The Directive implements the 40 recommendations issued by the Financial Action Task Force ("FATF") revised in February 2012, which set a global standard for combatting money laundering and terrorist financing. The European legislator, however, exceeded some recommendations of the FATF and has included some additional European requirements.
The key issues are:
- Adjustment of the risk-based approach
- New rules regarding electronic money
- Registers for ultimate beneficial ownership
- No distinction between "Internal" and "External" politically exposed persons
- Cooperation between national financial intelligence units
- Enhanced sanction regimePractical challenges
The Directive introduces an enhanced risk-based approach:
Under this approach every relevant entity must take appropriate steps to identify and assess the risks of money laundering and terrorist financing in every individual business relationship and transaction, taking into account all risk factors including those relating to its customers, countries or geographic areas, products, services, transactions or delivery channels. The entities must have in place policies, controls and procedures to mitigate and manage effectively the risks of money laundering and terrorist financing.
Factors and types of evidence of potentially higher risks are stipulated in the Directive as politically exposed persons, correspondent banking relationships and persons residing in a country with a high risk level.
The Commission will have the power to adopt delegated acts in order to identify high-risk third countries, taking into account strategic deficiencies.
New rules regarding electronic money
The use of electronic money products is increasingly considered to be a substitute for bank accounts, which justifies subjecting those products to anti-money laundering and countering the financing of terrorism obligations. Based on an appropriate risk assessment which demonstrates a low risk, a Member State can allow relevant entities not to apply certain customer due diligence measures with respect to electronic money. In first place the low risks refer to the electronic money product such as that the payment instrument is not reloadable, or has a maximum monthly payment transactions limit of € 250 which can be used only in that Member State. In this respect the Directive intends to harmonise the conditions of exemption for the electronic money products, which currently vary massively between the Member States.
Registers for ultimate beneficial ownership
The Directive requires that companies have to identify individuals who have ultimate beneficial ownership. A beneficial owner of a company is a person, who has a minimum of 25% direct or indirect ownership. Companies are required to disclose at least the full legal name, month and year of birth, nationality, country of residence of their beneficial owners, including the details of the beneficial interests held. The Member States are required to hold the information of beneficial ownership in a central registry and provide access to competent authorities, entities required to conduct due diligence checks and other parties with a legitimate interest.
"Internal" and "External" PEPs
Under the Directive financial institutions should execute a higher degree of caution when dealing with politically exposed persons. The Directive expands the definition of a politically exposed person ("PEP"). This is a natural person who is or who has been entrusted with prominent public functions including the following: heads of state, government and parliament members, members of the judiciary and directors of state-owned enterprises. Foreign PEPs, which include persons within international organisations, have to be treated with the same customer due diligence measures like domestic PEPs.
Cooperation between national financial intelligence units
The Directive strengthens national authorities’ administrative sanctioning powers and allows them to operate on cross-border basis. The national financial intelligence units that are involved with the analysis and dissemination of information about suspected money laundering or terrorist financing will have more rights to operate on a cross-border basis with other national financial intelligence units.
The Directive tightens and specifies the administrative sanctions and measures available to national authorities to punish relevant entities for non-compliance with anti-money laundering obligations. The maximum administrative pecuniary sanction is at least twice the amount of the benefit derived from the breach, or at least € 1 Million. In the case of the involvement of a financial institution or another legal person, maximum administrative fines will rise up to a minimum of € 5 Million or 10% of the total annual turnover.
The most important changes are the changes regarding the risk-based approach. Even if relevant persons have met the requirements of the Third Money Laundering Directive, they will need to make changes to meet the new requirements under these major reforms. Relevant organisations will be well-advised to address these changes as soon as possible, in order to ensure full compliance in good time.
The Member States have to bring into force the laws, regulations and administrative provisions necessary to comply with the new Directive by 26 June 2017.