Jessica Parker comments on the latest European Anti-Money Laundering Directive in In-House Perspective magazine

4MLD: burden or benefit?

Examining the key provisions of the latest European Anti-Money Laundering Directive, Lucy Trevelyan considers how lawyers can prepare for implementation – and how far it can go in tackling terrorist funding.

A key part of an in-house lawyer’s role is, of course, to keep abreast of any new rules and regulatory regimes affecting how their company does business. But general counsel is likely to face challenges when it comes to preparing for the Fourth European Union Anti-Money Laundering Directive (Directive (EU) 2015-849).

The Directive (4MLD) was approved by the European Parliament on 20 May 2015 and EU Member States have until 26 June 2017 to implement it.

However, in the wake of last December’s attacks in Paris, there are now moves to try and speed its introduction by this September as part of a broader strategy to combat terrorist funding.

4MLD features a number of key changes to the anti-money laundering (AML) provisions of its predecessor (Directive 2005/60/EC). They include:

• greater emphasis on a risk-based approach: entities will need to assess the level of risk presented in specific jurisdictions and sectors, and adjust their approach to customer due diligence (CDD) accordingly. Enhanced due diligence (EDD) will have to be conducted in relation to third countries (those outside the EU) identified as high risk by the European Commission;
• increased scope: more entities in certain sectors will have to carry out CDD, such as the gambling industry;
• widening the definition of politically exposed persons (PEPs): domestic individuals holding prominent positions in their home country – and their families – will be considered PEPs; EDD will always be required when transactions involve PEPs (as opposed to simplified due diligence, which it was felt is being overused);
• increased transparency around beneficial ownership: the threshold for beneficial ownership stays the same – those controlling more than 25 per cent of a business – but companies will have to maintain records evidencing beneficial ownership;
• including tax crimes as a predicate offence for money laundering: this will become mandatory across the EU; and
• more senior management responsibility: a senior manager will need to approve the establishment of business relationships.

According to Jessica Parker, partner at Corker Binning, the new regime will be more challenging for some EU Member States than others, which are more geared up. The United Kingdom, for example, is perceived to have ‘gold plated’ the previous third Directive and so already has many of the required systems in place.

White & Case partner Jonathan Pickworth adds that, although many of the concepts within 4MLD are already part of some jurisdiction’s AML landscape and it will not represent a sea-change in their approach, policies and procedures will still need to be updated.

‘While businesses will be considering implementation of 4MLD, they should also ensure that the policies and procedures they have in place properly meet the standards set out in existing domestic regulations and any other applicable regulatory guidance. It may be appropriate to stress test policies to ensure they are fit for purpose,’ he says.

For example, 4MLD puts an increased emphasis on a risk-based approach and acknowledges that it is appropriate to identify areas of higher and lower risk with a view to better targeting money laundering and terrorist financing risks. ‘The risk-sensitive approach has been a cornerstone of the UK AML regime and is outlined in the Money Laundering Regulations 2007. However, while this approach is not new, the application of EDD, for example, is not always straightforward,’ he explains.

Onus on accountability

The two areas likely to require the most thought, suggests Parker, are the enhanced requirements concerning ultimate beneficial owners (UBOs) and the increased emphasis on senior management responsibility.

‘Those in senior management positions in the financial services industry will be accustomed to the increasing expectation of accountability by regulators. 4MLD continues this trend with Art 8(4) stipulating that a compliance officer at management level must be appointed. Separately, the senior management must sign off on the business’s controls and the continuation of relationship with PEPs.’

Senior management is defined as an officer or ‘employee… of sufficient seniority to take decisions affecting its risk exposure’. So although, as Parker says, these individuals do not have to be at board level, bearing in mind the significant penalties for non-compliance, entities will want to ensure that whoever is taking these decisions has sufficient resource and power.

And the penalties are more significant. Sanctions available to Member States against erring entities include public censure, withdrawal of authorisations, director disqualification, or administrative penalties of at least twice the amount of breach or €1m (the minimum is increased to €5m or ten per cent of annual turnover for credit or financial institutions).

Transparency test

4MLD is unlikely to satisfy those campaigning for complete transparency, says Maria Theodoulou, partner at Stokoe Partnership. But it goes a long way to ensuring the ownership of companies and their assets are transparent.

As Parker explains, 4MLD requires Member States to compel businesses and structures to hold adequate, accurate and current information about their UBO. ‘Information concerning UBO will be available to investigators, entities that must do CDD and any person who can demonstrate a legitimate interest. It is anticipated that non-governmental organisations interested in investigating and exposing financial crime such as corruption will be able to demonstrate a legitimate interest,’ she says.

‘Ultimately, the real test of whether the new system meets the calls for transparency will be determined by how the courts interpret the meaning of “legitimate interest”, and who will be granted access to the new registers,’ says Theodoulou.

David Kirk, partner at McGuireWoods, agrees. ‘The new rules on beneficial ownership will increase the transparency of transactions, and should allow informed judgments to be made both at initial compliance stage and as transactions progress.’

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Read the full article as published on In-House Perspective here.