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.

The post 4th EU Anti-Money Laundering Directive appeared first on Chambersfield Economides Kranos.

An Article by Michalis Economides, Advocate & Legal Consultant | CEO of Chambersfield Economides Kranos Law firm

Article Publication: Insider Magazine May 2019.

The liberalization of markets, the economic penetration in other jurisdictions, the transnational agreements that allow freedom of movement between the member states, the immediate transfer of capital and the rapid technological developments have overturned the world market equilibrium.

These changes have altered the way of doing business by turning companies’ activities from local to international; however, these changes also aided the spread of crime in the economic sphere. It is important to mention that the opening of the markets and the free movement of people and capital, have favored the growth of the economy while in some cases also favored the money-laundering activity.

European Union, International Organizations and Intergovernmental Organizations and States, in an effort to control illegal activities, have enforced laws and adopted directives which aimed at eliminating this phenomenon and further institutionalizing any movements taking place between the markets.

In the fight against these illegal activities, technology plays a leading role because of its ability to collect, control, analyze and broadcast, in real time, information that helps identify suspicious criminal and money-laundering activities. These technologically advanced systems use internationally specialized, integrated databases which assist the investigation process for suspected criminal activities.   Consequently, these systems are valuable allies to the legislator since they assist on monitoring the compliance of businesses and legal entities, on the basis of regulations, laws and directives as listed in the legislative framework.

Following the adoption of the 4th European Directive 2015/849 of the European Parliament and the Council of 20 May 2015, as well as, the publication of the 5th European Directive 2018/843 on 19 June 2018, the provisions of which should be applied at State level in 18 months (January 2020), many reports and discussions have been strongly stressed about the difficulties and high costs involved in harmonizing business and financial institutions. Taking into consideration that money-laundering and terrorist financing undermine the stability and credibility of a country’s financial institutions and systems, have the ability to distort statistical growth rates while discouraging investment by foreign investors and negatively affect inflows of capital from the international market, the short-term costs that we have to bear today will, in the long run, be overcovered by the steady, healthy economic growth of the country.

The efforts for preventing and combating money laundering and terrorist financing, currently being made by the supervisory authorities and businesses in Cyprus i.e. financial institutions, law firms, etc. at a State, European and International level, are being considered to be amongst the strongest competitive advantages of Cyprus.

The enforcement of these laws offers multiple benefits for Cyprus, such as a healthy and steady increase in the country’s economic aggregates and improvement in the overall quality of life. Terrorism, all kinds of criminal activity and tax evasion are major problems of every society, causing undesirable consequences such as economic and social instability, trade insecurity and lifestyle, as well as high costs of social harm.

Subsequently, the successful implementation of directives and regulations against money-laundering, are positively contributing in the restoration of Cyprus’s trust and reputation as a safe investment destination.

The post AML Directives Positively affects Cyprus appeared first on Chambersfield Economides Kranos.