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Significant changes ahead: The Fourth AML Directive

October 2016

Significant changes ahead: The Fourth AML Directive

THE FOURTH ANTI-MONEY LAUNDERING DIRECTIVE TO BE IMPLEMENTED BY JUNE 2017

The Fourth Anti-Money Laundering Directive (4AMLD) is due to be implemented in the UK by June 2017. The aim of the Directive is to enhance and improve the EU’s anti-money laundering (AML) and counter terrorism financing (CTF) capabilities in light of the increased global threat from tax evasion and criminal/terrorist activity.

There are several notable changes introduced by the new regulations, all of which are underpinned by an increased focus on the adoption of a risk-based approach. As a result of these changes, Regulated Entities (REs) such as law firms and financial institutions (non-exclusively), will need to conduct a full review of their policies, processes and training practices to ensure compliance with the new regime.

The key changes required as a result of 4AMLD are summarised below: 

Risk Assessment

All REs must now conduct a documented AML/CTF risk assessment in respect of their business. The assessment must take into account risks relating to customers, countries or geographic areas, products, services, transactions or delivery channels. Any such assessment must be continually maintained for accuracy. Furthermore, there is an overarching requirement for REs to adopt a risk-based approach when conducting client due diligence measures.

Simplified Due Diligence

There is no longer a blanket exemption that allows the application of Simplified Due Diligence (SDD) for REs. Applying SDD measures must now be justified on the basis that the business relationship or transaction presents a lower risk. Regardless, however, of whether SDD is appropriate, REs must still monitor relationships and transactions so as to detect any suspicions of money laundering or terrorist financing and report accordingly.

Politically Exposed Persons

4AMLD has amended the definition of Politically Exposed Persons (PEPs) to now include people entrusted with a prominent public position domestically, as well as domestic PEPs who work for international organisations. REs will now be required to apply Enhanced Due Diligence on PEPs for at least 18 months after the individual ceases to be a PEP.

Reliance

An RE may still rely on third party Customer Due Diligence (CDD). However, the ultimate responsibility for meeting the CDD requirements lies with the entity relying on the information. Additionally, REs will have to obtain the necessary CDD information from the third party, which may include documentation (originals or copies). The RE must also take adequate steps to ensure the third party provides, immediately, upon request, relevant copies of the information being relied upon.

Beneficial Ownership

4AMLD requires that entities incorporated within the EU should hold adequate, accurate and current information on their beneficial ownership, in addition to basic information such as the company name, address, proof of incorporation and legal ownership. Furthermore, the beneficial ownership information of trusts that generate tax consequences should also be held centrally. The Government has already introduced a beneficial ownership register for companies and Limited Liability Partnerships via the Small Business, Enterprise and Employment Act 2015. Additionally, 4AMLD slightly expands the definition of Beneficial Owner to ensure that REs identify those individuals who assume control over an entity in the event that there is no person whom satisfies the 25% ultimate beneficial ownership threshold.

Next steps

Many REs already conduct practices which comply with the new regulations. However, it is important that all REs undertake a review of their current policies and procedures to ensure that any gaps are identified and resolved before the June 2017 implementation date.

Failure to adhere to the new legislation could result in sanctions which include fines of up to 10% of annual turnover or 200% of profits gained, individual fines of €5m, withdrawal of regulatory authorisation and publication of public statements detailing the breaches committed.

The UK Government is proposing to create the Money Laundering and Transfer of Funds (Information on the Payer) Regulations 2017 in order to implement the 4AMLD and expects this to come into force in national law by 26 June 2017. The Government has also confirmed that the 2017 Regulation will generally reflect the requirements within 4AMLD, only “gold-plating” (going further) where there is good evidence that a material AML/CTF risk exists which must be addressed.

For further information on the development of 4AMLD, its implementation into national law and the UK Government’s future plans concerning AML/CTF please see:

http://ec.europa.eu/justice/criminal/document/files/aml-directive_en.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/553409/4mld_final_15_sept_2016.pdf

https://www.gov.uk/government/publications/action-plan-for-anti-money-laundering-and-counter-terrorist-finance

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