Key Changes under the 4th Anti-Money Laundering Directive
20 November 2017
The EU Commission, with a view to combat money laundering and terrorist financing and further strengthen the currently applicable anti-money laundering legislation making it at the same time more effective, has introduced in May 2015 the fourth Anti-Money Laundering Directive. The 4th AML Directive was expected to be implemented by the Member States by the 26th of June 2017, however, only a very small number of Member States have fully implemented the new AML Directive so far (more specifically UK, Germany and Denmark). In anticipation of the imminent amendments to the currently applicable Cyprus legal and regulatory framework, the purpose of the present publication, is to briefly present an overview of the key changes the 4th AML Directive is about to bring, the challenges on Members States for its implementation and the expected, quite burdensome, requirements on obliged entities.
To begin with, one of the most significant provisions of the 4th AML Directive is Article 30(1) which provides that Member States are obligated to ensure that companies incorporated within their territory are under the obligation to acquire and have in their possession sufficient, accurate and valid information in relation to their beneficial ownership, encompassing any relevant details of existing beneficial interests. Moreover, according to the aforementioned provision, those companies are compelled not only to provide information relating to their legal owner, but are also required to provide information relating to their beneficial owner to obliged entities when the latter are taking customer due diligence (CDD) measures.
According to article 3(6) “beneficial owner” is considered to be any natural person(s) who owns or controls the company or/and any natural person(s) on whose behalf an activity or transaction is being carried out. In cases of corporate entities, the term “beneficial owner” is further defined as any natural person who possesses a shareholding ownership or controlling interest of more than 25% of the shares or the voting rights in that company.
Furthermore, as per article 30(3), Member States shall keep adequate, valid and accurate information in relation to beneficial ownership of all corporate and other legal entities incorporated within their dominion in a National Central Register. The relevant competent authorities, the Financial Intelligence Units (FIU) and the obligated entities will be able to have access to these interconnected National Registers. Access to the registers will also be provided to any organisation or person indicating a “legitimate interest” in such access. Thus, transparency will be significantly increased. The information that are kept in the aforesaid registers include, inter alia, the beneficial owners’ name, nationality, country of residence, month and year of birth and the nature and scope of beneficial interest they possess (article 30(4).
Additionally, one of the most significant changes under the 4th Anti-Money Laundering Directive is that the provisions relating to politically-exposed persons (PEPs) are no longer restricted to politically-exposed natural persons from abroad but are also applicable to domestic persons occupying prominent public positions (Article 3(9). The term “politically-exposed persons” includes heads of State and government, members of parliament, members of political parties, members of Supreme Courts and other high-level judicial bodies, ambassadors, members of the boards of central banks, directors and deputy directors of the board of international organisations, etcetera.
When a PEP ceases to be in possession of a prominent public position, obliged entities shall continue to consider the risk of conducting business with such PEP for the minimum period of 12 months or even longer, until it is ensured that this individual does not pose any additional risk.
Of particular importance is the fact that the Directive prohibits the refusal of conducting business relationships with individuals solely because of the fact that they are considered to be politically-exposed persons as this is against the Directive’s objectives and purposes. The Directive clearly states that PEPs shall not be stigmatised as being involved in criminal activities.
Articles 6,7 and 8 of the 4th AML Directive are also of paramount importance since they provide that the EU Commission along with other competent, EU authorities such as EBA and ESMA are required to conduct an assessment on money laundering and terrorist financing risks. The EU Commission is also required to make available the findings of the aforementioned risk assessment and its recommendations to Member States and obligated entities so that each Member state will be able to comprehend these risks and confront them more easily and effectively. In addition, it is provided that Member states are under the obligation to identify, comprehend and mitigate money laundering and terrorist financing risks by conducting National Risk Assessments. The national risk assessments aim to aid obliged entities to carry out their own risk assessments. When conducting AML risk assessments, obligated entities shall take into account various factors such as geography, customers, and the type of products. The findings of these risk assessments shall be kept in a record and shall also be renewed and kept up-to-date.
What is more, the 4th AML Directive is expected to tighten up the rules relating to customer due diligence (CDD). From now on, simplified customer due diligence measures will be applicable to lower-risk transactions and customers. Obligated entities are required to carry out adequate monitoring to ensure that a particular transaction or customer is of lower risk and therefore, simplified customer due diligence measures are indeed applicable. In other words, the decision to apply simplified customer due diligence measures shall be justified and supported by relevant documentation as the blanket approach, according to which all customers get into one category, will not be applicable.
In cases of customers or transactions encompassing a higher risk, enhanced due diligence (EDD) measures shall be applicable. These cases include, inter alia, conducting unusually large or complicated transactions that have no obvious economic or lawful reason, or carrying out transactions with high-risk third countries that have weak anti-money laundering systems. It is noteworthy that the AML Directive provides that obliged entities are required to carry out risk assessments for any jurisdiction in which they conduct business, and which is not within the EU. The AML Directive also forbids reliance on third parties having their place of business in such high-risk third countries.
Moreover, a provision of particular importance is article 3(4)(f). According to the aforesaid provision, from now on, tax crimes (relating to both indirect and direct taxes) will be considered as “criminal activities” and will be punishable as predicate offences for money laundering. Furthermore, the 4th AML Directive has enlarged the scope of obliged entities subjected to it by extending its application to the provision of general gambling services and not just casinos. It is notable that the new AML Directive obligates gambling service providers that present a higher-risk to apply CDD measures for transactions equal to or exceeding 2.000 Euros (Article 11(d).
Another significant change under the 4th AML Directive is the fact that the threshold for persons trading in goods when dealing with cash payments has been reduced from 15.000 Euros to 10.000 Euros. According to Article 11(c), Member States are required to ensure that in such transactions, obliged entities apply Customer due diligence (CDD) measures in cases where the transactions are equal to or exceed the amount of 10.000 euros.
Last but not least, one of the most significant changes under the 4th AML Directive is the imposition of even stricter penalties on obliged entities that are in breach of their obligations under the Directive. According to article 59, maximum administrative pecuniary penalties of at least twice the benefit obtained from the breach can be imposed on obligated entities that are in breach where the benefit is determinable, or at least 1.000.000 Euros. Moreover, in cases relating to financial institutions or credit institutions maximum administrative pecuniary penalties of at least 5.000.000 Euros or 10% of the total annual turnover can be applicable.
It shall be noted that Cyprus has not yet proceeded to the implementation of the new Directive. Although a draft, proposing amendments to the currently applicable national legislation has been prepared and discussed, there are some issues that have to be settled. For example, some fine tuning is required in relation to ultimate beneficial ownership (UBO) threshold. As already mentioned, the threshold proposed by the 4th AML Directive for identifying UBO is 25%. However, this was not mirrored in the proposed draft which provided that legal or natural persons holding 10% of a company’s shared are considered to be UBO. Therefore, a final determination needs to be made. The new legislation is expected to be enacted soon.
In conclusion, the implementation of the 4th Anti-Money Laundering Directive will constitute a significant step forward and will certainly contribute significantly to the combat of money laundering and terrorist financing. The Directive places some quite challenging requirements on Member States and obliged entities especially in relation to the conduct of risk assessments and their reporting obligations. The Directive is expected to significantly increase the degree of transparency, fairness and efficiency of transactions within the EU. However, it is of crucial importance for each obliged entity to take the necessary steps in order to comply with the new requirements under the 4th AML Directive due to the extremely strict penalties and excessive fines that may be imposed for non-compliance. As a final remark, following recent European cases, it will be quite interesting to see on how increased transparency, purported by the 4th AML Directive can, if at all , symbiotically co exist with stricter personal data protections afforded by the General Data Protection Regulation, set to be directly applicable on May 2018.
For further information on the 4th Anti-Money Laundering Directive and guidance as to how an obliged entity shall respond to the new, demanding, legal requirements, feel free to contact us.
Varnavas Playbell, Eleni Louka
The above is for information purposes only and does not constitute advice nor should it be relied on.