UK implementation of the Fifth Money Laundering Directive
Regulatory change waits for no firm, and whilst firms have only recently completed implementing the fourth money laundering directive (4MLD) into their sales practices, firms now need to get ready to implement the fifth money laundering directive (5MLD).
On the 15th April 2019, the UK government published its consultation paper on how the UK proposes to enact 5MLD into UK law and has invited the industry to respond.
A full copy of the consultation paper can be found here.
EU member states (including, for now, the UK) have until January 2020 to implement 5MLD into law. As with everything else Brexit related, if the UK enacts the changes at all, is dependent on the terms of any Brexit deal. However, as the UK was a key driver in the drafting of the 5MLD even if we leave the EU without a deal, we at Apricity consider that we will still enact this change.
The 4MLD introduced wide-reaching changes to how a business approaches anti-money laundering including:
- The removal of automatic entitlement to apply simplified due diligence (SDD) on customers.
- Expansion of the risk-based approach to due diligence.
- The definition of a Politically Exposed Person (PEP) was amended to include domestic PEPs (such as UK Members of Parliament).
- Traders in high-value goods must undertake customer due diligence (CDD) when dealing with cash transactions of €10,000 (or its sterling equivalent) or more (decrease from €15,000).
Thankfully, the changes proposed in the 5MLD are not as extensive, nor is it as far-reaching as its predecessor.
What are the key changes?
Previously, money laundering regulations have predominantly applied to banks, building societies, money service business, brokers etc. 5MLD brings letting agents, art dealers, cryptocurrency exchanges and tax advisers into the fold of firms covered by money laundering regulations.
The key changes from 4MLD include:
- Firms will be able to place reliance on electronic identification tools to complete customer due diligence (CDD).
- The FCA’s new national bank account register – which will be accessible by law enforcement within the UK and EU member states.
- Clarification of what prominent public functions meet the definition of a PEP.
- Tighter controls relating to firms conducting business or opening subsidiaries in high-risk countries.
- Increased transparency of whom is the actual beneficial owner of a company.
- The use of anonymous safety deposit boxes will no longer be permitted.
- Customers wishing to purchase gift cards and other prepaid products with a value of more than €150 will be subjected to due diligence.
The UK government is consulting upon its proposals to enact these amendments, a more detailed summary of the more applicable changes and what you should be considering now is below:
Customer due diligence
As you will no doubt be aware, the identification and verification of customers must be based on documents from a reliable and independent source i.e. a copy of a driving license, bank statements, council tax bills etc. Not a letter from their mum.
The 5MLD proposes that, where available, a firm should also consider electronic identification means (as long as the supplier has been approved by the UK government). For firms, this will increase the number of options available to them to verify an applicant’s identity and is likely that this will lead to a shift in how we long term approach due diligence.
With a view to cracking down on criminals disguising their illicit funds through businesses, 5MLD places additional pressure upon firms to identify the beneficial owners of firms, whom they are conducting business with and maintain a record of this information centrally. As part of this, it is proposed that where a significant money laundering or tax evasion risk is identified, that the threshold for identifying beneficial ownership of a business may be reduced from 25% controlling ownership/voting rights to 10%.
5MLD also introduces public access to these registers, which will increase scrutiny and potential reputational damage if businesses get it wrong.
Politically Exposed Persons (PEPs)
The 4MLD brought into scope domestic PEPs (such as Members of Parliament), following its enactment, the FCA published guidance upon PEPs and how regulated firms should approach them (the FCA’s PEP Finalised Guidance can be found here.
The FCA states that firms should take a case by case approach when identifying and applying enhanced due diligence (EDD) upon PEPs. The guidance document also confirms that UK PEPs should be treated as low risk unless a firm has identified other issues, which would mean that a PEP poses a higher risk to the firm.
As part of this consultation, the government is querying with the industry if the FCA’s existing Finalised Guidance document is adequate and if its proposals in relation to intergovernmental organisations, headquartered in the UK, are acceptable.
Should you provide services for domestic or international PEPs, you may wish to re-review the FCA’s Finalised Guidance again and respond to this consultation with any concerns.
The definition of “tax adviser” will be enhanced to include firms and sole practitioners who provide, directly or with other persons, assistance or advice about the tax affairs of other persons.
Should your firm provide tax advice, you may wish to respond to this consultation setting out what you foresee the potential impact will be to you and your business if this definition is enacted.
Getting it wrong
Failure to comply with the 5MLD and the consequences are far reaching:
- Fines of up to €5million/10% of total annual turnover, whichever is greater.
- Managers involved can be prevented from running a regulated business.
- The firm itself can be prevented from trading.
- A public statement of any breach will be made which could result in reputational damage.
How to respond
The UK government consultation paper on its proposals on how to enact 5MLD can be found here and should you wish to respond to it, you have until the 10 June 2019.
For your reference, the full text of 5MLD can be found here.
- UK Government Consultation Closes: 10 June 2019
- Deadline for 5MLD to be enacted by member states: 10 January 2020
The regulatory focus upon anti-money laundering is not going to go away any time soon, in its business plan for this year the FCA has already confirmed that it will be focusing its efforts upon Financial Crime. In addition to this, the 6MLD is also already in the pipeline and a draft has been published by the EU. Watch this space…