Primary Areas of Focus
The 5AMLD builds on the regulatory regime applied under its predecessor and reinforces the EU’s AML/CTF regime to address several emergent and ongoing issues. The primary areas of focus are enhanced regulations for cryptocurrency, prepaid cards, high value goods, beneficial ownership, a requirement for companies to compile and publicly release a PEP list made up of prominent politically exposed public functions/positions, and enhanced due diligence with companies that do business with customers from high-risk third countries. High-risk third countries are countries identified by the European Commission as having “strategic deficiencies in their national anti-money laundering and counter-financing of terrorism regimes that pose significant threats to the EU financial system. These countries require more extensive checks when money is moved from them into the EU. These are only a few of the parameters the EU is monitoring and enhancing to ensure terrorist financing and money laundering are unable to prosper today.
The 5AMLD makes significant new legislative steps in the treatment of virtual currencies and goes further than the 4AMLD in imposing reporting obligations by giving Financial Intelligence Units the authority to obtain the identities of owners and their demographics in an effort to combat the partial anonymity associated with cryptocurrency. Under the 5AMLD regulations, cryptocurrencies and cryptocurrency exchanges are considered “obliged entities” as they require customer due diligence (“CDD”) to be performed and suspicious activity reports (“SARS”) to be filed when reporting thresholds are met. Additionally, to combat the partial anonymity, the 5AMLD also introduces regulations for providers of cryptocurrency exchanges as well, as they must now be registered with the competent authorities in their domestic locations. For example, any new crypto-asset businesses operating in the U.K. are required to have registered with the U.K.’s Financial Conduct Authority (FCA) before they can conduct crypto-asset activities. These implementations are to be completed by January 10, 2020 for new crypto-asset businesses. For those crypto-currencies already operating in the U.K. before January 10, 2020, those will receive a transitional period to register with the FCA by no later than January 10, 202 .
Prepaid cards are highly enticing to criminals as they cannot be traced and are typically used in the “layering” stage of money laundering, by using dirty cash to pay for prepaid cards which could then be layered into the financial system. The 5AMLD set the monthly limit to anonymous prepaid cards issued at €150. This means firms will be required to carry out identity checks on customers using prepaid cards funded with more than €150 . Additionally, anonymous remote or online transaction limits will also be reduced to €50. The use of anonymous prepaid cards issued outside the EU may also be prohibited unless the jurisdiction is considered to have equivalent money laundering legislation to the EU.
High Value Goods
High value goods are susceptible to money laundering as they are commonly utilized during the integration phase of the money laundering process. The integration phase includes the movement of previously laundered money into the economy where criminals then receive these funds from what appear to be reputable sources. An example of this process is the purchase of high value goods such as yachts, jewelry, and art. Under 5AMLD art businesses & individuals trading in works of art valued at €10,000 or more, irrespective of the payment method, are specifically identified as “obliged entities” and thus will be required to conduct CDD before they establish a business relationship with a client or carry out an occasional high value transaction equal to €10,000 or more, irrespective of the payment method . The 5AMLD states that art galleries must now appoint money laundering compliance officers and gallery owners and their managers must also register with HM Revenue and Customs, the UK’s tax payments and customs authority, and will be charged with reporting suspicious activity . This change is aimed to shift responsibility for identifying beneficial owners to the gallery owners or auction house so that true ownership cannot be obscured through intermediaries. This rule not only applies to single transactions but to multiple linked transactions as well. This, however, does not solely apply to high priced art, as other high value goods are also considered high risk including oil, arms, precious metals, and tobacco.
The 5AMLD requires qualifying entities doing business within the EU to register beneficial ownership and have this information publicly available. The core reason for Ultimate Beneficial Ownership (“UBO”) identification is to prevent money laundering and terrorist financing being hidden behind the closed doors of corporations and legal entities. Criminals create false addresses, registration numbers, PO boxes, and email addresses to help form an illusion of an entity with no connections to themselves, and the requirement of providing a UBO helps defend against this illicit activity. This is done by putting the responsibility of the activity of the company on the UBO. For example, based on the AML risk rating of the customer, a requirement could be to identify anyone with 25% ownership, or if the risk is high based on numerous factors including geographic location, industry type, and services and products provided, the requirement could be to identify UBOs with at least 10% ownership. The 5AMLD expands on how 4AMLD introduced a focus on Ultimate Beneficial Ownership by introducing the following measures :
- UBO lists (drawn up under 4AMLD) are to be made publicly accessible within 18 months of 5AMLD’s implementation date.
- Trusts (or any similar arrangement) must observe beneficial ownership regulations and, like companies, must make that information available to authorities or others demonstrating legitimate interest.
- UBO national registers must be inter-connected at an EU level in order to facilitate cooperation and the exchange of information between member-state authorities.
- Member states are to strengthen their UBO verification mechanisms to ensure the information they carry is accurate and reliable.
- Member states must introduce separate UBO registers for bank accounts: unlike company UBO registers, these lists will not be publicly available and only accessible by authorities.
5AMLD implementation dates for beneficial ownership were as follows :
- January 10th, 2020 - beneficial ownership for corporates were to be set up;
- March 10th, 2020 - beneficial ownerships of trusts were to be set up.
Enhanced Due Diligence (EDD)
One of the biggest challenges for not only the EU, but for all governments trying to defend against terrorist financing and money laundering is companies conducting business with entities in high risk countries . These countries require more extensive checks when money is moved from them into the EU and the 5AMLD will require enhanced due diligence on transactions with entities from and to high risk countries . The type of information required to be collected when dealing with such companies, includes the source of funds of the company, information on beneficial ownership including source of wealth, and intended nature of business relationship. The 5AMLD also requires companies that do business with customers from high-risk third countries to report transaction details with high-risk third countries to senior management and obtain approval prior to establishing or continuing those business relationships, to increase controls on specific business relationships, and identify transactions that may need further scrutiny .
Politically Exposed Persons (PEPs)
The 5AMLD requires EU member states to compile and publicly release a functional PEP list made up of prominent politically exposes public functions. This list will help determine who is and who is not a politically exposed person and will help settle the confusion between regulators and the regulated who exactly is, and who is not, a PEP. This list will feature the positions that are considered politically exposed and is “designed to make it easier for smaller compliance teams to identify the PEPs they should be screening against and monitoring for ongoing changes to risk of their clients and customers . Financial institutions are required to identify any PEPs who are associated to their client and this regulation will help with the identification and screening of those individuals.
Impact to U.S. Financial Institutions
Just as foreign financial institutions and businesses operating within the United States are expected to adhere to government regulations, U.S. financial institutions with a presence in the EU are also required to comply with the new requirements brought about by the 5AMLD. Many U.S. financial institutions are global in nature and have offices and relationships where the 5AMLD is in effect. It is imperative for U.S. analysts, who work with European clients, to be up to date with all the latest regulations and documentation requirements of the EU. Failure to implement these changes can lead to penalties and fines for the businesses. The year 2019 saw the second largest amount of fines handed out to financial institutions and other businesses, only trailing the year 2014. The following table shows which countries led the world in penalties in 2019 and the number of infractions that occurred.
The release of 5AMLD enhanced regulations and has forced financial institutions and other businesses to take a second look at their processes and procedures. Sia Partners is well versed in current AML/KYC regulations and those set to take effect in the near future. Sia Partners has professionals with expertise in the AML/KYC space who have aided prior clients with KYC remediation projects, data visualization and reporting, data assessment, and many other AML/KYC related projects. Our analysts have proven experience in the latest local and overseas AML regulations and have proven to not only provide high quality work but also create streamlined processes using data analytics which have saved our clients time, resources, and money. Additionally, Sia Partners is based out of Paris and has a very large presence in the EU. Sia Partners will continue to monitor new regulations the EU releases and will be ready to provide our clients with the required knowledge and skills to help them follow these regulations.