Money laundering is an issue that allows corrupt individuals to legitimise their illegal activities. This issue occurs consistently in the world’s most prestigious institutions, perpetrated by the world’s most prestigious individuals. When money is being laundered, corruption is being facilitated, allowing many standards to be undermined.
In 2013 the European Commission released its proposal for the 4th EU Money Laundering Directive (“Directive”), which is to strengthen screening processes to disable dirty money to be laundered. The proposals were based in response to the Financial Action Task Force (“FATF”) 2012 recommendations, to help improve customer due diligence programs globally. Specifically, more due diligence around PEPs and Ultimate Beneficial Ownership has been cited consistently as a way to fight bribery and corruption, as well as to create more transparency in the fight against tax evasion.
It is expected that the regulation will officially be passed by the EU in 2014, after which EU countries will have up to two years to roll out the changes. It is important for banks and corporates to start preparing for the legislation, to help ease the transition once the regulation is valid.
What are some of the major changes with the Directive?
- Beneficial Ownership – All companies will have to perform due diligence and hold information on the ultimate beneficial owners for the corporate banking customers of any entity that owns 25% or greater percentage in the corporation. The directive is aiming to increase transparency and to make such information available to anyone who is performing due diligence checks on them.
- Politically Exposed Persons (PEPs) – There is an introduction of new requirements for screening of PEPs. The requirement has been widened for financial institutions to include screening for domestic PEPs in addition to those from abroad. Furthermore, the Directive is proposing to allow a risk-based decision to limit the number of years that an individual will be considered a PEP, thus challenging the idea of ‘once a PEP, always a PEP.’
- Customer Due Diligence –The 4thMLD creates an environment that allows for different processes and escalations required to be taken by member states according to the nature and severity of the risks. Specifically it details how firms should approach due diligence when factoring in jurisdiction and vertical issues, and clarifies the types of situations in which simplified customer due diligence will be appropriate, against those where it is necessary for firms to conduct enhanced due diligence checks.
- Inclusion of Tax Crimes – Although tax crimes have been predicate offences for some countries in Europe, this has not been the case with many other jurisdictions. The Directive adds tax evasion and other serious fiscal offences to the list of predicate offences.
- Due Diligence Outsourcing – The 4th MLD will permit groups to rely on the due diligence undertaken by other group companies. In the past, banks have been reluctant to outsource remediation and customer research to other entities, but with the Directive they will now have a broader ability to consider the outsourcing of due diligence processes.
- Information Requirements for Fund Transfers – The Regulation on wire transfers tightens the existing Regulation, and aims to increase the traceability of payments by making it mandatory to include the information on payees, such as the payee’s name and account number. Payment service providers will need to verify the identities of beneficiaries for payments that are originating outside of the EU for amounts over €1,000, to put in place risk-based procedures to determine when to execute, reject, or suspend transfers, and to keep those records for up to five years.
As the Directive is yet to be voted, it is possible that there will be amends and additional changes to the regulation. As these obligations continue to develop, corporations are advised to become more compliant and to implement changes where they are necessary.
The full proposal could be found here.