4th EU Anti-Money Laundering Directive

The 4th EU Anti-Money Laundering Directive (AMLD4) came into force on 26 June 2015. It replaces the 3^rd EU Anti-Money Laundering Directive and its purpose is to strengthen and improve existing anti-money laundering and counter-terrorist financing laws.

It will also ensure consistency in the application of such laws across all EU Member States.

by Michael Economides, CEO, Chambersfield Economides Kranos | Gold Magazine, October 2017, issue 79

History

The 1st Anti-Money Laundering Directive (AMLD) was enacted in 1991 and primarily concerned drug-related offenses, initiating monitoring requirements that financial institutions had to adhere to, such as reporting all suspicious transactions.

In 2001, the 1st AMLD was replaced by the 2nd AMLD, which mainly harmonized the framework of the European Union with that of the Financial Action Task Force (FATF).

In 2005, the 3rd AMLD came into force, extending the Anti-Money Laundering (AML) coverage, in connection with certain businesses and professions, such as accounting and legal services, as well as establishing a risk- based method applicable to customers (due diligence).

Additionally, the 3rd AMLD introduced the notion of simplified due diligence (SDD) and enhanced due diligence (EDD).

More recently, terrorist incidents and the leaking of the so-called ‘Panama Papers’ indicated the need for new, stricter regulations in order to prevent tax fraud, money laundering and terrorist financing.

The main aim is to safeguard the financial systems of member states from abuse: the releasing of illegitimate funds laundered via business entities that end up committing severe criminal offences, with harmful consequences for society as a whole. In fact, the European Commission has taken up the fight against tax avoidance, money laundering and terrorism finance, very seriously and, in 2015, the EU proceeded with the introduction of the most comprehensive AML legislation in Europe, with a two-year implementation period for the member states.

The 4th AML Directive (AMLD4) applies to a diversified number of businesses (referred to as “obliged entities”) which, regardless of their size and business volume, are conducting financial transactions.

The main scope of AMLD4 is to further intensify the ownership transparency of firms, by strengthening standard practices:

Know Your Customer (KYC), Customer Due Diligence (CDD) and Politically Exposed Persons (PEP’s). Basically, AMLD4 will be implemented in many types of businesses, from financial institutions to gaming companies, real estate agents and traders, when proceeding with transactions in cash form exceeding €10,000.

In addition, AMLD4 introduces the prerequisite of a significant requirement for member states: the establishment of national registers of the beneficial owners of companies and business-related trusts, which will be interconnected, so as to achieve and enhance collaboration between the member states and local competent authorities. Law firms and banking institutions, as well as individuals or entities with a proven legitimate interest, will have access to the new central registers.

In summary, through AMLD4, the European Union is introducing strict regulation for tackling money laundering and terrorism financing, so as to safeguard its financial system from being used fraudulently.

Key Changes

The key changes introduced by AMLD4 may be summarized as follows:

• Further enhancement of Customer Due Diligence (CDD). AMLD4 specifies that only through the provision of adequate documentation and risk analysis may simplified CDD be applied.
• Additional emphasis is placed on the concept of Ultimate Beneficial Ownership (UBO), which, under Article 3 (6) of AMLD4, means “any natural person who ultimately owns or controls a company, or who holds more than 25% of the issued share capital”.

As per the new provisions, company ownership can no longer be anonymous and shareholders’ information should be public.

Legal entities and individuals should hold sufficient, accurate, up-to-date data regarding the UBO and the information is to be available at any time, upon the request of the responsible authorities. Moreover, the same practice applies to business trusts, trustees and beneficiaries.

• A more detailed definition of a Politically Exposed Person (PEP) is introduced. The Directive expanded its coverage by including national PEPs, not just foreigners, as high-risk customers due to exposure through their public position. Additionally, the Directive includes “family members” and close associates, as well.
• According to AMLD4, PEPs are under a 12th month “surveillance period” that may be prolonged and should be periodically evaluated as per the sanction lists of each business sector.
• The cash payment threshold has been reduced to €10,000 from €15,000 and could be set even lower on a national level.
• Occasional transactions – referred to as any dealings outside the scope of a regular business relationship – of €15,000 euro and more must also be monitored.
• E-Money products are regulated for the first time under AMLD4.
• AMLD4 integrates the entire gambling sector, not just the casino industry as per previous Directives.

In addition, the 4th AML Directive prescribes that “obliged entities” should review and verify at all stages Customer Due Diligence (CDD) by adapting a risk-based approach and undertaking ongoing monitoring, so as to specify the degree of risk through, inter alia, KYC assessments, and thus proceed accordingly, either by accepting the transaction or reporting it to the Financial Intelligence Unit (FIU) as suspicious.

Know your Customer | (KYC) and the Risk-Based Approach

The Know Your Customer (KYC) assessment responds to questions concerning the origin of the money in a transaction, the reason for the transaction, the intention and nature of the transaction, as well as the engaging parties.

As far as the risk-based approach in AMLD4 is concerned, it has been observed that it now has a wider coverage, describing risk assessment and CDD in a more detailed and descriptive way. Business owners must perform their own evidence-based decision making, referred to in the Directive as a “holistic risk-based approach”, so as to identify any risk of money laundering and financing of terrorism, depending on the nature and activities of their business. Basically, business owners are obliged to be constantly up to date and to take into consideration all the

facts associated with a customer’s profile and origin, cash flow and annual turnover, jurisdiction and/or geographical area, services, products, business deals and/or distribution channels and methods.

Making the Transition

The changes that AMLD4 brings to business operations are significant and businesses have immense challenges to overcome.

However, AMLD4 has made breakthrough advances as regards the approach to the control, monitoring and prevention of money laundering and terrorism financing.

First – and most importantly in my opinion – businesses need to thoroughly educate their personnel and implement control procedures through compliance checklists, so as to ensure that they are conforming to all required specifications, policies, standards and regulations.

Secondly, firms need to fully comprehend AMLD4 and its requirements, so as to be able to identify the risk analysis procedures, specify the methodology and structure to be followed, establish and apply control mechanisms and checklists for an up-to-date CDD, and formulate the procedures for reassessing existing clients and assessing new ones.

In summary, the impact of AMLD4 on businesses goes way beyond affecting resources and mostly concerns the application of risk management, comprehending and blueprinting their current operations so as to set up processes that constantly comply with legislation and the regulations of this Directive and others that will follow.

The businesses and corporations to which AMLD4 is applicable are obliged to appoint professional compliance officers and invest in their ongoing education. Most importantly, such businesses and corporations may also outsource such significant tasks to third party professional entities, i.e. law firms, for ongoing support in compliance, training of their in-house personnel and providing an up-to-date overview of their AML policies and practices.