4th Money Laundering Directive – What you need to know

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22 February 2016


Posted by Yehuda Solomont, director of marketing at Legal Futures Associate VinciWorks

Solomont: directive puts a heavy emphasis on employing a risk-based approach to money laundering at every level

Solomont: directive puts a heavy emphasis on employing a risk-based approach to money laundering at every level

The European Union’s Fourth Anti-Money Laundering Directive came into force on 26 June 2015. It requires European member states to update their respective money laundering laws and transpose the new requirements into local law by 26 June 2017.

Officials from HM Treasury have indicated that the UK legislation will likely be passed just in time for the deadline. The two laws that require an update are the Money Laundering Regulations and the Proceeds of Crime Act 2002.

The directive includes some fundamental changes to the anti-money laundering procedures at law firms, including changes to customer due diligence (CDD), a central register for beneficial owners and a focus on risk assessments. However, with proper preparation and training, the transition to the new regime should be seamless for most firms.

Timeline

This process has been plagued by delays, but the likely timeline is as follows:

  • First half of 2016 – Consultation document, three months to respond and open HM Treasury events.
  • Second half of 2016 – Draft regulations.
  • Early 2017 – Guidance finalised.
  • June 2017 – Regulations come into effect.

What is changing?

Changes to CDD

CDD will be required by anyone trading goods in cash with a value over €10,000 (current level is €15,000), and by casinos where customers wish to place a stake or collect winnings of at least €2,000

Enhanced measures for local PEPs

The rules for politically-exposed persons (PEPs) will no longer be limited to persons outside the UK. Local PEPs will be subject to the same scrutiny as foreign PEPs. The directive adds a note chastising firms for refusing the business of a PEP:

“The requirements relating to politically exposed persons are of a preventive and not criminal nature, and should not be interpreted as stigmatising politically exposed persons as being involved in criminal activity. Refusing a business relationship with a person simply on the basis of the determination that he or she is a politically exposed person is contrary to the letter and spirit of this directive and of the revised FATF Recommendations.”

Central register of beneficial ownership

Under the directive, corporates and other legal entities will be required to maintain accurate and current information on their beneficial ownership. They must provide that information to the government. That information on beneficial ownership will be held by each member state in a central register that will be accessible to banks, law firms and “any person or organisation that can demonstrate a legitimate interest”.

These interconnected registers will contain the names, dates of birth, nationality, country of residence and the nature and extent of the beneficial owners’ interests in the transaction.

This is potentially good news for law firms. A primary requirement, and administrative burden, of CDD at the moment is identifying beneficial owners. Access to a pan-European register will likely make CDD research much easier.

No automatic exemption from enhanced CDD

Under the Third Directive and the current Money Laundering Regulations, firms are able to automatically apply simplified CDD in the following circumstances:

  • Credit or financial institutions subject to the requirements of the Money Laundering Directive or similarly compliant local legislation;
  • Companies whose securities are listed on a regulated market subject to specified disclosure obligations;
  • UK public authorities; and
  • UK pension schemes.

Under the Fourth Directive, firms will be able to use these circumstances as part of a justification for simplified due diligence after conducting a risk analysis. However, the exemption from enhanced CDD will not be automatic, and the decision to apply simplified CDD will need to be backed up by documentation.

The Law Society has raised concerns that some of these situations will create an undue burden on firms, particularly in the case of pooled client accounts. The Law Society is lobbying this issue with HM Treasury.

Emphasis on a risk-based approach

The word risk appears 149 times in the Fourth Directive, compared with 36 times in the Third Directive and 13 times in the Money Laundering Regulations 2007. This is not a coincidence. The new directive puts a heavy emphasis on employing a risk-based approach to money laundering at every level. It directs states to commission national risk assessments, firms to develop risk-based policies, and practitioners to conduct CDD in a risk-based manner.

The current UK regulations already incorporate a risk-based approach, but the new directive goes even further and it seems to require more documentation of the risk assessment. For law firms this will mean:

  • Demonstrating and documenting that risk assessments are conducted and kept up-to date, taking into account risk factors including those relating to their customers, countries or geographic areas, products, services, transactions or delivery channels;
  • Written money laundering policies and procedures that take the firm’s risk assessment into consideration;
  • Internal audit teams, where necessary, to test the internal policies, controls and procedures; and
  • Money laundering training on how to conduct a risk-based CDD and ongoing monitoring.

Expands beyond the EU borders

Firms with majority-owned subsidiaries located in other countries where the minimum AML requirements are less strict than those of the member state must implement the requirements of the member state at those subsidiaries.

What does this mean for law firms?

  • Potentially easier CDD process with access to register of beneficial owners, although firms will not be allowed to rely solely on the register for CDD;
  • Firms and banks will no longer be able to apply simplified due diligence to pooled client accounts. The Law Society believes that this has severe implications for the profession and it is lobbying HM Treasury to change that provision;
  • The directive places significant weight on national risk assessments by member states. The recent UK national risk assessment found that law firms are high-risk targets for money laundering and that CDD processes and policies were weak. This new regime will likely bring even more scrutiny to processes at law firms.

What should law firms do to prepare?

  • Plan to roll out new AML courses in early 2017, once the transposition is complete. The training should include:
    • Changes incorporated in the Fourth Directive;
    • How to perform and document a risk-based assessment of money laundering; and
    • How to access the beneficial ownership registry.
  • Money laundering reporting officers (MLROs) should perform and document an internal risk assessment;
  • MLROs should update policies to reflect changes to the directive and incorporate a risk-based approach;
  • MLROs should consider adding an audit function to test procedures; and
  • All new policies should be reviewed and approved by senior management.

Other money laundering news on the horizon

  • The Home Office is reviewing its Suspicious Activity Reports (SARs) regime and an action plan is expected soon. Over 350,000 reports were submitted last year, with only 1% submitted by lawyers.
  • FATF mutual evaluation expected in March/April 2018.


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