4th AML Directive (EU) 2015/849
The nature of money laundering and terrorist financing threats is changing rapidly and facilitated by a constant evolution of technology, requiring a permanent adaptation of the legal framework. Actions taken only at a national level, without considering the international cooperation and coordination would have a limited impact.
An Anti Money Laundering (“AML”) framework divided into four directives, the most extensive AML legislation in Europe, has been developed. The directives have been transposed to national legislation in the Member States. However and despite the substantial progress made, flows of illegal funds still exist and harm the integrity of financial markets.
Currently the Fourth AML Directive is in place aiming to remove any ambiguities of the previous Directive and improve consistency of AML and counter-terrorist financing ("CTF") rules across all EU Member States.
The purpose of this newsletter is to inform you regarding the main provisions of the latest Directive and emphasize on the primary modifications in important areas.
The Fourth Directive is in line with the Third Directive and still requires the identification of the beneficial owner.
Beneficial owner is “any natural person who ultimately owns or controls a corporate entity or other legal entity and as well the natural person on whose behalf a transaction or activity is being conducted.”
In respect of corporate entities, the definition of the ultimate beneficial owner is further specified as “a natural person who ultimately holds a shareholding, controlling interest or ownership interest over 25% of the shares or the voting rights in a corporate entity.”
The essence of the beneficial ownership is precisely not ownership in the ordinary sense of the word, but rather control and exercise of dominant influence. In some instances control and legal title may not lie in the same hands.
Creation of National Central Register:
As per the new Directive, Member States will be required to hold satisfactory, accurate and current information on the beneficial owners of all corporate and other legal entities (including Anglo-American trust structures) incorporated within their territory in a National Central Register.
Obliged entities subject to the Directive, competent authorities and the Financial Intelligence Units will be able to access these interconnected Registers as well as any person or organization demonstrating "a legitimate interest," a term which is not defined and most certainly will raise issues in the future.
The name, the month and the year of birth, the nationality, the country of residence, the nature extent and the beneficial interest held, are some of the information that could be provided. There may be cases where no natural person can be identified as the one who ultimately owns or has control over a legal entity. In such exceptional cases, obliged entities, having exhausted all other means of identification, and provided there are no grounds for suspicion, may consider the senior managing official to be the beneficial owner.
The Fourth Directive also provides some clarity on the definition of senior management as “someone with sufficient knowledge of the institution’s money laundering and terrorist financing risk exposure and of sufficient seniority to take decisions affecting its risk exposure.”
Extending the definition of tax crimes and criminal activity:
The Fourth Anti-Money Laundering Directive widens the scope of obliged entities. This is notably achieved by submitting gambling services to the Directive beyond just casinos.
Member States, having carried out a risk assessment, may exempt certain gambling services some or all of the requirements laid down in this Directive but must provide justification for doing so and also notify accordingly the Commission.
Another entry in the broad definition of criminal activity are the tax crimes (relating to direct and indirect taxes) which are now included in the list of offences for money laundering and terrorist financing activities.
However, another ambiguity arises as different tax offences may be designated in each Member State as criminal activity, since the national law definitions of tax crimes may differ.
Politically Exposed Persons (“PEPs”):
The rules for politically-exposed persons (“PEPs”) are no longer limited to persons outside each EU Member State. The Directive goes even further to introduce two discrete categories of PEPs: domestic and foreign which will now be subject to the same scrutiny.
The revised Directive provides detailed guidelines and specifies who such persons should be: heads of state, members of parliament, members of supreme courts, ambassadors, members of the governing bodies of the political parties, etc.
The definition also includes persons who are senior figures in international organizations. This means directors, deputy directors and members of the board or equivalent function of an international organization.
Refusing establishment of a business relationship simply on the basis that a person is considered a PEP is contrary to the objective of the Directive.
Where a PEP is no longer entrusted with a prominent public function by a Member State or a third country, obliged entities must consider the continuing risk posed by affiliation with such PEP for at least 12 months or longer, until it will be determined that the person does not pose any further risk.
Risk Based Approach:
The Fourth Anti Money Laundering Directive requires EU Member States to identify, understand and mitigate the risks on a national level.
These national assessments are expected to assist obliged entities in conducting their own AML risk assessments, where factors such as customer, product and geography must be taken into consideration. These assessments should be recorded and verified, as well as refreshed and updated frequently.
The EU Commission will conduct an assessment of the AML and Terrorist Financing risks to identify cross-border threats. The first report of the Commission is expected by 26 June 2017.
The revised Directive also tightens the rules on simplified customer Due Diligence measures and the decision to apply as such should be backed up by documentation as opposed to a blanket approach where customers fall into a certain category.
The Fourth Anti Money Laundering Directive contains a non-exhaustive lists of risk factors to be taken into consideration by obliged entities when performing their internal risk assessment and in particular determining the application of simplified or enhanced due diligence measures (Annex II and III of the Directive). Guidelines in this area are also expected from European Supervisory Authorities by 26 June 2017.
The threshold for traders in goods dealing with cash payments has decreased from €15,000 to €10,000 and a new requirement of conducting Customer Due Diligence for any inward or outward cash payments of €10,000 or more, is applied aiming to improve traceability of such payments.
The previous Directive only provided for proportionate penalties or measures imposed in an ‘effective, proportionate and dissuasive’ manner to the concerning obliged entities. For natural persons sanctions could be adjusted “in line with the activity carried out” by that person.
The revised Directive goes even further to introduce new minimum- more specific penalties.
Additionally, every obliged entity, subject to this Directive, will face a reputational risk as the ‘naming and shaming’ approach is also being pursued. This means that the competent authorities shall publish the decisions based on breaches of the requirements laid down by the 4th AMLD, unless overriding reasons require an anonymous publication.
Third Country Equivalence:
The Fourth Anti Money Laundering Directive repealed the ‘white list’. Under the new regime, obliged entities must conduct country-specific risk assessments for any jurisdiction outside of the EU where obliged entities operate.
Each Member state should decide on a more risk-based approach since the use of the geographical factor is less relevant.
Member States should at least provide for enhanced customer due diligence measures to be applied by the obliged entities when dealing with natural persons or legal entities from countries having strategic deficiencies in their national anti-money laundering and terrorist financing regimes.
Reliance on third parties established in such high-risk third countries should also be prohibited.
EU Member States are required to undertake legislative action to implement the Fourth Anti Money Laundering Directive by June 26, 2017.
All obliged entities can therefore start planning their journey towards implementation.
The new Directive intends to better equip Member States and obliged entities with preventative measures combating money laundering. However, its provisions shall only serve as a baseline for their EU operations, followed by a more detailed country-by-country assessment of the requirements that go above and beyond the ‘floor’ set by the Fourth AML Directive.
It is therefore apparent that although the 4th AML Directive will not achieve full harmonisation, it is a welcomed development with a positive prospect.