On the 20th of May 2015, two years after the European Commission first proposed the 4th AML Directive, the European Parliament approved the final text of the 4th AML Directive intended to address the threat of money laundering in 2015 and beyond.
The 4th AML Directive effectively implements and expands on the ‘International Standards of Combatting Money Laundering and the Financing of Terrorism and Proliferation’ adopted by the Financial Action Task Force (FATF) in 2012, and will bring about the following changes within EU Member States within the next two years:
1. Each Member State will have to set up a central register with information on beneficial ownership of companies and other legal entities, which information will be accessible to competent authorities and FIUs without restriction and to Subject Entities within the framework of their customer due diligence measures.
Furthermore, any person or organisation who can prove a legitimate interest in the information may also be able to access such information.
The Directive is however clear in specifically prohibiting Subject Entities from relying on the information available at such central register as a means to carry out their due diligence exercise.
In regard to the beneficial owners of Trusts, it is only express trusts which generate a tax consequence in a particular Member State which will require disclosure of identity details of the Settlor, Trustee, Protector (if any), Beneficiaries or class of Beneficiaries and any other personal who may have an influence on the Trust, to such central register.
2. In relation to companies and other legal entities, a new definition of ‘Beneficial Ownership’ does away with the 25% shareholding interest which until now was the yardstick used by Subject Entities in determining beneficial ownership or control in a company.
A person’s percentage holding in a company will become just one of the factors which will determine the Subject Entity’s assessment of beneficial ownership or control.
In addition, where no natural person is identifiable as the beneficial owner and having exhausted all means of identification, the managing officials of such a legal entity may now be considered the beneficial owners by the Subject Entity carrying out the due diligence exercise.
3. Further emphasis is placed on the risk-based approach to the assessment of AML/FT risk, with three levels, namely a Supranational level, a National level and an individual Subject Entity level, all documenting and reporting on AML/FT risks.
At Supranational level, the European Commission will be reporting on risks within the Internal Market and cross-border activities. At National level, Member States will be required to carry out their independent risk assessments. At the level of Subject Entities, these will be required to document and keep up to date risk assessments on their clients, and make them available on request to regulators and supervising authorities.
Similarly, Subject Entities will be required to have policies, controls and procedures to mitigate the risks identified at EU, national, and their own business level.
4. Changes in the due diligence process, so that certain entities which used to automatically qualify for simplified due diligence before the 4th AML Directive, would now still have to be assessed by Subject Persons, who would then be able to choose to apply simplified due diligence, if appropriate, rather than automatically exempt such entities.
Similarly, a non-face-to-face relationship will not automatically require Subject Entities to apply enhanced due diligence, but will be one of the factors to be taken into consideration by the Entity as it carries out its risk assessment.
5. A new definition of ‘Politically Exposed Person’ (PEP) will now capture domestic PEPs and do away with grey areas with a non-exhaustive example of the offices which would render a person a ‘PEP’, for AML risk assessment and due diligence purposes.
6. The 4th AML Directive will also broaden the reach of AML legislation by rendering all persons trading in goods to the extent that they make or receive cash payments of 10,000 Euro or more, Subject Persons for AML purposes. (Note: Previously the threshold was set at 15,000 Euro. It is also worth noting here that Member States may adopt lower thresholds and impose additional general limitations to the use of cash.)
7. Clear identification of all gambling providers (not only casinos) as Subject Persons / Subject Entities for AML purposes, thus do away with any grey areas or inconsistencies there may have been in this area.
8. Tax crimes will be treated as predicate offence in all Member States. (Note: Countries that already have an “all crimes” approach such as Malta and the UK will not/not likely be affected.)
While the 4th AML Directive was heralded as a means to strengthen the Internal Market, it certainly brings with it new burdens and responsibilities not only on Member states, but also on Subject Entities, who will have to rise up to the occasion and not only revise their AML policies and procedures, but also invest time and resources (at a direct or indirect cost) to re-train their employees and ensure proper compliance in an increasingly competitive industry.
The larger the organisation, the greater the need to appoint Compliance Officers who are not only knowledgeable on the subject and focused on keeping the organisation fully compliant, but who also have the time necessary to periodically review the effectiveness of the organisation’s systems and controls, documenting such tests and their results, and advising Senior Management in order to ensure continued effective compliance and avoid administrative and other sanctions.
Internal audit functions will become the norm, not the exception, with Compliant Officers appointed to managerial positions to set the right tone within the organisation, as to the importance of proper compliance.
This article is for information purposes only and in no way exhaustive. It is not intended as a substitute to legal or other advice.