The EU's 5th Anti-Money Laundering Directive
The EU Directives are legislative acts that establish common goals for all EU member states. Each country has the flexibility to determine its own framework to meet these directives, so long as they are met. Although these are legally non-binding, failure to comply can lead to fines and other punitive actions. Let's dive into everything you need to know about the EU's 5th Anti-Money Laundering Directive!
What is AMLD5?
The 5th anti-money laundering directive, or AMLD5, was released in June 2018 to update the existing AML legal framework. It also sought to update and provide clarification on the 4th Anti-Money Laundering Directive – AMLD4.
Member states must incorporate the requirements of AMLD5 into domestic laws within member states by January 2020.
The introduction of this directive was expedited by several high-profile terrorist attacks in Europe and political scandals that occurred after the issuance of AMLD4. Simply put, lawmakers were taken aback by the sophistication of money laundering crimes that were linked to cryptocurrencies and felt that they needed to do something to address it.
As a result, AMLD5 was issued to provide more protection and greater transparency regarding crypto transactions.
High-Level Overview of AMLD5
The EU’s 5th Anti-Money Laundering Directive has guidance over topics that can be broken into the following sections: obliged entities, customer due diligence, purchase identification, beneficial ownership information, and PEP screenings.
Obliged Entities
AMLD5 has brought custodian wallet services and virtual currency providers into the scope of the EU regulatory framework. It also adds anyone who provides audit, external accounting, or tax advising services as a principle business - as well as estate agents where the monthly rent is greater than 10,000 Euros.
Any businesses that fall into these new categories must now consider additional controls they have to be put into place to comply with regulations. They must have a plan of action in place to create this framework as well as review the adequacy of any existing processes so that gaps can be identified accordingly.
In other words, fiat-to-virtual currency exchanges and custodian wallet providers will now have to adhere to the same Know Your Customer (KYC) and AML regulations that traditional financial institutions must comply with. This includes everything from customer due diligence to monitored transactions.
These entities must also register with the appropriate authority within the member state, such as the UK's Financial Conduct Authority – or FCA.
Customer Due Diligence
Additional customer due diligence is now required for any funds coming from high-risk third countries. AMLD5 creates a new article that harmonizes enhanced due diligence requirements that member states are obligated to comply with any time they have a business relationship with high-risk third countries.
This is a change from the existing guidance, which allows member states to determine their types of enhanced due diligence processes. The inconsistency caused by this was a problem in the past since member states apply different rules and regulations for their regulated businesses.
As a result of this new directive, firms may need to update their policies and procedures regarding working with high-risk third companies to ensure that they adhere to the requirements laid out in AMLD5.
Purchase Identification
This new directive also lowers the threshold for purchase identification requirements relating to e-money and prepaid cards.
The updated identification thresholds for e-money and prepaid cards is 150 euros, which is down from 250 euros. The threshold for customer due diligence surrounding remote payment transactions has also been reduced from 100 euros to 50 euros.
Firms must base their identity verification process on documents and information from reliable and independent sources. The process must include electronic identification if it is available - and if national authorities allow the use of those documents.
In response to this, firms will have to determine the criteria for acceptable electronic sources of identification. They may also need to revise their onboarding processes to accommodate for this update – something that could potentially require investing in upgraded technological infrastructure that can support this type of electronic verification.
The two primary concerns for regulated businesses are whether they have the right technology available to conduct this type of purchase identification and whether they can store and extract data electronically.
AMLD5 also eliminates the ability of individuals to have anonymous bank accounts and safety deposit boxes across the European Union.
Beneficial Ownership Information
Another update included in AMLD5 is that the public is entitled to have access to beneficial ownership information for corporate and other legal entities. Not only does it make UBO – Ultimate Beneficial Owner – registers accessible to the public, but it also adds an aspect of the mandatory review.
Previously this information was only available to individuals that could demonstrate legitimate interests, so this is a major improvement in beneficial ownership transparency.
To comply with this aspect of AMLD5, regulated firms may need to create a formal process for members of the public to access these records. they will also need to update their procedural documents relating to data privacy laws and providing information to FIUs, or Financial Intelligence Units.
PEP Screenings
PEP screenings refer to an aspect of anti-money laundering compliance that requires regulated firms to check if individuals are on a politically exposed person list. If they are, there are additional due diligence measures that must be taken.
AMLD5 Seeks to improve these screenings by having the Commission assemble a list of all prominent public functions which will be available to the public. Likewise, member States and accredited international organizations related to them will be required to keep up-to-date lists of functions that would qualify as prominent public positions.
In summary, the EU’s 5th Anti-Money Laundering Directive improves on AMLD4 in a wide variety of areas.
First, it improves and updates the current anti-money laundering and counter-terrorism financing framework in place to improve collaboration and cohesiveness across the European Union. It also closes several loopholes that AMLD4 created that were being exploited by financial criminals. Finally, it brings the EU's anti-money laundering efforts in line with the Financial Action Task Force (FATF) standards that were updated in June 2019.
