On 10 January 2020 the EU’s Fifth Money Laundering Directive (EU) 2018/843 (“5MLD”) implemented by The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (“New Regulations”) came into force to address some of the gaps in the existing transparency rules. Amongst the most significant amendments are that cryptocurrencies, art market participants, letting agents, and tax advisors will now be subject to the same regulation as traditional financial institutions. In addition, the New Regulations make substantive changes to both regular and enhanced customer due diligence obligations.
Expansion of the Regulated Sector
The virtual currency industry has been brought within the remit of the New Regulations, resulting in an increased number of entities now being obliged to register for money laundering supervision with the Financial Conduct Authority (“FCA)” or Her Majesty’s Revenue & Customs (“HMRC”). Changes to “obliged entities” include:
- Cryptoasset exchange providers and custodian wallet providers being required to register for money laundering supervision with the FCA;
- Art market participants (where the value of the transaction (or a series of linked transactions) is at least €10,000) will be required to register with HMRC;
- A broadening of the definition of estate agents to include letting agents, who must carry out due diligence for any agency agreement with a monthly rent of over €10,000; and
- A broadening of the definition of accountants to include tax advisors, and who will need to register with HMRC.
Changes to Customer Due Diligence (“CDD”)
The New Regulations also expand the parameters where entities must apply CDD so that several more entities will now be obligated to conduct CDD, including:
- Cryptoasset exchange providers, who must conduct CDD in relation to any transaction carried out using a machine to exchange cryptoassets for money, or vice versa;
- Art market participants, as above, must conduct CDD in relation to storage of such works; and
- Letting agents, must conduct CDD on both landlords and tenants.
Beneficial Ownership Registers
The Fourth Money Laundering Directive (“4MLD”) previously introduced national beneficial ownership registers. The 5MLD now widens the availability of those registers to increase transparency. This means that anyone who can show a ‘legitimate interest’ can access the central register.
The CDD obligation also highlights the need to understand the ownership and control structure of non-individual customers, to keep written records of actions taken to identify beneficial owners, as well as to verify the identity of the senior manager of an entity where attempts to identify the beneficial owner have failed. 5MLD also extends beneficial ownership reporting requirements to any legal arrangement that is similar to a trust, and also tax neutral trusts.
The thresholds for carrying out CDD for entities involved in electronic money have been lowered. The only exemptions from doing so are now where the maximum amount that can be stored on the payment instrument is €150, or where it is not reloadable.
Changes to Enhanced Due Diligence (“EDD”)
The New Regulations also amend the application of EDD to:
- Relevant transactions where a party is established as one of the 23 countries deemed by the European Commission to represent ‘high-risk third countries’;
- Transactions where a party is a beneficiary of a life insurance policy;
- Transactions where a party is a third-country national, seeking residence or citizenship rights in exchange for transfers of capital, purchase of property, government bonds or investment in corporate entities; and
- Transactions related to oil, arms, precious metals, tobacco products, cultural artefacts, ivory or items related to protected species, or of archaeological, historical, cultural and religious significance, or rare scientific value.
These changes add further requirements to gather information on the intended nature of the business relationship and information on the source of wealth, funds of the customer and its beneficial owner. The purpose of EDD is to understand the reasons for the transaction, to obtain senior management approval, and increase monitoring of a transaction.
EU Financial Intelligence Units
To enhance cooperation and information sharing between countries and to bring them in line with international practices, the New Regulations also require national centralised automated mechanisms to be put in place which should include, as a minimum, the names of account holders, the beneficial owner of the account, the International Bank Account Number and the account opening and closing dates.
Politically Exposed Persons (“PEPs”)
The 5MLD also require countries to hold an up-to-date list indicating the exact activities that qualify as a prominent public function according to their respective laws so that the Commission can create a single publicly available list of PEPs.
Companies House Discrepancies
The New Regulations identify that an inconsistency is identified between information on Companies House and information made available to a relevant person whilst performing their due diligence checks, this must be reported to Companies House, who will then investigate and resolve the discrepancy where necessary. An exception has been made for legal professional privilege.
5MLD focuses on increasing the transparency of information, in particular information relating to beneficial ownership and trusts, and increasing the level of due diligence conducted for financial transactions, particularly when dealing with high risk countries.
By 3 December 2020, Member States will also have to transpose into national law the Sixth Money Laundering Directive (“6MLD”) (which was published on 12 November 2019) and which includes further measures to address gaps in the existing regime. Whilst the UK’s exit from the EU may impact upon its implementation of the 6MLD, with one of the most stringent anti money laundering regimes in the world, it is largely expected that the UK will not stray far from the EU’s position.