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Anti-money laundering—Commissioner Barnier welcomes progress in Council
The use of the financial system for the purpose of money laundering and terrorist finance is prevented by a Directive in a proposed anti-money laundering (AML) package agreed by the European Council. The second legal instrument included in the package regulates information accompanying transfers of funds to secure due traceability of the transfers. Both proposals take into account 2012 recommendations from world AML body the Financial Action Task Force (FATF) to promote the highest standards for AML and counter terrorism financing.
What are the key features of the Directive?
The Directive implements five key changes:
It increases the emphasis on a risk-based approach (which has already formed part of the UK AML regime for many years). The Directive acknowledges that measures should be adjusted according to the level of risk presented in specific jurisdiction and sectors and clarifies situations when simplified customer due diligence (CDD) will be appropriate. It has been argued, for example, that too many financial institutions have adopted simplified CDD in circumstances where more detailed CDD was appropriate.
Politically exposed persons (PEPs)
It incorporates recommendations relating to PEPs. As well as clarifying that enhanced due diligence is always appropriate when transactions involve PEPs, the Directive also widens the definition of PEP to include domestic individuals holding prominent positions in their home country. As with foreign PEPs, the provisions will apply to family members and known close associates.
It increases transparency around beneficial ownership of companies and trusts. The threshold for beneficial ownership remains unchanged—being those controlling more than 25% of a business—but companies (and maybe trusts) will be required to maintain records evidencing beneficial ownership. This is the most controversial requirement in the Directive. It is not clear whether member states will interpret the obligation widely (as an obligation to hold the information publicly) or more narrowly (as an obligation to provide the information on a transactional basis only). The UK government is in favour of public registers for companies but not trusts.
It includes tax crimes as a predicate offence for money laundering for the first time in the EU. Tax crimes have long been predicate offences in the UK, though this is not the case in many other jurisdictions.
It has increased in scope. The requirement for certain entities to carry out CDD has increased (eg from just casinos across the entire gambling sector and for high value goods traders).
What is the background to the Directive?
As AML and terrorist financing typologies have evolved, the underlying regulatory landscape also needed to be adapted. One of the main drivers for the Directive was the issue of updated financial crime/AML recommendations by the FATF in February 2012. The European Commission then engaged Deloitte to assess the implementation and application of the Third Money Laundering Directive 2005/60/EC across the EU and on 11 April 2012 the EC adopted a report making recommendations for further development of the legislation. The proposed new Directive reflects the concern that the third Directive had been implemented inconsistently across the EU and posed problems for business operating cross-border as outlined in the Deloitte report.
How will the new Directive affect organisations in the UK?
The impact of most of the changes on UK regulated firms is unlikely to be substantial, as the UK’s AML regime incorporates the majority of these rules already and was considered amongst the gold standard for AML regulation. However, the biggest impact will be felt in relation to increasing the transparency of beneficial owners. It is likely that companies (and maybe trusts) will need to transmit up-to-date information to a central public register (note the recent UK government consultation and proposals for draft legislation on a public register of corporate beneficial ownership), accessible by regulators and regulated businesses. Enhanced due diligence to be carried out on domestic PEPs is another change, as is the requirement in the Directive for a written risk assessment.
What should organisations and their lawyers be doing in preparation?
Organisations should be reviewing the effectiveness of their current systems and controls to ascertain whether they are working effectively. Money laundering reporting officers should review their existing risk assessments (documenting them where this has not already been done) to ensure their business/sector/product/client risks are covered. There should be an expectation that systems designed to screen PEPs may have a slight increase in output. However, practically all major financial institutions already consider domestic PEPs as part of their AML programme so this change should not have as great an impact as one may imagine.
Firms should be considering whether there is a need for a compliance officer at management level (particularly given the Financial Conduct Authority (FCA)/Prudential Regulation Authority proposals around senior manager oversight for compliance and AML) and an internal audit function (to test internal policies), depending on the size and nature of the business.
When will it be coming into force, and when can UK lawyers expect corresponding changes to the UK’s approach to AML?
Once the Directive is adopted, member states have a maximum of two years to transpose the Directive into national legislation. It is anticipated that adoption will take place at some point in 2015 with the new UK regulations likely to come into force in late 2015 or early 2016. This will ensure that the new provisions are in place before the FATF mutual evaluation review of the UK in spring 2016.
What challenges do you foresee?
As discussed above, many UK organisations already have policies and procedures in place that comply with the prospective changes. For example, many UK banks adopt a 10% beneficial ownership test going beyond law and regulation. The key challenges will, in our view, remain the same as under the third Directive, namely consistency of approach (by multiple jurisdictions and multiple regulators). For global businesses, this will be critical, rather than any one individual change.
Zia Ullah is a partner in Eversheds fraud and investigations group and specialises in AML, anti-bribery and anti-corruption, and international sanctions. He advises on all aspects of financial crime law and was previously the global head of sanctions at Barclays. He is appointed to the FCA’s skilled persons panel for financial crime.
Zia would like to thank Dominic McLean, a trainee solicitor with the firm, for his input.
Interviewed by Kate Beaumont.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
This was first published on Lexis®PSL Corporate Crime. For a free trial click here.
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