By Denis O’Connor
Even before the Fourth Anti-Money Laundering Directive (4MLD) had been implemented across all 28 Member States in June 2017, the European Commission proposed substantial amendments to it.
This proposal soon became known as the Fifth Anti-Money Laundering Direct ive “5MLD”.
The underlying reason for these amendments was the belief that e-money and prepaid cards had, to some extent, been used in the financing of the attacks in Paris in November 2015.
Later, the European Commission also used the publication of the Panama Papers in April 2016 to propose further measures.
What’s in it for the banks and how are they likely to fare?
Perhaps overlooked is the proposal that all Member States institute a national register of bank and payment accounts containing the name of the account holder (and any beneficial owners), the account holder’s (and any beneficial owners’) national identifier number such as their tax identification number and the account number.
Alternatively, each country may use a central retrieval system that contains the same information.
Access to the register will only be available to the authorities for the purpose of combatting financial crime.
Some banking trade associations believe that 5MLD is burdensome as banks would have to regularly report details of new accounts, closed accounts and any changes in previously supplied information.
However, banks are well used to supplying customer data to the authorities in a standardised format for FATCA, CRS, Single Customer View and transaction reporting purposes.
Accordingly, banks are well placed to submit the required details in due course.
However, objections to these registers will be probably be made on the grounds of data protection.
It is noteworthy that such registers exist at state (lander) level in Germany, where based on their recent history, there is a very strong ethos of data protection.
Additionally, the French authorities maintain a national register.
As these countries are subject to EU data protection laws, it appears to be no insurmountable problems in this respect.
Today, banks currently distribute customer data for many reasons such as for tax reporting and for transaction reporting purposes.
Bank customers who send funds abroad will use the correspondent banking services. In so doing, their personal data will be sent alongside the payment details to all the banks in the payment chain.
Interestingly, data protection concerns are rarely heard today when discussing correspondent banking issues.
5MLD proposes, in certain circumstances, to reduce the percentage of voting control of a corporate and other legal arrangements from 25% to 10% that has to be identified and verified for beneficial owner purposes.
Some banks, as a matter of policy, currently identify 10%, so this proposal will not affect them. Also, UK readers with long memories will recall that in the early 1990’s, the test for beneficial ownership purposes was 10%, not the current 25%.
Few Member States took up the 4MLD option of implementing publicly accessible central registers of corporates’ beneficial owners.
However, following publication of the Panama Papers, these centralised registers will be open to unrestricted public access as will such details for those trusts that undertake commercial activities.
The ability of the media and civil society organisations to investigate the ultimate ownership of corporates and some trusts will be enhanced and thus may deter those who wish to misuse these structures for improper purposes.
The recent Laundromat saga demonstrates the valuable role the media play in this regard.
Notwithstanding 4MLD required firms to take Enhanced Due Diligence (EDD) measures on clients and counterparties based in high risk third countries, 5MLD seeks to impose mandatory EDD measures in such cases.
This proposal is intended to eliminate divergences across the EU and thus assist in the fight against financial crime.
Whether firms will welcome the regulatory certainty these measures afford or feel it restricts their freedom to adopt their own measures remain to be seen.
5MLD will allow national Financial Intelligence Units to seek information from local firms absent the submission of a Suspicious Activity Report, without breaching client confidentiality.
UK firms will not be directly affected by this proposal as a similar measure was recently introduced via the Criminal Finances Act.
Finally, virtual currency platforms, similar to Bitcoin, and custodian wallet providers will fall within the scope of direct AML regulation for the first time and hence their operators will have to adopt policies and procedures that firms in wide variety of sectors are familiar with.
Whilst the anonymity afforded by prepaid cards will be reduced as the identification threshold will be reduced from €250 to €150.
These proposals are subject to revision as they are considered by Council of Ministers and the European Parliament. Until these arms of the Brussels administration collectively agree on the final form of 5MLD, one cannot accurately predict an implementation date, as two previously announced dates have come and gone.
However, firms would be well advised to monitor the legislative discussions in Brussels and consider how their policies and procedures might need to be amended.
Last week, negotiations over 5AMLD failed to take off after it emerged that the Council attended the final scheduled trialogue, a special meeting, but lacked a mandate to negotiate, an EU Parliamentary statement said.
Denis O’Connor is both a Fellow of the Institute of Chartered Accountants in England & Wales and the Chartered Institute of Securities and Investment. He was a member of the British Bankers’ Association Money Laundering Committee from 2003 -10; and a member of the JMLSG’s Board and Editorial Panel between 2010 and 2016.
He has been a frequent speaker at industry conferences on financial crime issues, both in the UK and abroad.