This summer, European Union member states will finalise implementation of the European Union’s Fourth Anti-Money Laundering Directive into their respective national laws. The Directive requires member states to update their national money laundering legislation to include the directive’s changes in certain key areas.
While Anti-Money Laundering (AML) is addressed in various pieces of national legislation (in the UK, the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007), there is a raft of allied law which governs the area and amendments will be made to all these at a national level to align them with the directive.
The main changes
There are a handful of key changes which the regulations will introduce including a statutory focus on risk management, amendments to the threshold for Enhanced Customer Due Diligence (ECDD) procedures, a new approach to dealing with Politically Exposed Persons (PEP) and the implementation of national registers of beneficial ownership. The bulk of the changes will serve to align European money laundering procedures with American procedures bringing a welcome end to the disparity in processes which transatlantic companies have had to endure.
This is an area which will be familiar to most insurance companies and many will already be taking a risk based approach to their AML practices. The directive however, focuses European companies on a risk based approach in a way that existing national legislation may not have. It requires that adequate safeguards be put in place by a company’s Money Laundering Risk Officer and for the processes to be stress tested and approved by senior management. There should also be an auditable record of the implementation of these processes so that the approach can be evidenced and justified in the event of any investigation
The changes provide for transparency in the process and focus on the identification of risk at all levels. In particular, risk assessments are to take into account variations in the origins of business. Different countries, regions, channels of referral and lines of business may be of more or less concern from a risk perspective and there should be discrete policy and procedural differences to address these variations.
Customer Due Diligence
There has been a reduction in the value of transaction which requires ECDD from €15,000 Euro to €10,000 and this will bring many more customers and transactions within the ECDD threshold. As such companies are seeking to make provision for any additional administrative support which this change might require.
Politically Exposed Persons
Under the new regime home state PEPs are subject to ECDD that previously only foreign PEPs had been. This may mean that some existing customers will need to be revisited and scrutinised more closely than before.
Central Register of Beneficial Ownership
This requirement for national governments has already been implementation in most EU countries with the UK’s registrar of companies maintaining a register of persons with significant control to meet this requirement.
What difference will it all make?
Firms which commit serious or repeated breaches or are found to have systemic failings in their application of procedures may be subject to a fine of no less than €5m euro or 10% of their annual turnover. Importantly, the directive is to be implemented by companies and all their subsidiaries including non-EU subsidiaries. This is a significant change to the previous regime in which money laundering directives were to be implemented only in the member state territory. This change means that companies will have to carry out a detailed analysis of whether the risks of doing business in a location where the required information is difficult or costly to access, outweigh the benefits of doing business there.
Companies were previously able to apply due diligence with differing levels of rigour depending on the nature and origin of their customer. In particular, if a customer was itself subject to AML regulations (such as a bank or a listed company) then that customer might be automatically exempted from ECDD. Under the Directive changes though, such a customer will still be need to be subjected to a risk analysis and their status as a compliant entity will not in itself be sufficient for them to not be subjected to ECDD.
There are also however clear benefits to having a central European registers of beneficial ownership as previously companies had to carry out this research on each client on their own in what was often a tedious, time consuming and costly process. More generally, these changes represent an active attempt by the EU to internationalise its approach to AML and they constitute a further step toward global AML standards, a goal which will serve to reduce both cost and administrative complexity for international businesses.