By Nina Kerkez, Senior Product Manager, KYC Solutions, Accuity
Ten years on since the passing of the Third Money Laundering Directive, the EU 4th Money Laundering Directive (4MLD) was finally approved in May 2015 by the European Parliament. During those ten years, the financial industry has faced many challenges and changes which have put more pressure on the regulators to monitor financial institutions closely. The 4MLD came into force on 26th June 2015 and EU member states are now required to transfer the directive into national law in two years.
How will the directive impact UK businesses?
The directive impacts various businesses, such as banks, and other financial institutions, accountants and auditors, law firms, the gambling industry and others. 4MLD will bring into effect new customer due diligence checks, with additional requirements to report on suspicious transactions, as well as the on-going monitoring of counterparties.
The reality is that the impacts of the 4MLD will not be hugely noticed by the policy makers in institutions. If an institution is already exposed to Money Laundering Regulations, changes will not have as high impact on the business, as many of these provisions are already incorporated in the UK law.
However, there are a few important alterations to consider that may impact institutions’ operations.
- Centralised Registers of Beneficial Owners – the creation of central registers for beneficial owners in institutions
Various global initiatives over the years have attempted to increase transparency to tackle financial crime and tax evasion, but now EU member states have to put in place registers of beneficial owners nationally. The UK is taking the lead with UK companies obliged to register their beneficial owners though Companies House by 2016. This information will be publicly available going forward from Companies House. By having the EU implement this law, it will lead non-member states to adopt similar measures, which will have a great impact on money laundering prevention. The change will help in identifying individuals that are hiding behind shell companies, nominees and bearer instruments, but it will take a long time before the industry can get there.
An additional challenge comes with registrations of individuals, as UK Companies House does not have a capacity to investigate the accuracy of information provided to them. Entities that are obliged to perform KYC will not be able to take that information for granted without confirming it with a potential or existing counterparty directly.
- Risk Based Approach – a concept that has been very well understood, but unfortunately not as well applied
The UK FCA has published reports stating that on-going monitoring of counterparties – a crucial step in RBA – is still not working as it should. With the 4MLD, entities will no longer be able to apply simplified due diligence only on the basis that the customer is regulated or listed on a stock exchange. Institutions will have to take into consideration various factors, such as ownership and location of the customer. This change will most likely impact banks, which will also not be able to white list non-EU regulators without considering money laundering risks in detail.
- Politically Exposed Persons – the extension of the definition of PEPs to include domestic PEPs as well
So far we have considered foreign PEPs, senior political, military and judicial figures as well as their families as higher risk customers when money laundering risks are looked at. With the inclusion of domestic PEPs, 4MLD also insists that enhanced due diligence is performed on these individuals by reviewing their source of wealth and funds. The highest risks surrounding PEPs will still be around their relationships and by increasing the number or individuals now considered a PEP, on-going reviews will be absolutely necessary.
- Pecuniary Sanctions Levels – the directive outlines the minimum sanctions for money laundering or terrorist financing
Financial institutions’ threshold for a legal person will be a maximum administrative pecuniary sanction of at least 5 million euros or 10% of the total annual turnover. In the case of a natural person, maximum administrative pecuniary sanctions will be at least 5 million euros.
Now, we are waiting to see the draft regulations published by member states. Regardless of the impact of the changes, institutions must have adequate systems in place in order to be able to capture and report on the relevant necessary information.
The full directive can be found here: