The Fifth Anti-Money Laundering Directive (Directive (EU) 2018/843) (the “Directive”) has been adopted and entered into force on 9 July 2018. The rules set out in the Directive are not directly applicable to the Member States, but are to be transposed into national law. The applicable rules within the Member States’ legislation became enforceable on 10 January 2020. This article will provide an overview of the five key changes introduced by the Directive.
The amendments which the Directive brings about were requested by Member States given the influx of terrorist attacks taking place within Europe from 2014 onwards. A collective effort by the members of the European Union was required in order to enhance protective measures against terrorism. Moreover, it is widely agreed that money laundering may be easily connected to terrorism, given that funding of terrorism is generally a derivative of money laundering. Thus, it was imperative to continue to enhance anti-money laundering measures within the European Union.
The main features of the Directive are:
- providing enhanced powers for direct access to information; and
- increasing transparency around beneficial ownership and trusts.
Furthermore, the Directive also increases the focus on virtual currencies by introducing regulations on virtual currencies as well as pre-paid cards.
The five key changes introduced by the Directive are in relation to:
- Beneficial ownership;
- Extension of scope to virtual currencies and art traders;
- Enhanced due diligence for high-risk third countries;
- Pre-paid cards; and
- Strengthening of Financial Intelligence Units.
In the upcoming sections we will analyse the details of each change.
In accordance with the Directive, registers of the beneficial owners of companies and other legal entities, except for trusts, shall become accessible to the general public. This will enhance public scrutiny and contribute to prevent the misuse of legal entities for money laundering and terrorist financing.
In Malta, this has been implemented via the online system of the Malta Business Registry which now provides for a new section on the ultimate beneficial owners per every company registered and moreover, the search system has been extended to include searches of beneficial owners.
When it comes to information on beneficial owners of trusts, this will be provided to any person who can demonstrate a legitimate interest. However, disclosure of such persons will be required by the competent authorities, Financial Intelligence Units and professionals in the sectors subject to the AML rules.
Extension of Scope to Virtual Currencies
In order to address the evolving sector of virtual currencies, the AML regime’s applicability has been widened to include:
- Persons who provide material aid, assistance or advice on tax matters as a principal business or professional activities;
- Estate agents who act as intermediaries in the letting of immovable property where the monthly rent is equivalent to EUR 10,000 or more;
- Virtual currency providers and custodian wallet providers; and
- Persons trading in works of art, including intermediaries, when the value of the transaction or series of linked transactions amount to EUR 10,000 or more.
The Directive provides a significant legislative step in the treatment of virtual currencies, especially since the Directive provides a legal definition of virtual currencies as being a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.
Furthermore, the anti-money laundering regime has been extended to include virtual currencies and virtual currency exchanges under the definition of an obliged entity together with the other services listed above. Therefore, such services are now subject to the same anti-money laundering regulations applied to financial institutions under the 4th AML Directive including the obligation to perform customer due diligence and to submit suspicious activity reports to Financial Intelligence Units. This further entails that Financial Intelligence Units have the authority to obtain the identification of the owners of virtual currencies, thus eliminating the anonymity associated with the use of such alternative currencies.
High Risk Countries
The Directive introduced the requirement for obliged entities doing business with customers from ‘high-risk third countries’ to perform enhanced due diligence which enhanced measures shall include:
- Requesting information on both the customer and the UBO which information shall be extended to the purpose of the proposed transactions and the source of wealth of the UBO; and
- Increasing controls on specific business relationships.
In accordance with the EU’s directives, such high-risk countries are third countries which have a strategic deficiency in their national anti-money laundering and countering of financial terrorism regimes that pose significant threats to the EU’s financial system. The Directive broadened the criteria for the European Commission’s assessment of high-risk third criteria which prompted the adoption of a new delegated regulation in relation to such high-risk third countries on 7 May 2020.
Following the steps introduced by the 4th AML Directive of reducing the monthly transaction limit on anonymous prepaid cards to EUR 250, the Directive goes a step further by setting the limit even lower, to EUR 150, which limited also applies to the amount that may be stored or topped-up on the anonymous pre-paid cards. Therefore, pre-paid cards exceeding that value require the identification of its holder.
In a further step to reduce the use of pre-paid cards for cyber-criminal activity, the use of prepaid cards for online or remote transactions is limited to transactions of EUR 50 or less. Moreover, prepaid cards issued outside of the EU are prohibited for use within the EU territory, unless such cards were issued by countries which enforce an equivalent legislation to the EU’s AML/CFT standards. Therefore, obliged entities are required to apply some simplified due diligence measures with respect to e-money transactions and transactions involving pre-paid cards.
Strengthening of Financial Intelligence Units
The role of the Financial Intelligence Units in the AML regime has been crucial. The Directive provides further steps to enhance the powers of the EU Financial Intelligence Units. The creation of centralised systems to facilitate the exchange of information have been crucial in the development of the AML regime.
The Directive introduces an obligation on Member States to put in place central registries or central electronic data retrieval systems for the timely identification of the holders of bank accounts, payment accounts and safety deposit boxes. Such systems would be made available to the Financial Intelligence Units from the Member States to facilitate mutual cooperation. The Member States are obliged to put in place such a system by September 2020. A similar central register will also be created for the identification of natural or legal persons holding immovable property within the EU.
Another measure introduced by the Directive to facilitate cooperation and information sharing between regulators is the new obligation on each Member State and accredited international organisation to make a list of prominent public functions in order to introduce a more efficient method of identifying politically exposed persons (PEPs). Although such lists will not disclose the person fulfilling each role, they will provide a comprehensive list of all the positions considered as politically exposed.
Following the entry into force of the Directive, national regulators have started increasing the reporting obligations of obliged entities. Therefore, entities which are subject to AML/CFT obligations should take this time to review their compliance programs and strengthen their KYC policies as much as possible to ensure that they satisfy the standards imposed by national legislation.
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