The financial regulatory landscape for businesses at risk of being involved in money laundering or terrorist financing is changing on an increasingly rapid basis.
The most recent development is the new 5th Anti-Money Laundering Directive (5AMLD), which will bring more transparency to financial transactions to improve the fight against money laundering and terrorist financing across the EU. It comes as a countermeasure after several horrific terrorist attacks across the EU and the vast financial dealings uncovered by the “Panama Papers”.
The 5th Anti-Money Laundering Directive (1):
- Establishes beneficial ownership registers – these will enhance the powers of EU Financial Intelligence Units and facilitate their increasing transparency on who really owns companies and trusts
- Prevents risks associated with the use of virtual currencies (cryptocurrencies) for terrorist financing
- Limits the use of pre-paid cards
- Improves the safeguards for financial transactions to and from high-risk third countries
- Enhances the access of Financial Intelligence Units to information, including centralised bank account registers
- Ensures centralised national bank and payment account registers or central data retrieval systems in all Member States
The 5AMLD directive will increase the pace at which financial information can be accessed and exchanged, which will improve the effectiveness of investigations and prosecutions, and contribute to disrupting criminal activities (2).
New compliance pressures and costs
For businesses, the new directive creates added compliance pressures and costs. For example, Latham & Watkins highlight that the 5th Anti-Money Laundering Directive will (3):
- Lower the threshold for identifying the holders of anonymous prepaid cards from €250 to €150
- Require know-your-customer (KYC) checks to be performed for remote payment transactions exceeding €50, or if a withdrawal of more than €50 is made
- Permit the use of prepaid cards issued outside the EU to only be used in the EU if they comply with equivalent anti-money laundering (AML) standards
- Require virtual currency exchange platforms and custodian wallet providers to perform due diligence on their customers, including KYC checks. Such entities will also need to be registered for AML purposes and will be regulated for AML purposes in the same way as financial services firms (and subject to the same AML regulatory obligations). This will be a significant change for relevant businesses, and is likely to increase regulatory compliance costs substantially
The challenge of implementing 5AMLD
Of course, for the fight against money laundering and terrorist financing to be effective, proper implementation of the new rules and strong coordination amongst the different authorities is essential.
The new regulation, for example, not only necessitates the need for familiarisation with its requirements, but also the review and updating of AML risk assessments, policies and procedures, as well as staff training.
Adding to this challenge is the fact that the speed with which businesses are having to process and comply with new legislation is quickening and escalating associated costs. The 4th Anti-Money Laundering Directive came into effect in June 2017, some 12 years after the 3rd directive, and a decade after the Money Laundering Regulations 2007 and the Transfer of Funds (Information on the Payer) Regulations. Yet, less than a year after the introduction of the 4th directive, the Council of the EU formally adopted the 5th directive on 14 May 2018.
The 5th directive came into force on 9 July 2018. The modified regulations should be in transposed into national law by all Member States by 20 January 2020. This trend will continue, with more new legislation expected to be introduced on an increasingly frequent basis.
For businesses running legacy AML platforms, the cost of adapting systems to reflect new legislation can not only be astronomically high, but lead to considerable delays.
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For organisations in need of a quick fix (that’s in as little as 2-4 weeks) to meet 5AMLD regulatory requirements, our platform can be easily connected to a legacy system and associated databases. By adopting big data technology and machine learning, you can be confident it leverages the very latest technology that can be applied to meeting AML obligations. It identifies previously unknown threats and strengthens controls, with the goal of combating evolving threats and reducing financial and reputational risk.
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1. European Commission. 2018. Statement by First Vice-President Timmermans, Vice-President Dombrovskis and Commissioner Jourovà on the adoption by the European Parliament of the 5th Anti-Money Laundering Directive. http://europa.eu/rapid/press-release_STATEMENT-18-3429_en.htm
2. European Commission. 2018. Proposal for a directive of the European Parliament and of the Council. https://ec.europa.eu/home-affairs/sites/homeaffairs/files/what-we-do/policies/european-agenda-security/20180417_directive-proposal-facilitating-use-information-prevention-detection-investigation-prosecution-criminal-offences_en.pdf
3. Latham & Watkins LLP, cited on Lexology. 2018. Cryptocurrencies and prepaid cards face closer AML regulation in the EU. https://www.lexology.com/library/detail.aspx?g=807e652a-fded-4629-bc01-21b64b746e8e