EU legislation

The EU’s 5th Money Laundering Directive – 5MLD

06/01/20

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6 January 2020

What is the 5MLD and Why the update?

On the 10th January 2020, the UK’s Anti-Money Laundering regime will update to incorporate international standards which are set by the Financial Action Task Force (FATF) to put in place the EU’s 5MLD.

The 5MLD is an update to the existing Money Laundering Terrorist Financing and Transfer of Funds Regulations 2017. The aim of which is to prevent the use of the financial system for Money Laundering and Terrorist Financing.

The Financial Action Task Force (FATF) has concluded that due to changes in the financial landscape since the last directive, money laundering and terrorist financing regulations need strengthening.

Looking back at three of the key requirements of the 4th MLD, which included the following, firms will need robust systems to be able to perform the updated requirements in these areas.

  • a requirement that firms prove they have taken appropriate levels of Customer Due Diligence to assess the potential risks of each client. This requirement is at the initial meeting stages and throughout the entire relationship
  • a requirement that firms know who the beneficial owners of corporate entities and trusts are and any individuals transacting for a significant third party who is not present.
  • a requirement that all PEPs are monitored for a minimum period of 12 months after leaving their role, and a widening of the PEP definition.

How do you perform your client due diligence? do you really know your client?

The new rules will impose added standards on all financial services firms, including fresh wording requiring a business to use electronic verification for their anti-money laundering checks wherever possible.

This means, to perform the due diligence required by the directive, by looking at paper-based documents such as passports and driving licenses may no longer be enough to evidence your requirements.

Enhanced Due Diligence

Firms must undertake a higher level of money laundering checks when conducting business with high-risk third countries.

The current list stands at 16 countries and these are:

  • Afghanistan
  • Bosnia and Herzegovina
  • Guyana
  • Iraq
  • Lao PDR
  • Syria
  • Uganda
  • Vanuatu
  • Yemen
  • Ethiopia
  • Sri Lanka
  • Trinidad and Tobago
  • Tunisia
  • Pakistan
  • Iran
  • Democratic People’s Republic of Korea.

 This list will grow, so we would always recommend that as a Firm you check the list before conducting business.

If you are not using electronic verification, it will be harder for you to perform enhanced checks.

Politically Exposed Persons PEPs and Sanctions checks

  • Are you aware if you are dealing with a family member or close associate of a PEP?
  • Are you confident that you can identify and accurately define a PEP?
  • Are you aware that Enhanced Due Diligence (EDD) is a requirement if firms identify a PEP?
  • Would you be aware if a client who you have been dealing with for years appeared on the Sanctions register?

If you are only focusing on paper ID checks you won’t be able to answer these questions.

Beneficial Owners

For firms obtaining information and performing due diligence on beneficial owners, it can be a real challenge. Whilst the UK does have a register of People with significant control (PSC), this is understood not to be independently verified. You can find the register for the UK here. Overseas firms may not use the register.  To enable firms to verify beneficial owners they complete electronic verification.  We would urge firms to seek further advice when taking new clients on from overseas or being able to adhere to ongoing AML requirements.

We wrote a blog recently on Trusts and recommend refreshing your knowledge about trust registration and AML requirements

Cryptoassets

All UK cryptoasset businesses carrying on activities in the scope of the MLRs will need to register with the FCA from 10 January 2020. Cryptoasset businesses must ensure they do not mislead clients on what protections apply to them. As this is a specialist high-risk area we recommend you seek compliance advice.

What do you need to do to comply?

Our recommendation is, if you are not already using an electronic verification AML system, that you invest in one. Undertake your own due diligence and keep this to evidence why and how you have selected the system.

We are here to assist if you’d like to discuss this further. Please call on 0161 521 8641 or email us at info@b-compliant.co.uk

Let’s chat