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.

Money Laundering, Cryptocurrencies and EU Legislation

Money Laundering, Cryptocurrencies and EU Legislation

While new EU rules aimed at tackling money laundering came into effect in early July, critics are already suggesting that the new regulations are obsolete. Commentators are suggesting that the EU needs to rapidly introduce legislation that empowers national regulators to tackle financial crimes and money laundering involving cryptocurrencies such as Bitcoin.

The fifth review of the EU Anti-Money Laundering legislation was kick-started by revelations of money laundering revealed by the Panama Papers expose. The new rules are focused on creating centralised bank account registers to simplify the work of security forces. But national financial intelligence units are poorly organised and they rarely cooperate: thieves can easily obscure their proceeds by moving them between countries.

However, critics are suggesting that the rise of cryptocurrencies means that additional protections are required and the EU needs additional powers to combat the changing face of financial crime. There is currently no single EU force that can coordinate the tracking, recording and prosecution of financial crimes that cross borders.

EU lawmaker Sven Giegold commented: “The Commission cannot hesitate any longer in bringing forward a legislative proposal for a European anti-money laundering authority.”

Before the EU releases further updates to the statute, they will need to allow time for member states to comply with the current release. Many member states are still struggling to implement the previous update, which was issued in 2015. This suggests that many countries are not well placed to defend against the tandem rise in cyber crimes and cryptocurrencies. In this environment, people will continue to have easy access to the tools they need to launder the proceeds of their crimes.

Malta may find itself on the frontline of the battle between regulators and money launderers, as Europe’s smallest country has successfully promoted itself as a digital currency hub, attracting significant investment from major players in the crypto industry.

Here in the UK, new legislation has been proposed to include the penalty of jail time for people who use the UK property market to launder money. This would reduce the attraction for criminals and corrupt officials to stash their funds in British property – a tactic that has inflated the UK property market, making it difficult for many people to buy a home. Campaign group Transparency International estimates that £4.2billion of London real estate is bought with suspicious assets.

Lord Duncan, the UK government minister for Scotland commented: “For too long criminals have been able to use the property industry as a front for investing dodgy funds, hiding dirty money and evading the law. This stops now.”

Anti-Money Laundering Courses from VinciWorks

Keeping up-to-date with money laundering regulations is a constant challenge. Our eLearning solutions are designed to help your teams remain aware of regulations and prepared to take action against crime.

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.