The 5th Money Laundering Directive1 (5MLD) came into force on the 10th January 2020. 5MLD is set to build on the regulatory requirements under the 4th Money Laundering Directive2 (4MLD). The purpose of 5MLD is to strengthen the UK's financial system in order to prevent criminals laundering money and funding terrorism.
Why the need for 5MLD?
The reason in part for 5MLD was the further guidance provided by the Financial Action Task Force3 (FATF) in order to tighten money laundering and terrorist financing and a number of events that have occurred; namely an increase in terrorist attacks in Europe over the last few years, the Panama Papers exposure, the increase of the use of cryptocurrencies and the European Union’s intent to implement FATF’s recommendations.
What are the key changes?
Virtual currencies are now regulated under 5MLD, including cryptocurrencies, digital tokens and other forms of digital value representation. Art traders now also fall within scope of 5MLD where a transaction value amounts to €10,000 or more. As a result, there is now an obligation to perform customer due diligence (CDD) and submit suspicious activity reports (SAR) in relation to these.
Training and the implementation of appropriate AML/CTF policies and procedures to comply with money laundering regulations will be required.
Politically Exposed Persons (PEP)
There is a requirement on member states under 5MLD to keep an up-to-date list of exact functions that qualify as prominent public functions. This requirement extends to international organisations. The European Commission intend to compile a list of prominent public functions which will be made public.
From a compliance perspective, keeping a list up-to-date of any sort requires work and accuracy of the data can also be an issue, therefore, firms should ensure that the appropriate level of compliance and controls are in place to manage this.
High-Risk Third Countries
Under 5MLD, companies that do any work with high-risk countries are required to carry out enhanced due diligence measures. Firms will be required to:
- obtain information on the customer and on the beneficial owner(s);
- obtain information on the intended nature of the business relationship;
- obtain information on the source of funds and source of wealth of the customer;
- obtain information on the reasons for the intended or performed transactions;
- obtain the approval of senior management for establishing and continuing the business relationship; and
- conduct enhanced monitoring of the business relationship by increasing the number and timing of controls applied, and selecting patterns of transactions that need further examination4.
These checks are deemed to be a minimum requirement for firms dealing with high-risk third countries.
5MLD requires member states to maintain registers of beneficial owners of corporate and other legal entities. The UK already has a register in place, Persons of Significant Control5. Under 4MLD, the information relating to beneficial owners can be accessed by obliged entities in order to comply with CDD measures. However, 5MLD goes a step further in increasing the transparency of beneficial ownership, granting public access to certain essential beneficial ownership information where there is a ‘legitimate interest’.
5MLD introduces a new lower limit of €150 on anonymous prepaid cards, following 4MLD limit of €250. Firms will be required to carry out due diligence checks on clients using prepaid cards with more than €150. 5MLD will also remove the anonymity of the use of prepaid cards online.
Information sharing with law enforcement
Information sharing between law enforcement agencies plays a significant role in combating money laundering and terrorist financing. 5MLD authorises Financial Intelligence Units (FIU) to obtain information even if a SAR has not been filed.
It is likely that firms will be challenged in keeping the data up-to-date and producing the information on demand when requested.
We're here to help
5MLD is now in force and firms are likely to have taken the appropriate steps to incorporate the additions to their compliance landscape, however, if there are any questions relating to this article or on a wider scale, then do get in touch with Nicola Anthony using the details below.
This material is for general information purposes only. This article is not legal advice in relation to the 5th Money Laundering Directive.
1 Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018, found here.
2 Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015, found here.