The EU’s 4th Anti-Money Laundering Directive (4th EU AML Directive) was enacted on 25 June 2015, and fully implemented on the 26 June 2017, replacing the third Anti-Money Laundering Directive.
As well as a greater emphasis on risk assessments to combat money laundering (AML) and terrorist financing (CTF) at every level, the Directive further enhances the requirement for more thorough Customer Due Diligence and upon the definition of a Politically Exposed Person.
In all, the changes to regulation will prove challenging to varying degrees of firms within different sectors, as they aim to comply.
The new Directive outlines new rules on accurate and current beneficial ownership identification and record keeping. This means that corporates and other legal entities must provide information to the government, which is made available by each member state in a central register. The new information requirement will cover full names, dates of birth, nationality, country of residence and the beneficial owners’ interest in the transaction.
Changes to Customer Due Diligence (CDD) and enhanced CDD
The 4th EU AML Directive has lowered the cash payment threshold for anyone trading goods in cash to €10,000 from €15,000 in the last Directive. This threshold can be lowered at the national level.
This is also expanded to casinos who must perform CDD on customers placing a stake or collecting winnings of €2,000 or more.
Business proprietors are now required to review and carry out enhanced CDD on the identity of customers particularly those deemed to be of higher risk. All financial transactions must be monitored and any suspicious activity (whether the transaction has been carried out or declined) must be reported by business proprietors to the financial intelligence unit (FIUs). Moreover, tax crime have been added to the list of predicated offenses for money laundering. The inclusion of tax crime is designed to improve cooperation across EU borders.
The 4th EU AML Directive favours a risk-based approach to due diligence.
Enhanced risk-based approach, requiring evidence-based measures
There is a heavy emphasis on risk-based approach to money laundering at every level.
Businesses included in the Fourth EU AML Directive are obliged to make their own risk assessment for their line of business.This means that they should have a written risk assessment for how their line of business could be used for money laundering and terrorism financing.
It is no longer enough to cross off a checklist for how a risk assessment should be done. A new approach, dubbed “a holistic risk based approach”, has been introduced in the Directive. It involves the use of evidence-based decision-making to target the risk of money laundering and terrorist financing facing the Union and those operating within it more effectively.”
The legislators urge the business proprietors to have risk assessments made for anti-money laundering and countering the financing of terrorism (CFT). What kind of risk assessment you should focus on (AML, CFT or both) depends on what kind of business you have. The holistic approach includes, besides monitoring transactions, to look for deviations in a customer’s behaviour.
Expanded definition of a politically exposed person (PEP)
In the Fourth EU AML Directive the PEP definition is expanded to also include all national PEPs as being high-risk customers due to the risk exposure attached to their positions. This includes UK PEPs.
The deï¬nition of a PEP is a “natural person who is or who has been entrusted with prominent public functions.” The deï¬nition goes beyond the individual himself to include family members and close associates. Middle-ranking or more junior officials are not included in this deï¬nition. The Fourth EU AML Directive states that the PEP status should be applied for a period of 12 months after they leave office. However, the period could be longer on a National level. After a risk assessment, the period could also be prolonged.
Screening against PEP and sanction lists is encouraged in the Fourth EU AML Directive when onboarding a client and also during the ongoing customer relationship. As a business proprietor, a key factor is to use independent PEP screening lists. Regarding sanction lists, the most commonly used sanction lists in the EU are United Nations Consolidated sanction and EU Global sanction. The banks and business proprietors who have the permission to do so, can also screen against the American sanction list Ofac.
With the new Directive paying greater attention to risk assessments, now more than ever, it pays dividends to invest in solid based risk system solutions.
But where does that leave firms for the future? The Directive’s greater emphasis on risk assessment Certain industry leaders rightly point out that draft regulations have been ongoing for two years and firms have no excuse to be unprepared for the new changes.
Trapets AB’s latest whitepaper The European Union Fourth Anti-Money Laundering Directive is available to download on bobsguide now.