What is the Fifth Money Laundering Directive?

What is the Fifth Money Laundering Directive?

Anti-money laundering (AML) laws and regulations are designed to detect and prevent proceeds of crime from financing all sorts of illegal activity globally. Laundered money is often used to fund a range of crimes, including terrorist attacks.

Following the release of the Panama Papers and a range of terror attacks in Europe, European leaders are aspiring to align with the Financial Action Task Force (FATF) AML recommendations for strengthening the 4th Anti-Money Laundering Directive (4AMLD).

In April 2018, the European Parliament announced its intention to adopt the 5th Anti-Money Laundering Directive (5AMLD) which will come into effect from 10th January 2020.

Key Changes

The main purpose of the Fifth Directive is to make amendments and enhancements to the structure of the Fourth Directive which came into force on 26th June 2017 and ensure that AML regulations are effective and up to date. These include additional provisions not originally included in the text of 4AMLD and a focus on enhanced due diligence, improved access to information and increased transparency.

Some of the key changes are summarised below:

Beneficial Ownership

The beneficial ownership registers for legal entities, such as companies and trusts, will need to be public. This will enable member states to maintain interconnected Ultimate Beneficiary Ownership (UBO) registries. UBO registers of company ownership will be publicly accessible.

The wider access to beneficial ownership information is aimed at increasing transparency and preventing financial criminals from misusing complex, corporate structures for money laundering and terrorist financing purposes.

Cryptocurrency Exchanges

The Fifth Directive includes a legal definition of cryptocurrency and assets, defined as “a digital representation of value that can be digitally transferred, stored or traded and is accepted as a medium of exchange.” Cryptocurrency exchanges and wallets will, therefore, be classed as an obliged entity and these will have to perform the same checks as any obliged entity in the Fourth Money Laundering Directive, including customer due diligence, monitoring ongoing behaviour and reporting suspicious activity.

The main aim of regulating virtual currencies is to prevent cryptocurrencies such as Bitcoin from funding crimes and terrorist activity.

Prepaid Cards

Electronic money and prepaid cards will be subject to enhanced due diligence checks. The Fifth Directive lowers the threshold requirement on prepaid card transactions from €250 to €150. The threshold for online transactions with a prepaid card is €50. Anonymous prepaid cards issued outside the EU will only be accepted if their issuance meets requirements equivalent to the EU AML regime.

The enhanced checks are aimed at reducing the risks of anonymous prepaid instruments, such as gift cards and travel cards, from being misused for money laundering and terrorist financing.

Politically Exposed Persons

5AMLD widens the definition of a Politically Exposed Person (PEP) on a national level to include people who hold “prominent public functions,” for example a politician, and their immediate family members and close associates. Member State will have to issue a list setting out which functions qualify as “prominent public functions”.

The lists will enable smaller organisations to manage ongoing risks, by identifying, monitoring, and screening PEPs and individuals with jobs and roles that may make them vulnerable to corruption.

High-Risk Countries

The Fifth Directive will require enhanced due diligence (EDD) checks and improving safeguards on financial transactions to and from high-risk countries. The countries are deemed high risk due to a lack of AML regulation and due diligence requirements within these nations. As of February 2019, the EU has produced a list of high-risk countries which includes Afghanistan, American Samoa, The Bahamas, Botswana, Democratic People’s Republic of Korea, Ethiopia, Ghana, Guam, Iran, Iraq, Libya, Nigeria, Pakistan, Panama, Puerto Rico, Samoa, Saudi Arabia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, US Virgin Islands, and Yemen.

Provisions under Brexit

The draft withdrawal agreement between the UK and the EU commission contains provisions that would oblige the UK to continue to apply EU laws during a transition period, with a jointly agreed (non-binding) political declaration, paragraph 84 which makes clear that the EU and the UK would continue to work together on AML compliance after Brexit.

Are Your Employees Aware?

With key amendments due in 2020, it’s a good time to evaluate if your current approach to financial crime risk management is adequate and for staff to refresh their knowledge of anti-money laundering laws and regulations. Our Anti-Money Laundering (AML) training courses focus on raising awareness around key legislation and laws to ensure compliance. Find out how DeltaNet International can support your business through our AML eLearning courses.

Complying with Anti-Money Laundering Regulation in Fintech

Revolut, the digital banking service with over four million registered users across Europe, announced last week that their CFO Peter O’Higgins was leaving the business after three years. The start-up had been battling a damning report by the Daily Telegraph which revealed lapses in compliance between July and September 2018. The digital banking service switched off an anti-money laundering (AML) system designed to flag suspicious transactions, potentially allowing thousands of illegal transactions to pass across the banking platform.

In a blog posted recently, Revolut CEO, Nik Storonsky, has denied allegations of non-compliance and provided an explanation on the AML breach that never was. This however brings back into focus the compliance challenges fintechs face as they continue to grow and its impact on their workforce.

Disruptive Technology and AML regulation

From making faster digital payments to depositing a check to your account using a banking app on your mobile phone (without setting foot in a bank!), customers today are spoilt for choice when it comes to choosing a financial service for managing their finances and day-to-day transactions. Fintech is transforming the way traditional financial institutions operate and the way customers are consuming financial services. Outdated manual processes and operations are now replaced by state-of-the-art apps and software, making the finance sector more user friendly than ever. Even the big financial institutions are moving on from their conservative approach to new technologies and investing in the workforce to develop innovative solutions to compete with fintech unicorns such as Revolut and Monzo.

With transactions taking place online through apps or websites, regulatory bodies, like the FCA, are wary of how new technology could be used for money laundering and other illicit activity by criminals. Most fintech businesses are subject to AML regulation just like any other financial institution or business. In some countries, including the UK, failure to disclose suspicious transactions is considered a criminal offence that could result in a prison term – in addition to fines. This is detrimental to fintech businesses as it will affect their market share and uptake, and lead to poor reputation. After all customers are more likely to have faith in regulated industries than unregulated ones.

Role of the Workforce in Compliance

Fintech businesses must look at the impact on their workforce and how they can ensure compliance with regulations while adapting to digital transformation. The FCA requires financial services firms to maintain robust AML systems and controls, since they are at risk from those seeking to launder the proceeds of crime or to finance terrorism. Knowledge and understanding of compliance are therefore essential to ensure that fintech businesses don’t get caught out by criminals looking to outsmart the system. There is a need for businesses to enforce compliance with a proactive approach, developing controls and processes with security and regulation in mind.

Businesses must also ensure that staff are aware of necessary actions to take when they spot irregularities. As part of AML regulation, the FCA requires financial businesses to file suspicious activity reports when the company knows, suspects or has reason to suspect that a transaction may involve money laundering or other unlawful activity.

In the long term, fintechs are expected to work closely with regulatory and legal bodies to develop a common regulatory framework in order to make compliance more seamless and efficient.

With the UK leading global fintech regulation, the best solution for fintech businesses is to adopt compliance as part of their culture and conduct as they continue to innovate with technology.

Compliance and FCA training from VinciWorks

Find out how VinciWorks can support your business with a wide range of corporate eLearning solutions dedicated to compliance and FCA led regulations. Our eLearning can be delivered as off-the-shelf packages, or we can customise the content to suit your organisation. Visit our website for more information.

Seven new microlearning modules released

When annual refresher training time rolls around, you probably take it for granted that you’ll be hearing some of these common complaints:

  • “We’re too busy to complete mandatory training”
  • “The courses are too long and boring”
  • “We already know this information”
  • “It’s just a box ticking exercise to cover the company legally”

If any of these sound familiar, VinciWorks has the solution: Take 5 microlearning modules.

Out Take 5 modules are highly focused 5 minute bursts of learning built around behaviours that meet mandatory training requirements without taking up learners’ time, or re-treading material they’re familiar with.

Take 5s pack a lot of punch despite their small size. Each course features explanatory videos, audio narration throughout, and high levels of interaction.

Want to find out more? We have seven new Take 5 modules available now:

Money Laundering Challenge – do your employees know the lengths people will go to make laundered money look legitimate? In this challenge, learners discover how Frank the Fraudster laundered his cash, and must confiscate the laundered money by answering questions correctly.

Gifts and Hospitality Challenge – do your employees know what gifts are acceptable and what could be seen as bribery? Learners follow the story as a potential supplier offers an employee corporate seats at a football match – but can they make the right choices and keep hold of their integrity handshakes?

Setting a Secure Password – do your employees know how to set a secure password? This module shows learners how to set a strong password, keep it secure, and keep hackers at bay.

Is Your Information Secure? – your workplace contains more information security risks than your employees might realise. In this challenge, learners must collect all 8 information security shields by successfully tracking down the risks in a virtual workplace.

Don’t Get Burnt – would your employees know how to get to safety in the event of a fire? In this challenge, learners evacuate a building that’s on fire, but must make the right decisions along the way to make it out with all of their safety tokens.

Working with Dual Screens – there are numerous benefits to using more than one monitor, but failing to set them up correctly increases risk of injury. Once completed, learners will know how to set screens to the same resolution and set up differently sized screens for safe dual screen working.

Fire – Can You Handle It? – would your employees know which type of extinguisher to use if they had to fight a fire? In this challenge, learners need to choose the right extinguisher to put out all four different types of fire.

The above Take 5 modules are available now as part of Compliance Essentials and Health and Safety Essentials. Get in touch today to arrange a demo.

Panama Papers leak reveals extent of wealth hidden offshore by rich and powerful

Methods used by the rich, powerful and corrupt to hide wealth have been exposed after over 11 million documents were leaked from Panama law firm Mossack Fonseca.

The documents reveal more than 200,000 offshore entities set up to conceal clients’ money. Although not technically illegal, the lack of transparency required for these shell companies make it easy for their beneficial owners to remain hidden – ideal for criminals seeking to launder money, as well as those looking to cheat the public out of tax.

Someone could, for example, loan public money to an offshore company, have it transferred through numerous others until its origins are untraceable, and eventually enjoy the benefits of the money without having to account for its origins. Meanwhile, the initial loan is defaulted on, and the public loses out.

That’s the essence of the $2bn money laundering ring that’s been linked to Vladimir Putin’s inner circle in the wake of this scandal. But it’s evidence closer to home that has people calling on the government to take action against widespread money laundering and tax evasion going on in the UK.

In fact, the NCA estimates that hundreds of billions of pounds in criminal proceeds is laundered through the UK each year. So, how do businesses in the UK currently combat money laundering?

Combating money laundering

Due diligence is at the heart of anti-money laundering. It requires businesses to find out everything they can about individuals involved, including company directors and beneficial owners, before transacting with anyone.

In high risk countries, such as Panama or the British Virgin Islands, identities should also be verified through certified copies of photographic identification. Once these identities are known, there are a number of risk factors that can indicate potential money laundering activity:

  • Individuals with criminal convictions
  • Individuals you never meet in person
  • Individuals who are Politically Exposed Persons, or connected to PEPs
  • Individuals in high risk areas according to the Transparency International Corruption Perceptions Index
  • Individuals using intermediaries based in high risk jurisdictions
  • Client companies with complex ownership structures
  • Corporate clients whose capital is in the form of bearer shares
  • Clients with a high level of cash income

Failure to carry out due diligence and establish exactly who stands to benefit from transactions is not only irresponsible; it can lead to money laundering charges, as well as being accused of turning a blind eye to criminal activity.

The Panama Papers scandal shows there is a lot of work to be done, but with pressure on governments to address tax havens now at an all-time high, perhaps it will turn out to be a small step in the right direction.

About VinciWorks

VinciWorks help businesses operating in regulated sectors train employees in anti-money laundering by offering our Combating Money Laundering and Terrorist Financing eLearning course. Course licence includes access through our Astute eLearning Platform, providing powerful tools for enhancing engagement and proving compliance.