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THE FIFTH MONEY LAUNDERING DIRECTIVE AND THE UK

June 2019 - Crime. Legal Developments by Rahman Ravelli Solicitors.

More articles by this firm.

With the UK government’sconsultation period on the European Union’s Fifth Money Laundering Directive coming to an end, AzizRahman outlines the Directive's likely effect.

The closing date has now passed for comments to besubmitted as part of the UK government’s consultation process on how to besttranspose the European Union’s Fifth Money Laundering Directive into law. Allsubmissions had to be made by June 10.

The Directive (5MLD) contains amendments to the Fourth MoneyLaundering Directive (4MLD) which will boost transparency and bolster theexisting preventative framework in order to tackle the risk posed by moneylaundering and terrorist financing across the European Union (EU).

EU member states are obliged to implement 5MLD by January2020. Even though the UK is still set to withdraw from the EU, it played anotable role in devising 5MLD and remains keen to prevent the financial systembeing used for money laundering and the financing of terrorism.

The UK government began the consultation period in April inorder to determine the best way of bringing 5MLD into UK law in a way thatbalances the burden on business with the need for regulated businesses to activelydiscourage money laundering. The government has said that representations madein the consultation period will inform its final decisions on how 5MLD istransposed into UK law. The Treasury has also declared that it will explain whyit has reached policy decisions that are made as part of the governmentresponse to the consultation.

The government has said it will only go further than theprovisions of 5MLD if there is what it calls “good evidence that a materialmoney laundering or terrorist financing risk exists that must be addressed’’. Itfully intends for any new provisions to come into force in national law by 10January 2020, in line with Article 4 of 5MLD; which has set that date as thedeadline for 5MLD to be incorporated into member states’ law.

4MLD

The Fourth Money Laundering Directive (4MLD) was devised inorder to strengthen the European Union (EU) against money laundering andterrorist financing and make sure that the EU was meeting the Financial ActionTask Force's (FATF) international anti-money laundering and counter-terroristfinancing standards. It replaced the Third Money Laundering Directive and hadto be transposed into member states’ law by 26 June 2017.

It came into force on June 26, 2015 and had to be on thestatute books of member states by June 26 2017. Created to ensure a stronger,more risk-based approach to preventing money laundering and the financing ofterrorism, it removed the automatic right to exempt certain customers orinvestors from due diligence checks; extending due diligence to domestic politicallyexposed persons (PEPs) - not justforeign ones - their family members and close associates.

4MLD also required corporates and legal entities, trusts andother similar structures to maintain adequate, accurate and current informationon their beneficial ownership. Under 4MLD, beneficial ownership could beextended to those who have as little as 25% a stake in a body.

But only ten months after the provisions of 4MLD had to betransposed into member states’ legal systems, the European Parliament announcedit had adopted the Fifth Anti-Money Laundering Directive. Allthough EU membershave until next January to transpose the Fifth Directive into national law, somecountries already have done.

The Scope of 5MLD

5MLD is not as all-encompassing as 4MLD, which imposedlarge-scale change on how businesses should seek to prevent money laundering.But it does add certain provisions that the Fourth Directive did not cover andit does extend its reach.

The changes include:

  • The regulation of virtual currencies andpre-paid cards to prevent terrorist financing.
  • Measures to ensure greater transparencyregarding beneficial ownership and trusts.
  • Improvements to the safeguards coveringtransactions both to and from countries deemed to be a high risk.
  • Making sure that all centralised national bankand payment account registers or central data retrieval systems are accessiblein all member states.
  • Cryptocurrencies have consistently been viewed withsuspicion, with the authorities concerned that they enable criminals totransfer ill-gotten gains more easily than they could using more traditionalmethods. 5MLD gives virtual currencies a legal definition. The virtual currencyplatforms and wallet providers will be regulated under 5MLD, placing a legalobligation on those handing them to conduct due diligence and report anytransactions that appear to be suspicious.

    Whereas 4MLD cut spending limits on prepaid cards, 5MLD willfurther lower the requirement for customer verification from €250 to €150 – andto €50 for certain remote transactions. Using anonymous prepaid cards that wereissued in non-EU member states may not be permitted unless that state’s money launderinglegislation is considered the equal of that of the EU.

    While 4MLD introduced the requirement for EU members to haveregisters of beneficial ownership, the Fifth Directive goes considerablyfurther. Under 5MLD, the public will have access to these registers – withouteven having to show that they have a legitimate interest in the records. It ishoped that this will ensure genuine clarity when it comes to the ownership offirms and bring to an end what has been a flourishing trade in the creation ofwhat have become known as “brass plate’’ companies – firms set up solely tolaunder money and keep wealth out of sight.

    Trusts will now have to demonstrate greater transparency;including regarding the aforementioned beneficial ownership requirements. Thethreshold for identifying beneficial ownership of trusts can be reduced from25% to 10% if there is considered to be a significant money laundering or taxevasion risk.

    When it comes to transactions from or involving high-riskcountries, 5MLD requires enhanced due diligence. This will cover obtainingevidence about the source of funds, any information regarding beneficialownership and background details relevant to the planned transaction. There mayeventually become a blacklist of countries deemed to be high risk regardingmoney laundering.

    But for now the wait is on to see precisely what approachthe UK government takes in the wake of its consultation.

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