money Laundering Directive, which was implemented across the EU on 10 January 2020. 5AMLD was innovative in a number of ways, not least the introduction of regulations for cryptocurrency services, reporting requirements for the purchase of high-value goods, registers for beneficial ownership, enhanced due diligence for high-risk countries and public lists of politically exposed persons (PEPs). Each of these AML requirements represented compliance challenges for remittance businesses, particularly in contexts involving the transfer of money across international borders. However, 5AMLD was also introduced with relative regulatory clarity: the high-value goods requirement, for example, involves a €10,000 transaction threshold, an unambiguous standard by which to measure compliance.
By contrast, 6AMLD focuses less on the enforcement of compliance standards than it does the practice of compliance, and the ongoing need for financial services firms to understand AML/CFT regulations and shift their risk-based response in order to comply with them. For remittance firms, that means rethinking their approach to many aspects of AML/CFT to ensure that compliance is not only achieved but delivered on an ongoing basis.
In 2020, the global remittance industry is expected to be worth around $746 billion, with an estimated growth of around 11.75% in the run-up to 2024. That value makes remittance services a target for international money launderers and means that 6AMLD compliance will be scrutinized closely by authorities.
In more detail, remittance firms should consider the following specific 6AMLD challenges…
Identifying cross-border crimes: Money remittance services primarily involve the transfer of funds across international borders, which means firms are particularly vulnerable to certain money laundering predicate offenses. Examining the list of predicate offenses set out by 6AMLD, it’s clear that some, such as “murder and grievous bodily harm” or “robbery and theft,” are far less likely to include a cross-border component, and therefore less likely to be relevant to the risk-based AML/CFT program implemented by a remittance service provider. However, other predicate offenses on the list, such as sexual exploitation, drug trafficking and smuggling are more likely to involve a cross-border component, and therefore pose a greater risk to remittance service providers. The two new predicate offenses added in 6AMLD — environmental crime and cyber-crime — are extremely likely to involve a cross-border component.
With this in mind, remittance firms will have to consider their risk assessments more carefully to ensure that, while they are able to detect high-risk cross-border customer activities, they do not neglect the risk associated with the other predicate offenses included on the 6AMLD list. Practically, this will mean an inevitably expanded compliance burden as AML/CFT resources are redirected to meet all necessary monitoring obligations.
Distinguishing offenses: Complicating a remittance firm’s AML response to higher-risk and lower-risk customer activities is the challenge of distinguishing between the predicate offenses outlined by 6AMLD. While they may be discrete in a legal sense, many of the crimes are similar to each other, both in terms of methodology and effect. Participation in organized crime, for example, exists on the criminal spectrum in close proximity to drug trafficking, trafficking in stolen goods and theft — to name just a few methodologically similar offenses.
The challenge for remittance businesses lies in distinguishing between these offenses in the development and implementation of their AML/CFT program, especially when some offenses are part of, or committed concurrently with, others. As with the need to balance the risk associated with cross-border and domestic customer activities, devising a risk response for every predicate crime on the 6AMLD list may be unfeasible and onerous, but, alternatively, legislating for only a small number of offenses that a given remittance firm deems “relevant” to its operational scope may result in compliance blindspots.
Environmental crimes: The new category of predicate offense, environmental crime, is particularly relevant to the remittance industry. Environmental crimes tend to involve the exploitation of natural resources or exotic animal species, often in countries with a low standard of domestic regulation. Examples of environmental crimes might include illegal logging in the Amazon rainforest, or the illegal hunting of elephants for the ivory trade in Africa. The products of those crimes are often transported for buyers around the world or involve a number of foreign criminal elements as part of a distribution network, with illegal profits being transferred via remittance.
Given the risk of remittance firms becoming involved in environmental crime-related laundering, compliance teams must ensure they are familiar with the relevant criminal methodologies and prioritize them within their AML monitoring framework. Certain environmental crimes may be associated with countries or regions: in order to manage risk, firms must learn to spot red-flag indicators that customers are engaged in an environmental crime and are attempting to launder illegal proceeds.
Adverse media: In order to manage an expanded risk landscape and fulfill their compliance obligations under 6AMLD, remittance firms must ensure their AML programs are set up to screen for and capture any adverse media that involves their customers and clients. Given the scope of potential money laundering offenses that will now potentially involve remittance services, firms must seek to capture adverse media from across the world.
Practically, this means that remittance firms should implement adverse media monitoring measures that take in stories across a spectrum of mediums, including televised and online news outlets. Monitoring must be based on a robust customer due diligence process in order to ensure customer identities are verified accurately along with any associates, close family members or beneficial ownership concerns that may affect their risk profiles.
At a glance, the compliance challenge associated with 6AMLD is significant for the remittance industry. The increased focus on accountability and penalties suggest that the EU is seeking to ensure that firms take on more AML/CFT responsibility — with less discretion for dismissing risks that were previously considered out of a compliance program’s scope.
The 22 predicate offenses set out and harmonized by the new directive are relatively prescriptive: given the difficulty involved in distinguishing between some of those offenses, remittance firms may struggle to implement AML measures for those that don’t present a realistic threat, no matter how capable or robust their compliance program is. The philosophy behind risk-based AML suggests that firms adjust their response commensurate with the level of risk they face: under the requirements of 6AMLD, however, most if not all remittance firms will be forced to cast a broad net to ensure they are able to respond to a wide range of scenarios.
Practically, the 6AMLD compliance burden may force some remittance firms to change the way they conduct their AML risk assessments. This may mean that firms have to broaden the scope of their screening and monitoring measures, seeking to capture information relevant to the wider risk landscape. Screening, for example, may have to be account-focused rather than payment focused, performed on a regular schedule rather than when a payment event occurs.
”“There are lots of unknowns. On paper, this looks quite onerous for the remittance industry. And I think we're in need of some EU or local regulator guidance in terms of interpreting some of the key aspects of this. Noticeably the requirements around the 22 predicate offences.”David DryHead of Compliance, WorldRemit
6AMLD compliance will obviously entail financial costs that may be onerous if not prohibitive to the budgets and business models of many remittance firms, and it seems likely that regulatory guidance, particularly at a local level, will become necessary. Guidance from local regulators in conversation with the EU’s AML legislators will provide welcome clarity for remittance firms seeking to prioritize and manage their compliance efforts, but the certainty that those regulators provide will depend on their interpretation of the directive itself.
Interpretations from member-state financial regulators may ultimately be counterproductive and have the unintended effect of working against the original harmonization objectives of 6AMLD. As each country adopts its own framework to implement 6AMLD, and as remittance firms work to adapt their AML programs, legislative divergence becomes more and more likely. The situation becomes more complex for remittance firms with an international footprint as they find their competitiveness degraded depending on the jurisdiction in which they are operating.
Remittance firms, and all other obligated entities, have until 3 June 2021 to comply with the requirements of 6AMLD. During that period, there may be further dialogue between national regulators and the EU that results in greater clarity and direction for the remittance industry, and helps to reduce the potentially onerous compliance burden. Until then, remittance firms should be ready to divert more resources towards compliance to ensure that they are ready for the new laws when they arrive.