29 Dec 2017
There were some major moments on the EU anti-money laundering (AML) scene in 2017 – on the legislative and regulatory front, highlights included the Fourth (4AMLD) and Fifth (5AMLD) Anti-Money Laundering Directives, as well as recommendations from the PANA Committee (Panama Papers Committee).
Here are some take-aways:
4AMLD kicks in
2017 saw the actual implementation of 4AMLD. The major changes it brings about include a greater emphasis on the risk based approach (RBA), the collection of beneficial ownership details of corporates in national registers, the collection of beneficial ownership details of trusts, the extension of the politically exposed persons (PEPs) regime to domestic office holders and the increased scope of enhanced due diligence to accounts between banks that are used for the settlement of securities transactions.
Other key 4AMLD points
Some of the new requirements, however, have received comparatively less attention. These include:
Firstly, there is a greater emphasis on corporate groups having consistent group AML policies across all business units and jurisdictions.
The 4AMLD measures replicate the 2012 Financial Action Task Force (FATF) Recommendations which themselves were heavily influenced by the US Senate subcommittee report into the activities of HSBC.
In extremis, where a foreign unit is unable to comply with group policies due to local law prohibitions, head office should consider closing the unit.
Secondly, 4AMLD affords greater recognition of data protection concerns whilst emphasising the need for increased information sharing around a corporate group.
On the one hand, 4AMLD recognises that the collection and processing of personal data in the fight against money laundering is in the public interest.
However, on the other hand, it now requires firms to train their staff in data protection laws and procedures. Additionally, when assessing whether a foreign jurisdiction has laws equivalent to 4AMLD, data protection laws must be considered as a key element of the process.
‘High risk’ lists
Thirdly, whilst the EU has withdrawn its list of equivalent jurisdictions for 4AMLD purposes and left that function to individual firms, the Directive required the European Commission to produce a list of third countries that are “high risk” in terms of money laundering to the EU28.
Firms are required to apply enhanced due diligence measures to clients from those jurisdictions.
The European Parliament was very disappointed when the Commission simply copied the FATF list of countries who have serious deficiencies in their AML legislation.
Parliament noted that the Directive required the Commission to devise and use its own methodology to produce a list of “high risk” third countries. Parliament also expressed its displeasure that no tax havens or secrecy jurisdictions were deemed to be “high risk”.
The Commission responded by undertaking to devise its own methodology for producing a “high risk” list by 2019.
5AMLD takes shape
Even before 4AMLD had been implemented throughout the EU28, in light of the Bataclan attacks in Paris and the publication of the Panama Papers, the European Commission proposed further measures to strengthen 4AMLD.
Just before Christmas 2017, the Council of Europe representing the 28 national governments, the European Parliament and the European Commission arrived at a political agreement on these further measures, colloquially known as “5AMLD”.
It is expected that this agreement will not be expressed in a formal legal text until the middle of 2018 with subsequent national implementation due in late 2019 or early 2020.
The principal 5AMLD measures include:-
- Public registers of the beneficial ownership details of companies and increased connectivity between national registers;
- National registers of the beneficial ownership details of trusts will be available to the authorities, the police, those firms subject to specific AML regulation, (such as banks, etc.) and those who have a “legitimate interest” in accessing the details – it has been subsequently clarified that journalists and civil society organisations will be deemed to have such “legitimate interests”;
- Greater verification of entries on the national beneficial owner registers in order to make them more accurate and reliable;
- Reduced monetary limits before verification of identity is required for the use of prepaid cards;
- Extending the scope of AML regulation to virtual currencies, tax-related services and works of art;
- Mandatory measures to be taken by firms in relation to customers from “high risk” countries, which will now include countries which have no or low beneficial ownership details and who do not cooperate in the exchange of information;
- National registers of current accounts with banks and payment accounts with other institutions. The registers will contain details of account numbers, the account owner and any beneficial owners and any national identity numbers, but the registers will only be available to the authorities.
- This measure replicates a national register in France and local state registers in Germany, both of which are compliant with EU data protection laws.
Amongst the most contentious elements of the 5AMLD discussions was whether there should be beneficial ownership registers for trusts and whether it should be available to the public.
Back in 2014, when discussing 4AMLD, UK Treasury Minister Lord Newby said “We consider registration of trusts to be a disproportionate approach and, in particular, one which undermines the common law basis to trusts in the UK.” It appears that the UK government has now reversed this position.
PANA Committee soldiers on
Finally, an often overlooked development in the EU money laundering landscape is the work of the PANA Committee of the European Parliament. The Committee was established following the publication of the Panama Papers to answer the following question:- “Why, after 25 years of EU legislation on money laundering, do we have so many EU firms, intermediaries and individuals appearing in the Panama Papers?”
These are some of PANA’s recommendations, endorsed by Parliament to the European Commission, just before Christmas 2017:-
- Publication of national bank account registers and publication of statistics of transactions with tax havens and high risk countries;
- Publication of country-by-country reports for large companies showing details of revenue, profits, staff numbers and profits tax paid on a country-by-country basis;
- Dissuasive and proportionate sanctions against banks and other intermediaries at EU and national level who are knowingly, willingly and systematically involved in illegal tax evasion and money laundering;
- The inclusion of certain EU countries on the EU list of non co-operative tax jurisdictions;
- The prohibition of commercial relationships with legal structures established in tax havens where the beneficial owners cannot be identified;
- The definition of “beneficial ownership” to include all natural persons who, directly or indirectly, control one share (or equivalent) in an organisation;
- A clear separation of lawyers who provide legal advice and those lawyers acting as financial operators, whilst recognising the importance of legal privilege.
It will be interesting to see whether the Commission adopts any of these and other recommendations by PANA, but already some of PANA’s recommendations have been reflected in the 5AMLD measures, such as greater co-operation between national financial units and greater connectivity between national beneficial ownership registers.
As we move into 2018, we can be certain that the European Commission and other EU bodies will continue to strengthen the legislative framework in the fight against money laundering and terrorism financing.
Denis O’Connor is both a Fellow of the Institute of Chartered Accountants in England & Wales and the Chartered Institute of Securities and Investment. He was a member of the British Bankers’ Association Money Laundering Committee from 2003 -10; and a member of the JMLSG’s Board and Editorial Panel between 2010 and 2016.
He has been a frequent speaker at industry conferences on financial crime issues, both in the UK and abroad.
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