Designed to add more teeth to the current EU laws combating the rampant menace of money laundering across the continent, the Fifth Money Laundering Directive (5AMLD) became EU law on 10th January 2020. It includes a host of significant changes to the existing framework of Anti-Money Laundering (AML) laws in the region.
There was a relatively short gap of just three years between the passing of 5MLD and its predecessor 4MLD (2015). To put things in perspective, the gap between the third and fourth directive was nearly a decade. Several factors were responsible for this increased urgency by the EU authorities.
Despite continued AML legislation, the specter of illegal cash flows and terrorism financing continues to plague the EU financial system. Some of the biggest money-laundering scandals were unearthed in recent years, particularly in the Dutch and Baltic banking systems.
New financial technologies like cryptocurrencies and prepaid cards are being harnessed for money laundering in a big way. Even terror attacks like the one in Paris in 2015 and the Brussels attack a year later, used such sophisticated means.
In this context, the authorities deemed it essential to bring some quick updates to the 4MLD. So in one way, one can almost consider the fifth Directive more as “4.5MLD”. Let’s take a look at these key updates one by one:
The fact that cryptocurrencies like bitcoin are favored by criminal enterprises and terrorists will not come as a surprise to many. Money laundering through cryptocurrency exchanges has been under the scanner of governments as well as prominent global agencies like the FATF.
5MLD amendments will bring increased transparency and compliance to both cryptocurrency exchanges and banks that deal with these exchanges. The main highlight is the screening requirement for exchanges – they will be considered as “obliged entities”, similar to other financial institutions that are required to perform KYC and reporting of illegal activity.
There is also a direct thrust against the veil of privacy used by cryptocurrency owners, with new provisions that give agencies the authority to access the details of cryptocurrency owners. Currency exchanges will also be required to register under the relevant national authorities, like the UK’s FCA.
Prepaid cards made it easier for criminals and terrorists to move funds anonymously, using low volume transactions. For prepaid cards, the identification threshold was €250 (set by 4AMLD). This limit has been lowered to €150, with anonymous remote or online card transactions further limited to €50.
This will undoubtedly make it harder for criminals to move cash anonymously across the EU borders. On top of that, the new rules also prohibit the use of prepaid cards issued outside the EU, unless those regions have a similar level of KYC standards as the 5MLD.
This particular strand within 5MLD is a direct continuation of a process that began in the previous directives. Building on that initial base, the new directives will expand the application of UBO regulations to trusts and other financial arrangements.
An EU-level database of inter-connected national registers for UBOs will be established. This has the potential to drastically improve the level of coordination and cooperation between member nations in monitoring UBOs.
Member states are required to take several steps to improve their UBO verification systems. Separate lists of UBO registers, one publicly available on companies, and another for bank accounts (not publicly available) should be maintained by member state authorities.
Transactions involving valuable goods that require AML checks will now include any works of art worth €10,000 or more. With a special focus on foreign terror networks, authorities will also be on the lookout for archaeological and cultural artifacts, as well as more traditional high-value goods like arms, oil, and precious metals.
Traders and other intermediaries in sales of these goods will be required to perform KYC or other forms of due-diligence AML reporting. The transactions involved can either be single or multiple-linked.
All EU companies that deal with customers or other firms in designated high-risk third countries will be required to increase their due diligence measures significantly. These include more steps to ascertain the sources of cash, more reporting requirements, additional authorization from senior management for such transactions and business relations.
EU member states will also be required to maintain an updated list of Politically Exposed Persons – public figures who may be vulnerable to corruption and money laundering charges. PEP lists can help compliance teams perform enhanced due diligence.
The outcome of the recent general election has lent a measure of stability and certainty to the future of Brexit negotiations. Though a no-deal Brexit still remains a distinct possibility, it should not have any major impact on the fate of 5MLD in the UK.
This is because the Government has already voiced its intent in transposing 5MLD changes to UK law, regardless of the trajectory of the impending Brexit. The HM Treasure consultation paper published in April 2019 has made this abundantly clear.
Since the January 10 deadline will already pass before any Brexit deal, 5MLD will be enforced without any procedural wrangles in the UK. But the same cannot be said about its successor, the 6MLD, which has a roadmap with a final deadline of 3 December 2020.
The fate of 6MLD in the UK will indeed depend on the eventual outcome of Brexit negotiations. If there is a withdrawal agreement, then we can expect the 6MLD to be a key part of the transitional period, which will most certainly last beyond 2020.
But if the outcome is a no-deal Brexit, then the ball will certainly lie in the UK’s court – it will be up to the Government to decide if they want to align with the EU and the FATF on AML. The chances are quite high that they will adopt it regardless, given the high risk posed by money laundering and terrorism funding.