On 20 May 2015, the European Parliament and the Council of the European Union (the “EU”), published the Directive (EU) 2015/849 (the “Directive”) on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (Anti-Money Laundering Directive (EU) 2015/849). The Directive will come into force on 26 June 2015; and must be transposed into the national laws of the Member States by 26 June 2017.
Scope and Applicability of the Directive
The Directive is an initiative triggered by the Financial Action Task Force (FATF) recommendations of 2012, on improving the EU’s Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) laws. The scope of the Directive is the prevention of the use of the EU’s financial system for illegal purposes of money laundering and terrorist financing.
The Directive shall apply to entities such as credit institutions, financial institutions and natural or legal persons, acting in the exercise of their professional activities (the “Obliged Entities”), as per Article 2(1) of the Directive.
The Directive has embraced the risks relating to gambling services within its scope primarily by extending its applicability to all providers of gambling services and not solely limited to casinos as provided by the third AML Directive. Furthermore. The Fourth AML Directive brings forward the application of customer due diligence for transactions amounting and exceeding EUR 2,000 to the gambling sector. It is to be noted however, that the Directive allows EU governments to request that these companies (with the exception of casinos) be opted out of the CDD requirements under the Directive, provided justification for so doing is submitted to the European Commission.
The Directive builds upon the mechanics employed by the third AML Directive and brings about new, innovative changes in combating AML / Counter Terrorism Financing across the Union, some of which are discussed below.
By virtue of this Directive, the Commission shall embark upon a risk-based approach and assess the risks of money laundering and terrorist financing affecting the EU, and draw up a report which will be available to the Member States and Obliged Entities.
On a supranational level, by virtue of this assessment, the Commission shall be in a position to recommend to Member States appropriate measures in order to identify and combat risks. Complementing this is the duty of the Commission to identify high-risk third countries by taking into account several factors, as put forward by the Directive itself, such as the powers and procedures of third countries’ competent authorities in combating money laundering and terrorist financing.
On the other hand, at Member State level, the Member States are to take the necessary measures to identify and mitigate risks of AML / CTF and in doing so, they shall make use of a number of variables set out in the Directive itself, together with the aforementioned report issued by the Commission. The risk assessment carried out by each Member State shall act as a stepping stone to improve its AML / CFT regime by specifically identifying areas where enhanced measures would be required
Customer Due Diligence (“CDD”)
The Directive puts forward the instances in which Member States shall provide that Obliged Entities apply CDD and which are the following:
(a) When a business relationship is established;
(b) When an occasional transaction amounts to EUR 15,000 or more, or constitutes a transfer of funds as defined in the Regulation (EU) 2015/847 of the European Parliament and of the Council of 20 May 2015 on information accompanying transfers of funds;
(c) In the case of persons trading in goods, in the case of occasional transactions in cash amounting to EUR 10,000 or more when carried out both in a single operation or in a number of apparent operations;
(d) For providers of gambling services, upon the collection of winnings, wagering of a stake, or both, when carrying out transactions amounting to EUR 2,000;
(e) When there is a suspicion of AML / CTF; and
(f) When doubt arise about the veracity or adequacy of previously obtained customer identification data.
The CDD aforementioned is described by the Directive as including:
(a) The identification of the customer and the verification of the customer’s identity on the basis of documents, data or information obtained from an independent and reliable source;
(b) The identification of the beneficial owner and in the case of legal persons, verifying the ownership and control structure of the customer
(c) The assessment and obtaining of information on the purpose and intended nature of the business relationship; and
(d) Ongoing monitoring of the business relationship.
In addition to the above, in the case of investment-related insurance business, Member States shall require that CDD is conducted on the beneficiaries, once identified or designated. In the case of identified beneficiaries, the name of the person is required whilst in the case of beneficiaries who are identified by characteristics or by any other means, it is sufficient to obtain such information to establish the identity of the beneficiary at the time of the payout.
Simplified Customer Due Diligence (“SCDD”)
This Fourth AML Directive imposes a duty on Obliged Entities to ascertain that transactions present a low degree of risk prior to applying the SCDD. As a result, such transactions no longer trigger an automatic entitlement, as was envisaged in the third AML Directive. The list of entities which are automatically classified for a SCDD, such as credit institutions, has been eliminated. In order for Obliged Entities to detect suspicious transactions, Member States shall give such Obliged Entities sufficient monitoring of transactions. Thus, a degree of close-cooperation is at the heart of the applicability of this Directive.
Enhanced Customer Due Diligence (“Enhanced CDD”)
In the case of Enhanced CDD, the Directive retained the automatic application for a number of transactions, such as cross-border correspondent relationships with third-country institutions and transactions with politically exposed persons. Consequently, Member States and Obliged Entities are to take into account a number of factors put forward by the Directive itself, in order to establish potentially high-risk situations.
The applicability of Enhanced CDD has been extended to domestically politically exposed persons extending the scope of the third AML Directive which only applied to foreign politically exposed persons.
Also Obliged Entities will be required to monitor the risk posed when a person ceases to hold the title yielding PEP status for a period of at least eighteen (18) months, as opposed to the current obligation of twelve (12) months.
Third Country Equivalence
The provisions relating to third country equivalence has been removed under the Directive. It has been considered that the use of exemptions solely on grounds of geographical factors is inconsistent with risk-based customer due diligence regime. Therefore, firms can no longer rely on exemptions for certain aspects of customer due diligence on the basis of “equivalent” anti-money laundering / combating terrorist financing procedures.
The Member States will also be required to ensure Obliged Entities that are part of a group to implement group-wide policies and procedures, including data protection policies and policies and procedures for sharing information within the group for AML / CTF purposes. These policies and procedures are to be implemented at the level of branches and majority-owned subsidiaries in Member States and third countries.
The Directive has extended its application to the extent that where Obliged Entities have branches or majority-owned subsidiaries located in third countries where the minimum anti-money laundering and combating terrorist financing requirements are less strict than those of the Member State, the branches and majority-owned subsidiaries located in the third country shall implement the requirements of the Member State, including data protection, to the extent that such is allowed in the laws of the third country.
Beneficial Ownership Information
The Directive lays down the requirement for corporate and legal entities to hold accurate information on their beneficial ownership and details of the beneficial interests involved, in a central or public register. Such information is to be kept in an accurate and updated manner.
In furtherance to this, it shall be the duty of Member States to leave such register accessible, in a timely manner, in all cases by: competent authorities, financial intelligence units (“FIUs”), Obliged Entities and any person or organization that can demonstrate a legitimate interest, without any restrictions. Obliged Entities may not solely rely on such register in order to carry out their CDD duties.
Furthermore, the Directive provides for exceptions to such access to information on the beneficial ownership, such as when the beneficial owner is a minor or when access to such information would expose the beneficial owner to any risk. This exemption does not apply to credit institutions, financial institutions and Obliged Entities that are public officials.
Similarly, the above shall also apply to trustees who shall be obliged to put forward information on their identity and the identity of the settlor and protector, if any, beneficiaries and any other natural persons exercising control over the trust.
The Directive has narrowed the scope of the exemption from certain CDD requirements for electronic money. Under the third Directive, Member States had the option to not apply CDD in respect of electronic money provided certain conditions are fulfilled. The Directive also provides for exemptions CDD requirements, however, the criteria which must be fulfilled are stricter in the case of rechargeable devices.
Member States may require issuers of electronic money (Directive 2009/110/EC of the European Parliament and of the Council) and payment providers (Directive 2007/64/EC of the European Parliament and of the Council) established on their territory, and whose head office is situated in another Member State or outside the Union, to appoint a central contact point in their territory to oversee the compliance with anti-money laundering and terrorist financing rules.
The Directive imposes the requirement on each Member State to establish a financial intelligence unit (“FIU”) to “prevent, detect and effectively combat money laundering and terrorist financing”, as provided in Article 32. Such FIUs shall be independently set up as central national units responsible for the transmission and analyzation of suspicious transaction reports.
Furthermore, Member States shall require Obliged Entities to immediately inform the FIU and refrain from carrying out transaction in case of reasonable grounds of funds being the proceeds of criminal activity or are related to terrorist financing and to provide the FIU with any necessary information it may request in accordance with the law. It is important to point out that such disclosure of information by an Obliged Entity shall not constitute a breach of any restriction on disclosure of information.
Reinforcement of cooperation between the European Commission and the FIUs
The Directive has amplified the importance of cooperation between Union and Member State level and between FIUs and the Commission. The Directive provides for cross-border cooperation between FIUs of the different Member States in order to ensure a fully-integrated system for combating AML / CFT.
A two-year implementation period has been set forth in which Member States are expected to implement the Directive into national legislation.
The Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) launched a public consultation on two anti-money laundering and countering the financing of terrorism (AML / CFT) Guidelines. These Guidelines are meant to promote a common understanding of the risk-based approach to AML / CFT and set out how it should be applied by credit and financial institutions and competent authorities across the EU. The consultation closes in January 2016.
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