The 5th Money Laundering Directive (“5th MLD” or the “Directive”) comes into effect on 10 January 2020. This Directive does not replace the fourth money laundering Directive (“4th MLD”) but rather amends and enhances it in a number of areas. While these changes are not substantive and the impact for firms should not be too burdensome, they are more prescriptive and so all are advised to review their money laundering risk assessments, and client onboarding processes especially with regard to clients domiciled in ‘high risk’ jurisdictions. The European Commission is mandated to periodically update a list of such jurisdictions, with the last version (seen here) actually being rejected by the European Council on (seemingly) political grounds. An update is though expected in the near future.
We examine what the 5th MLD means for regulated firms below.
Additional Enhanced Due Diligence Requirements
The 5th MLD has expanded mandatory enhanced due diligence (“EDD”) measures to include business relationships or transactions that involve persons established in high risk third countries and not, as previously was the case, only high risk individuals. Firms therefore need to ensure they assess and re-asses those clients based in high risk third countries and endeavour to obtain additional information about the customer or beneficial owner(s) as required.
Firms will also need to apply one or more "additional mitigating measures" (where applicable) involving high-risk third countries. These include increased supervisory checks as well as continuous enhanced monitoring. Where the risk cannot be mitigated the directive suggests reviewing the ongoing viability of the relationship.
Firms are required to get senior management approval (which may be from the MLRO) for establishing or continuing a business relationship that are established in high risk jurisdictions.
Firms will also need to consider the background and purpose of all transactions in instances where they are complex, unusually large, conducted in an unusual pattern or they do not have an apparent economic or lawful purpose.
Improved Customer Due Diligence
The 5th MLD amends the 4th MLD by clarifying that firms must apply Customer Due Diligence (“CDD”) measures to existing customers on a risk-sensitive basis or when circumstances relevant to a customer’s risk assessment have changed. Firms are required to determine and verify the law to which a body corporate is subject which should include its constitution, the full names of the board of directors, the senior persons responsible for the operations. Previously, the requirement was to only take reasonable measures in this regard.
This means verifying the identity of the senior managing official when the customer is a body corporate and the beneficial owner cannot be identified and keeping written records of actions taken.
The 5th MLD also highlights additional sectors which are to be considered as higher risk which includes oil, arms, precious metals, tobacco products and cultural artefacts.
Creation of a Beneficial and Politically Exposed Persons Register and Registration of Express Trusts
Firms will be expected to check and keep an excerpt from a publicly available EU-wide beneficial ownership register as part of their due diligence when entering into a new business relationship with a company or trust that is subject to beneficial ownership registration requirements. This process should supplement processes that already utilise the existing Persons with Significant Control (“PSC”) register, maintained by the UK’s Companies House.
Where a firm needs to undertake a Politically Exposed Persons (“PEP”) register check (normally for enhanced due diligence purposes), there will be a publicly accessible EU register listing the exact functions which are considered as prominent public functions for the purposes of defining a PEP.
There is increased transparency regarding the ownership of express trusts with the requirement that new (UK) trusts register with the HMRC Trust Registration service from 10 March 2020. Information relating to the underlying beneficial owners will become available, although access will be limited to instances where firms can demonstrate a legitimate interest in the beneficial ownership.
Capturing Virtual Currencies and Limiting the Scope of E-money
Regulators have expressed concerns that virtual currencies are being used to launder the proceeds from crime and finance terrorist groups. Therefore, the 5th MLD requires virtual currency exchange platforms and custodian wallet providers to be registered with their local regulator and consequently apply CDD.
Given the FCA’s ongoing focus on financial crime over the last few years and their sanctions on firms for having inadequate system and controls, firms should ensure that their staff are fully trained, that they have implemented robust anti-money laundering and financial crime prevention policies and procedures as well as stringent record keeping practices. Further, where third parties are engaged in the CDD process (for example fund administrators), firms should seek assurance that the processes and policies of those third parties have been updated to reflect the new obligations and increased emphasis on risk assessment.
The changes were adopted and transposed in the UK via The Money Laundering and Terrorist Financing (Amendment) Regulations 2019. It is not envisaged that Brexit will materially affect this adoption.
How We Help
ACA has considerable experience in the private markets sector and can be appointed to perform an independent assurance review of your firm’s anti-money laundering policies, procedures, systems and controls. This may take the form of a sample file review of investor types and/or transactions against the applicable regulatory requirements and industry best practices.
We also offer a range of anti-money laundering and financial crime prevention training courses, which can be held at our office or tailored and hosted at your chosen location at a time or date convenient for you. Bookings can be made online via our website.
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