Just as financial institutions and other interested parties have come to grips with the ongoing requirements of the 3rd Money Laundering Directive, as effected in an Irish context by the CJA 2010, over the horizon comes the next wave of requirements courtesy of the 4th Money Laundering directive (MLD4), which will extend and replace MLD3, the current EU anti-money laundering (AML) and counter terrorist financing (CTF) regime. Member states are obliged to transpose MLD4 into national law by 26 June 2017.
MLD4 came about as a reaction to revisions of to the Financial Action Task Force (FATF) Recommendations which were adopted in February 2012 in order to address newly emerging AML and CTF concerns as well as a European Commission review of MLD3.
One of the key aspects of MLD4 relates to beneficial ownership.
Here in Ireland we are familiar with the extraordinary labyrinthine nature of too many corporate structures. We have a long history of concealment of beneficial ownership and this lack of transparency does nothing to inspire confidence in business practices – witness the soon-to-return Michael Lynn whose web extended to companies in Brazil, Romania and elsewhere – hardly natural places of business for a private practice solicitor.
MLD4 requires that Member States must ensure that entities incorporated in their jurisdictions obtain and hold “adequate, accurate and current information on their beneficial ownership” which can be accessed by competent authorities and EU Financial Intelligence Units (FIUs). Member States will also be required to store that information on beneficial ownership in a central register, accessible to:
- competent authorities and FIUs without restriction;
- “obliged entities” (i.e. those listed in Article 2(1) of MLD4 as being entities to which MLD4 applies) within the CDD framework; and
- others that can demonstrate a legitimate interest.
The storing of beneficial ownership information on a central register will not relieve obliged entities of their CDD obligations which they will be required to continue to fulfil using a risk-based approach.
MLD4 also provides clarity around “indirect ownership” and introduces some new rules in respect of the beneficial ownership of trusts, including details of the beneficial interest held. Member States must require trustees to obtain and hold adequate and up-to-date information on beneficial ownership regarding the trust and, when the trust gives rise to tax consequences, Member States must ensure that the beneficial ownership information held by trustees is held on a central register. Trustees must also provide beneficial ownership information to Obliged Entities in a timely manner, in accordance with CDD (customer due diligence) framework requirements.
The scope of customer due diligence requirements will also be extended. Obliged Entitiees will soon have to carry out CDD related to occasional cash transactions amounting to €10,000 or more in the case of persons trading in goods. This is where persons trading in goods who make or receive cash payments of €10,000 or more will be obliged to conduct CDD whether the transaction is carried out in a single operation or over a number of operations which appear to be linked.
Providers of gambling services must condust CDD for single transactions where winnings exceed €2,000 on collection. The scope of exemptions for CDD in relation to rechargeable electronic money devices has also been tightened.
MLD4 also clarifies the definition of a politically exposed person (PEP) and widens the categories of individuals who can be regarded as PEPs to include members of the governing bodies of political parties, and directors, deputy directors and members of the board or equivalent function of an international organisation.
The rules relating to PEPs are also extended to cover domestic PEPs. MLD4 requires that, when a person ceases to be a PEP, an Obliged Entity must consider the continuing risk imposed by that person for at least twelve months. Risk-sensitive measures must be applied until that person is deemed to pose no further risk specific to PEPs. Furthermore, Obliged Entities are not entitled to rely exclusively on PEP lists, they are responsible for making their own determination as to whether a customer is a PEP, or associated with a PEP.
In mitigation, MLD4 will continue to allow Obliged Entities to rely on third parties for CDD requirements in order to ease the burden of compliance.
Undoubtedly, while an Obliged Entity may not rely “exclusively” on external lists, there is no question that referral to such lists is a critical part of AML/CFT procedures. To that end, and as previously disclosed, StubbsGazette is making available to its suscribers a comprehensive global database of PEPs.
That will be welcome to many as MLD4, in the words of legal firm Dillon Eustace, places greater emphasis on enforcement and sanctions and sets out detailed provisions as to the type of administrative sanctions and measures that, at a minimum, should be implemented by Member States.
“Sanctions under MLD4 include pecuniary and non-pecuniary sanctions. A maximum administrative pecuniary sanction of at least twice the amount of the benefit derived from the breach (where that benefit can be determined) or at least €1,000,000 may be imposed. In respect of credit institutions and financial institutions, a maximum administrative pecuniary sanction of at least €5,000,000 or 10% of total annual turnover in the case of a legal person, and at least €5,000,000 in the case of a natural person may be imposed.”
From here on, the stakes over AML/CFT compliance are very real.