Over the past 30 years, the financial industry has faced many challenges and regulatory changes. With the recent announcement to adopt the 5AMLD, how could this affect your organisation?
Pressure and Pace – the European regulatory landscape
Over the past 30 years, the financial industry has faced many challenges, through new regulations, changing sociocultural opinions and the impact of significant events that affected the worldwide economy. Money laundering has always been at the centre of financial crime and the concept of money laundering regulation is as old as money and banking itself. The foundation of the Financial Action Task Force (FATF) in 1989 signified the start of a strategy to prevent money laundering. Originally, the focus had been on drugs trafficking and money laundering, but after the devastating effects of 9/11, terrorist financing was thrust into the spotlight. Money laundering has always been at the forefront of financial crime; however, the 9/11 tragedy had a long-term impact on financial institutions and their governing processes. Questions arose around how terrorism is financed, why it was getting through our banking systems, and how it could be prevented in the future.
With increased pressure to have tighter regulations and processes in place, the European Union (EU) introduced the 3rd AML Directive in 2005. It placed an emphasis and responsibility on organisations to conduct Customer Due Diligence (CDD). However, the financial crisis in 2008 demonstrated a wider fault within the global banking system and forced governments and financial institutions to revisit the regulatory and general processes that were in place. This has been recently followed by a number of terror attacks across Europe over 2015/2016 and played a significant part in the creation of the 4th AML Directive and most recently the updated 5th AML Directive. What comes to the forefront is the increased pressure and the increased pace of activity now required.
The evolution of the 5th AML Directive
As the economic landscape changes, so do the regulations required for organisations to remain equipped to deal with new and emerging threats. The introduction of the 3rd AML Directive formed part of a strategy by the EU to begin implementing a risk-based approach to tackle money laundering and terrorist financing. The three main impacts of the directive were the requirement for organisations to have a risk assessment procedure in place, to regularly monitor clients, and to conduct due diligence checks.
The problems still arising from money laundering and terrorism, fuelled by the growth of the internet and the identity challenges of this new digital environment, prompted the EU to introduce a new 4th AML Directive to replace the previous one. Building on the initial risk-based strategy, the 4th Directive kept the core principles of the 3rd, whilst adding greater detail and more stringent procedures. The key changes include:
- A national risk assessment to be conducted requiring all organisations to submit information
- Simplified Due Diligence checks that required explanation and justification for decisions made
- Retention of required client records for a minimum of 5 years
- A directory of beneficial owners
- Increased power for Financial Intelligence Units, allowing them to intervene
We can see from these changes that the new directive aims to stop organisations from blanket screening clients, without delving into actual and potential risks.
If the 4th Directive addresses the shortfalls of the 3rd, then what brought about a need for the 5th? The first point to make is that this new directive is not replacing the old one, as the 4th did with the 3rd. The new directive provides additional requirements and further details that will increase the transparency of financial transactions. Effectively requiring forensic control over information and analytics virtually to a granular level. There are five key additions to note:
- Beneficial ownership information must be accessible in all cases to:
- The competent authorities and FIUs, without any restriction
- Obliged entities, within the framework of customer due diligence
- Any member of the general public
- Mechanisms must be in place by member states to “ensure that corporate and other legal entities incorporated within their territory are required to obtain and hold adequate, accurate and current information on their beneficial ownership”
- The AML Directive is extended to all tax advisory services, art dealers, letting agents, virtual currency exchanges and custodian wallet providers
- The 5th AMLD details measures that must be taken to perform enhanced due diligence (EDD)
- The requirement for customer identification for using prepaid cards has been lowered to €150
The good, the bad and the opportunity
What comes to the forefront when a new regulation is enforced is the instant panic to comply or risk facing penalties, such as the withdrawal of a banking licence for financial institutions or, in extreme cases, prison sentences. Yes, compliance is essential in order to avoid penalties or interjection from the Financial Intelligence Units; however, there are opportunities that also arise from the new requirements.
Regardless of whether a party is aware or not of a financial crime within their organisation, the reputational damage of a scandal remains the same. As all EU countries will be required to implement stricter measures, transparency across both national and international processes will increase. A large proportion of counterparties will be involved in this highly transparent system and it will get harder to unintentionally become part of a scandal.
Several recent scandals have moved financial crime matters higher on the political agenda, which has led to the stricter enforcement of new regulations. In addition, the prevention of money laundering is of high public interest, so proactivity toward implementing the new directive can demonstrate an organisation’s reliability and credibility to its national and international counterparties.
Best practices for implementing the new regulation
It must be noted that the 5th AML Directive is simply refining some of the terms of the 4th Directive, so compliance should not be too much of a hurdle for the entities that were already subject to the previous AML-CTF requirements. However, for newly subjected entities, it will be a different story. The deadline for complying with the 5th AML Directive is 10th January 2020, leaving some time for all involved to define or adjust their compliance frameworks.
To identify the actions needed to comply with new requirements, subjected entities should reassess whether they have the right set of resources, including:
- Documentation for organising their AML-CTF processes (risk-based approach, KYC procedures, sanctions screening and transaction monitoring, suspicious activity reporting, etc.)
- Tools and data to secure effective and efficient conduction of AML-CTF checks (prevention and detection of activity involving high risk or prohibited counterparties)
- Sufficient amount of skilled staff, essentially to ensure consistency between the ends and the means of the AML-CTF framework
If you would like to find out more about how Accuity can help you in implementing effective financial crime compliance processes, to help meet the obligations of the latest global regulations, please contact us.