Newsflash Business Crime & Financial Services 23rd Mar 2018

A Money Laundering Directive Too Far?

The Fourth European Money Laundering Directive (‘4MLD’) was agreed in June 2015 and was brought into force in the United Kingdom through domestic legislation on 26th June 2017.

Among the most important changes to the Ant-Money Laundering (‘AML’) / Counter-Terrorist Financing (‘CTF’) regime established by 3MLD (the 2005 Directive; the genesis of the Money Laundering Regulations 2007), were:

  • Reinforcement of the ‘Risk-Based Approach’, applied both by obliged entities and supervisors, coupled with a need to assess jurisdictional AML/CTF risks.
  • Designation of ‘Tax Crimes’ as a new ‘predicate offence’, so that money laundering includes cases where the proceeds of tax evasion is involved.
  • Introduction of a new requirement for all cross-border wire transfers to include beneficiary information and expansion of the scope to certain e-money and mobile telephony payment products.
  • Clarification and guidance in areas such as customer due diligence, beneficial ownership and Politically Exposed Persons ‘(PEPs’).
  • Guidance on sharing AML supervisory responsibility between home and host competent authorities. In the wake of the transposition of the Payment Services Directive, concerns had been raised by a number of Member States, about potential gaps in the AML framework caused by payment institutions operating across borders via networks of retail agents.
  • Tightening of the EU’s Simplified Due Diligence regime, given that it has been criticised by the Financial Action Task Force (‘FATF’) as representing too broad a waiver from applying the Customer Due Diligence for certain bodies and products.
  • Clarification with respect to EU data protection rules, in particular regarding the ability to transfer information to different parts of an international group (including operations in third countries) for anti-money laundering purposes.
  • Enhancing transparency of beneficial ownership information and clarification of the existing 25% ownership threshold.
  • Enhancing cooperation and information sharing between EU Financial Intelligence Units – entailing integration of Council Decision 2000/642/JHA into the EU Directive.

However, before the conclusion of the 4MLD negotiations, further gaps in the regime had already been identified and discussions had begun in relation to 5MLD.

More than half of the EU’s member states failed to implement domestic legislation to usher in 4MLD by the 26 June 2017 deadline. After some encouragement, 9 of the 17 refuseniks fell into line. However, 8 (Bulgaria, Cyprus, Greece, Luxembourg, Malta, the Netherlands, Poland and Romania) continued to delay while Belgium’s and Spain’s implementing legislation was found to be deficient.

5MLD was agreed in principle in December 2017 and is due to be implemented, in stages, in 2019. The UK Government maintains that Brexit is unlikely to affect the implementation of the Directive or, at least, its effects.

5MLD will:

  • End the anonymity linked to virtual currencies, requiring exchange platforms and custodian wallet providers to apply customer due diligence controls.
  • Require the registration and licensing of currency exchange platforms or offices, cheque cashing offices as well as trust or company service providers.
  • Lower the threshold for identifying prepaid card holders from €250 to €150.
  • Extend due diligence requirements to cover tax advisory services, letting agents and art dealers.
  • Apply tougher criteria for assessing whether non-EU countries pose a heightened money laundering risk – such an assessment would increase reporting demands, with closer scrutiny of transactions involving nationals from risky jurisdictions.
  • Foster closer cooperation between national Financial Intelligence Units (FIUs), giving them access to information in centralised bank and payment account registers, enabling them to identify account holders.
  • Permit access to information on beneficial ownership as follows:
    • Access on the basis of ‘legitimate interest’ to beneficial ownership information on trusts and similar legal arrangements.
    • Public access upon written request to beneficial ownership information on trusts that own a company that is not incorporated in the EU.

However, the MLD story does not end there. With the implementation of 4MLD lagging but ongoing and the ink not yet dry on 5MLD there are further measures progressing through the Brussels legislative machinery to enhance the fight against money laundering. Their working title? 6MLD.

The proposed 6MLD will:

  • Establish minimum rules concerning the definition of criminal offences and sanctionsfor money laundering offences.
  • Provide definitions of the term “criminal activity” which constitute predicate offences for money laundering, while allowing Member States to maintain different approaches as regards predicate offences for money laundering (choosing between an all-crimes approach, lists of predicate offences, list of offences with a minimum penalty);
  • Provide that the three types of money laundering (conversion or transfer, concealment or disguise, and acquisition, possession or use) should be criminalisedwhen committed intentionally;
  • Require Member States to criminalise forms of aiding and abetting, inciting and attempting many of the mentioned offences.
  • Require Member States to apply effective, proportionate and dissuasive criminal penaltiesand sets the minimum maximum penalty at four years of imprisonment, at least for serious cases;
  • Define ‘aggravating circumstances’as the commission of an offence within a criminal organisation or when the perpetrator abused their professional position to enable money laundering.
  • Require Member States to ensure the liability of legal persons, while that such liability is alternative to that of natural persons.
  • Aim at ensuring that investigative toolswhich are provided for in national law for organised crime or other serious crime cases can also be used in cases of money laundering.

As can be seen from the list above – 6MLD is unlikely to trouble the UK legislature. European Union FIUs received almost one million suspicious transaction reports (‘STRs’) in 2014, however, two thirds of those were filed in just two member states – the UK and the Netherlands. The problem lies elsewhere.

It remains unclear whether the MLD chronology set out above signals the end of a broad political consensus around international developments in AML / CTF law or whether it is merely a reminder that we must be able to chew what we have bitten off.

On 22nd March 2018, the UK Government announced its FinTech Strategy. Significant regulatory proposals include:

  • The creation of a Cryptoassets Task Force to help the UK to be at the forefront of harnessing the potential benefits of the underlying [blockchain / distributed ledger] technology, while guarding against potential risks.
  • ‘Robo-regulation’ pilot schemes to help new fintech firms, and the financial services industry more widely, comply with regulations by building software which would automatically ensure they follow the rules, saving them time and money.

Could this be the genesis of 7MLD?

Gavin Irwin

Gavin Irwin is a specialist advocate in serious and financial crime. He regularly advises and appears in matters concerning fraud, money laundering and corruption. Gavin is instructed to advise individuals and businesses on regulatory and risk-management issues, including: sanctions and export licensing; data protection; consumer protection; and, professional conduct and discipline.

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