European Union always strives to combat Money Laundering and Terrorist Financing. One of the measures for doing so is a set of regulatory requirements called Anti Money Laundering Directive or AMLD. Recently, on January 10, 2020 The Fifth Anti Money Laundering Directive (5AMLD) came into force. It was adopted on May 30, 2018. 5AMLD is an amendment to 4AMLD, which came into effect on 26 June, 2017. 5AMLD tries to address weaknesses in the European Union’s Anti-Money Laundering (AML) and Counter Terrorism Financing (CFT) regime.
Why Do We Need 5AMLD?
According to the 5AMLD factsheet, 5 primary goals of the directive are to:
- Increase transparency about who really owns companies and trusts to prevent money laundering and terrorist financing via opaque structures;
- Improve the work of Financial Intelligence Units with better access to information through centralised bank account registers;
- Tackle terrorist financing risks linked to anonymous use of virtual currencies and of pre-paid instruments;
- Improve the cooperation and exchange of information between anti-money laundering supervisors and with the European Central Bank;
- Broaden the criteria for assessing high-risk third countries and ensure a common high level of safeguards for financial flows from such countries.
The big difference of 5AMLD is that now it doesn’t only focus on financial institutions. The main changes concern 6 main areas:
- Virtual currencies and exchanges
- Prepaid cards
- High value transactions
- Beneficial Ownership (BO) registry
- High-Risk Third Countries
- Politically Exposed Persons (PEPs)
1. Virtual Currencies and Exchanges
One of the main 5AMLD changes concerns virtual currencies. The directive aims to increase trust and transparency, while stepping back from the anonymity of digital assets. 5AMLD defines virtual currency as a digital representation of value that can be digitally transferred, stored or traded and is accepted by natural or legal persons as a medium of exchange.
- Now entities which provide services that are in charge of holding, storing and transferring virtual currencies will have to perform identity checks on their customers and report any suspicious activity to the Financial Intelligence Units (FIU). This means that FIU can request the information about the identity and the address of cryptocurrency owners.
- Cryptocurrency exchanges have the same regulations as financial institutions. This means that exchanges will need to abide by the same AML and CFT requirements, performing adequate Customer Due Diligence (CDD) and submitting Suspicious Activity Reports (SARs).
- Cryptocurrency exchanges now have to be registered with local money regulatory authorities such as BaFin in Germany, or the UK’s Financial Conduct Authority.
These regulations make cryptocurrency use more lawful and normal, getting European Union closer to some of the Asian countries legislation that have already integrated virtual currencies into the financial system.
2. Prepaid Cards
Anonymous prepaid cards now have lower monthly limits:
- 150 EUR for in-shop purchases
- 50 EUR for online purchases
In addition to the limits, the EU has banned the use of non-EU issued cards. The use of such cards is completely prohibited unless this region has similar AML/CFT regulations and KYC standards in place.
After 4AMLD the limit used to be 250 EUR. Now companies have to review their onboarding processes to account for the updated limits.
3. High Value Transactions
One of the new actors in the 5AMLD are art traders or those who act as intermediaries. Now they have to also abide by the AML/CFT regulations, which includes performing CDD and submitting SAR.
For the transactions of 10,000 EUR or more AML checks have to be performed. Interestingly this rule is valid not only for expensive pieces valued at 10,000 EUR or more but also for multiple smaller transactions that are linked between each other.
Art is not the only good that is now regulated by 5AMLD. Other high value goods that fall under the regulations are:
- Precious metals
- Historical, cultural and archeological artifacts
These measures aim to eliminate loopholes that previously existed, and through which Money Laundering (ML) and Terrorist Financing (TF) was performed.
4. Beneficial Ownership (BO) Registry
4AMLD introduced Ultimate Beneficial Ownership (UBO) to prevent ML. This brings the following changes:
- BO registers for legal entities have to be public 18 months after 5AMLD came into force.
- The data on BOs of trusts will be accessible to competent authorities (FIU, etc.) and to the other persons, who can demonstrate the legitimate interest.
- All of the BO registries will be interconnected in the EU to facilitate cooperation and exchange of information between member states.
- All of the member states have to improve their UBO verification mechanisms to guarantee the accuracy and the reliability of the information.
- Member states have to also develop separate lists for UBOs of bank accounts, which will only be accessible to authorities.
This will increase public scrutiny and prevent the misuse of legal entities for ML and TF.
5. High-Risk Third Countries
The EU has established new criteria for the assessment of high risk third countries. The new criteria is the transparency of the beneficial ownership. Additionally, companies that work with countries, which have strategic deficiencies in their AML and CFT, will have to perform enhanced controls to and from these countries.
Enhanced controls that companies will need to integrate are:
- Enhanced Due Diligence (EDD)
- Identifications of customers, their UBOs, the source of the funds and the purpose of the transaction
- Reporting system to inform upper management about the transaction and get their approval
- Increase controls on certain business relationships and identify transactions that need a more deliberate research
5AMLD has also “hormonized” the list of checks so there are no loopholes in the EU regulation.
6. Politically Exposed Persons (PEPs)
Now all of the member states have to create public functional PEP lists. The EU will also compile and release an EU-level version of the list. Those lists should help companies identify the PEPs.
If one of your clients is a PEP, he or she will need to go through EDD during the KYC process.
The Sixth Anti-Money Directive (6AMLD)
We are only starting to get used to 5AMLD but 6AMLD is not too far away either. In fact it will come into force on December 3, 2020.
6AMLD is aimed to advance the criminal law aspects of 5AMLD and make the maximum jail time for ML activities at least four years.
In addition to that, courts can impose more measures such as fines, exclusion from access to public funding or judicial winding-up.
6AMLD also tries to improve the enforcement of cross-border cases.
What Are The Penalties For Not Being Compliant?
Unlike the upcoming 6AMLD, 5AMLD has not made any changes to the prosecution or the penalties. Therefore, they have stayed accordingly to the 4AMLD.
Currently member states do not have equal penalties. For example, Article 29 of the 4AMLD states that fines can go as high as 2 times the gained amount, while according to the German law they can go to up to 20 times the gained amount.
How To Stay Compliant?
The easiest way to stay compliant is to outsource your onboarding process to eKYC providers. Hiring Compliance Officers and building the system in-house is always more expensive and has a bigger risk of security breaches and not following the regulations. Digital KYC/AML providers such as BASIS ID have big teams of professional Legal Officers who make sure that your onboarding is seamless for your users while being 100% compliant and mitigating risks related to financial crime.