In June, the UK will implement the European Union’s Fourth Money Laundering Directive into national law. The Directive requires EU member states (of which Britain will remain one until at least 2019) to update their national money laundering legislation to include the directive’s changes in certain key areas.
While money laundering in the UK is in the main addressed by two pieces of legislation; the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007, there is a raft of allied law which governs the area. Amendments will be made to these to align them with the directive and thereby with the rest of the EU.
What are the main changes?
There are a handful of key changes which the regulations will introduce:
- A refocus of the risk management approach
- Amendments to the threshold for enhanced Customer Due Diligence procedures
- Amendments to the approach to Politically Exposed Persons
- The implementation of a national Register of Beneficial Ownership
This is an area which will be familiar to most financial services companies and many will already be taking a risk based approach to their Anti Money Laundering practices. The Directive however, focuses on a risk based approach in a way that previous legislation has not. It requires that adequate safeguards be put in place by the Money Laundering Risk Officer and for the process to be tested and signed off by senior management. There should also be an auditable paper trail so that the approach taken can be evidenced and justified in the event of any investigation.
The changes provide for transparency in the process and focus on the identification of risk at all levels. In particular, risk assessments are to take into account variations in the origins of business. Different countries, regions, channels of referral and lines of business may be of greater or lesser concern from a risk perspective and there should be discrete policy and /or procedural differences to address these variations.Amendment 2 - Customer Due Diligence (CDD)
There has been a reduction in the value of transaction which requires enhanced Customer Due Diligence from €15,000 Euro to €10,000.
This will bring many more customers into the DD process and provision should be made for any additional administrative support which this will require.Amendment 3 - Politically Exposed Persons (PEP)
Under the new regime local PEPs are also subject to the enhanced CDD that previously only foreign PEP’s were.
This may mean that some existing customers will need to be scrutinised more closely.Amendment 4 - Central Register of Beneficial Ownership
This requirement for government is already in implementation with Companies House currently maintaining a register of persons with significant control.
What difference will it all make
Financial services firms which commit serious or repeated breaches or are found to have systemic failings in their application of procedures may be subject to a fine of no less than €5m euro or 10% of annual turnover. Importantly, the directive is to be implemented by companies and all their subsidiaries including non-EU subsidiaries. This is a significant change to the previous regime in which money laundering directives were to be implemented only in the member state territory. This change means that companies will have to carry out a detailed analysis of whether the risks of doing business in a location where the required information is difficult to access, outweigh the benefits of doing business there.
Under previous Directives companies were able to apply CDD with differing levels of rigour depending on the nature and origin of their customer. In particular, if a customer was itself subject to the regulations (such as a bank or a listed company) then that customer might be automatically exempted from enhanced Due Diligence. Under the impending changes though, such a customer will still be need to be subjected to a risk analysis and their status as an AML compliant entity will not be in itself sufficient for them to be subjected to simplified Due Diligence – there will need to be a body of evidence supporting the decision either way.
There are however clear benefits to having a central UK wide (and European wide)register of beneficial ownership as previously companies had to carry out this research at their own cost in what was often and tedious and time consuming process.
For your ease we set out in short below the requirements in respect of simplified and enhanced due diligence.
Simplified Due Diligence
Simplified due diligence is sufficient where the risk of money laundering is not significant. It can often involve checks of customer identification only and may require further verification. Additional checks may be triggered by suspicious activity. If the nature of the business requires detailed information on business structures or if the client is itself subject to Money Laundering Regulations then simplified Due Diligence may be appropriate.
Enhanced Due Diligence
Enhance Due Diligence is necessary where it is thought that there is a greater risk of Money Laundering. Enhanced Due Diligence can range for second or third identity and ownership checks to verification of sources of funds, sanctions list checks and press and media reviews. Instructions received at a distance or instructions from Politically Exposed Persons may require Enhanced Due Diligence.
Further information on the changes can be found at: https://www.gov.uk/government/consultations/transposition-of-the-fourth-money-laundering-directive