Due to an increase in terrorist activity across Europe and the revelation of the Panama Papers in 2016, the incoming Fifth Money Laundering Directive (5MLD) follows hot on the heels of the Fourth Money Laundering Directive. Scheduled to come into effect in the UK from 10 January 2020, the HM Treasury has now released a Consultation Paper (CP) seeking industry views on the proposal for the 5MLD transposition in UK law.
With less than 12 months to go, regardless of whether you intend to respond to the CP, you should be considering what impact the proposed changes will have on your business and whether your approach to financial crime risk management is sufficient.
Contact us to arrange a meeting to discuss how this is likely to affect your business here.
Financial Action Task Force recommendations
While some of the proposals put forward in the CP have already been well publicised, the Treasury have also sought to include recommendations arising from the Financial Action Task Force (FATF) Mutual Evaluation Report (published in December 2018). As such, the Treasury is seeking views on whether these changes are codifying existing practice or are more substantial, and whether they will be of genuine value in reducing Money Laundering and Terrorist Finance.
Below, we have highlighted some of the key areas you need to consider.
Customer Due Diligence and Enhanced Due Diligence
The CP includes the proposal to make certain changes to Regulation 28 of MLR, in response to FATF MER, including:
- Reasonable measures: Regulation 28 of MLR currently states that “reasonable measures” must be taken to verify key information of a corporate body. However, FATF Recommendation 10.9 places a full obligation that this information is verified, and HM Treasury are proposing to amend regulation 28 (3) and mandate the determination and verification of this information.
- Requirement to understand: FATF recommendation 10.8 states that a relevant person should be “required to understand the nature of their customer’s business and its ownership and control structure”. At the moment, this is only implicitly laid out within MLR, therefore HM Treasury proposes to explicitly include such a provision for relevant persons to understand this information as part of their Customer Due Diligence (CDD) obligations.
The Treasury is also seeking opinion on changes to article 33(6) of MLR in light of the FATF MER:
- Beneficiary of a life insurance policy: FATF Recommendation 10.13 states financial institutions should be required to include “beneficiary of a life insurance policy” as a relevant risk factor when determining whether to apply EDD measures. This is not explicitly covered in the MLR and the treasury is seeking views on the potential impact of implementing this change and the value it might bring.
Beneficial ownership requirements
5MLD introduces further changes to the requirements for obliged entities in verifying the identities of customers or beneficial owners. This includes, when entering a new business relationship with a company, or trust, that is subject to beneficial ownership registration, the obliged entity must collect either:
- proof of registration on the register;
- an excerpt of the register.
The Treasury envisages updating the MLR to address this requirement, but only in relation to the establishment of a new business relationship, avoiding any need for firms to apply this requirement retrospectively.
Beneficial ownership information
5MLD extends the requirements for member states to maintain beneficial ownership registers for corporate and other legal entities by introducing a requirement to ensure the beneficial ownership information is accessible to the public. The UK meets this requirement already for most legal entities through the publicly accessible Register of People with Significant Control (PSC), held at Companies House.
However, the key change brought about by 5MLD is the obligation to report discrepancies in beneficial ownership information. This means member states are required to put in place “mechanisms” to ensure that the information held on the central register is adequate, accurate, and current. The CP sets out the approach envisaged by the Government and seeks views on these options, including requiring obliged entities to report these discrepancies to Companies House through a reporting mechanism.
National register of bank account ownership
5MLD requires that the UK implements a central automated mechanism which identifies natural, or legal, persons which hold or control bank accounts, payment accounts, or safe-deposit held by credit institutions in the UK.
The Government consider that, as a minimum, information accessible through the register would need to be submitted by:
- UK-incorporated credit and payment institutions, and UK branches of non-UK credit institutions, providing ownership information of bank and payment accounts identified by IBAN.
- UK-incorporated credit institutions, and UK branches of non-UK credit institutions, providing ownership information of safe-deposit boxes held within the UK. This would not extend to safe-deposit boxes held by non-UK branches of UK-incorporated credit institutions.
The Government is also considering gold-plating these minimum requirements by additionally requiring submission of ownership information to the register from:
- UK-incorporated credit and payment institutions which issue credit cards;
- e-money issuers which issue prepaid cards; and
- credit unions and building societies which issue accounts not identified by IBAN.
The CP welcomes evidence on the benefits to law enforcement agencies of this information being accessible through the register, and of the additional costs to businesses of providing such information.
Requirement to undertake risk assessments
FATF Recommendation 15 requires financial institutions to undertake risk assessments prior to the use of new products, business practices and delivery mechanisms. This is not explicitly included in MLRs, but is clarified in the Joint Money Laundering Steering Group (JMLSG). The consultation is seeking views on updating the MLRs to explicitly capture this requirement.
FATF Recommendation 18.2(b) states that groups should be obliged to implement group-wide programmes against money laundering and terrorist financing, including the provision of customer, account and transaction information from branches and subsidiaries. Again MLRs do not explicitly require relevant persons to have policies, controls and procedures relating to the provision of customer, account and transaction information from branches and subsidiaries and it is therefore proposed that the MLRs be updated to make this explicit.
Financial crime healthcheck
Following the recent high profile Money Laundering fines this CP and the changes proposed within 5MLD is a clear sign of the UK Regulator’s continued focus on ensuring firms maintain strong and proportionate financial crime risk management frameworks.
Never has it been so important to know how well your financial crime framework is working. A healthcheck can be a cost effective way to not only test the levels of financial crime compliance within your firm (a review covers all areas typically covered in a regulatory visit), but to gain insight of the latest best practice approaches and how they can be incorporated into your existing financial crime approach. Find out more.
If you would like to discuss how the proposed changes could affect your business, or if you would simply like a sounding board about any concerns, then please contact us.