It seems to have been a long time coming but it has finally come into effect. And it imposes many obligations on many in business.
The Fourth EU Money Laundering Directive (4MLD) came into force on June 26, 2015 and had to be on the statute books of member states by June 26 this year
It has been created to ensure a stronger risk-based approach to preventing money laundering and the financing of terrorism. And it does this by placing a number of obligations on banks and other financial institutions – the organisations the Directive calls “obliged entities’’.
It is the latest in a series of EU efforts to tackle money laundering that began 26 years ago. Its emphasis on a risk-based approach is reflected in the levels of customer due diligence it expects to be carried out.
4MLD removes the automatic right to exempt certain customers or investors from due diligence checks if they are a credit institution in the EU - or another country with equivalent anti-money laundering measures - or a listed company.
There is now an obligation to carry out risk assessment and monitoring on customers and enhanced requirements for due diligence when it comes to people or organisations from what are classed as high-risk countries under the Directive
The Directive also extends the due diligence requirements regarding politically exposed persons (PEP’s). It covers domestic PEP’s, not just foreign ones, and their “family members’’ and “persons known to be close associates”.
Obliged entities must have a procedure for identifying PEPs. If a person no longer appears to meet the criteria for being classed as a PEP, the obliged entity must, for at least 12 months afterwards, continue assessing the risk posed by that person and apply appropriate measures. Such measures should only be stopped when checks have deemed that the person is no longer a PEP risk.
4MLD also requires corporate and legal entities, trusts and other similar structures to maintain adequate, accurate and current information on their beneficial ownership.
The definition of beneficial ownership under 4MLD extends down to those who have a 25% or more stake in such a body. But, in organisations deemed to pose a risk of money laundering or tax evasion, this can drop to 10%. EU member states must ensure that the information on beneficial ownership is held in a central register that is accessible to the authorities.
Each EU state must also carry out a national risk assessment every two years of its exposure to money laundering and terrorist financing. Risk assessments must be documented, kept up to date and made available to the relevant authorities and to each other member state.
But what does all this mean if you are one of those organisations classed as an obliged entity?
Firstly, you must consider how you will manage those clients that deal in large amounts of money. This may mean making extra requests for information on income or earnings and more ongoing checks. The Directive orders that due diligence be carried out on customers whenever there is a cash transaction of 10,000 euros or more. The previous limit was 15,000 euros.
The Directive also retains the obligation for firms to keep their information on a client for five years after the end of the business relationship - and this can now be extended to 10 years in certain circumstances. It also extends the money laundering obligations that casinos must follow to all gambling services.
To put it in the simplest possible terms, if your bank, financial institution or other type of business is covered by 4MLD you have to have made sure you are fully compliant with it. This means meeting your obligations but also developing and maintaining a workplace culture whereby you have procedures in place to identify and prevent money laundering.
By doing so, if you are investigated for money laundering you will be able to show that you had acted to try and prevent it.
Checking the background and history of someone you are looking to do business with is part of due diligence. 4MLD, like many regulations that preceded it, is all about making checks and imposing restrictions.
But if you are covered by the Directive, you also have to be aware of the signs that someone may be looking to launder money.
Companies have to have procedures for staff to report suspicions and must have a nominated officer to whom these concerns can be voiced. And once these concerns have been raised, they have to be investigated and, where necessary, acted upon.
If anyone covered by 4MLD does not know how they should comply with it, or how they should recognise and act upon signs of possible laundering, they need to take immediate legal advice.
The authorities, both in the UK and across the EU, are constantly looking at ways to destroy the routes by which financial systems are used to launder money.
4MLD is the latest attempt to toughen the financial world’s resistance to those looking to disguise the proceeds of crime. Those obliged entities that it covers cannot afford to fall short when it comes to meeting the responsibilities it places upon them.