On 5 July 2016, the European Commission approved a proposal (2016/0208 (COD)) (the “Proposal”) to implement a number of amendments and additions to the Fourth Money Laundering Directive, ((EU) 2015/849) (“4MLD”).

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The Proposal has been drafted in response to the growing threat of terrorism within the EU, as well as in an attempt to enhance transparency within the global financial system – a particularly relevant consideration in light of concerns arising from the “Panama Papers” mass data leak.

The measures contained in the Proposal were developed in connection with the Commission’s February 2016 Action Plan for strengthening the fight against terrorist financing.

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The Proposal contains a number of amendments to 4MLD, including in relation to the disclosure of beneficial ownership information, the information request powers available to Financial Intelligence Units (“FIUs”), and the enhanced due diligence measures (“EDD”) applicable to entities based in high-risk third countries. In a number of cases, the proposed amendments introduce EU-wide requirements in areas where similar domestic steps that have already been taken in one or more Member States.

The Proposal also significantly fast-tracks the prospective timeframe for implementation of the 4MLD, bringing the implementation date forward by around six months (to January 2017).

This update provides an overview of the proposed changes.

1. Changes to the implementation timeframe
2. Is the UK still required to implement 4MLD in light of the vote to leave the EU?
3. Changes to the proposed disclosure regime for information on beneficial ownership
4. Additional monitoring/due diligence requirements
5. Harmonisation of the approach to EDD for high-risk third countries
6. Changes to information powers available to Financial Intelligence Units
7. Other proposed amendments
8. Next steps – implementation of the Proposal

Changes to the implementation timeframe

One of the most significant details of the Proposal is the proposed change to the implementation date for 4MLD. Under the original draft, Member States were required to implement the laws, regulations and administrative provisions necessary to comply with 4MLD by 26 June 2017. However, if the Proposal is approved, this implementation date will be brought forward to 1 January 2017, meaning that Member States will have less than six months to ensure that the requirements of 4MLD, including those proposed amendments and additions contained in the Proposal, are implemented in full.

Is the UK still required to implement 4MLD in light of the vote to leave the EU?

1. The recent vote for the UK to leave the EU does not have any direct legal effect on its own. In order to leave the EU, the UK must first inform the European Council of its intention to leave. This notification triggers the two-year period specified by the Treaty on European Union for the negotiation of the terms of a Member State’s withdrawal.
2. The UK Government’s approach to EU Directives which have not yet been implemented, such as 4MLD, may depend on their lead time but the assumption should be that implementation will continue while the UK remains in the EU.
3. The Financial Conduct Authority issued a statement following the referendum result confirming that firms subject to its rules must continue to abide by their obligations under UK law, including those derived from EU law, and must continue with their implementation plans for legislation that is still to come into effect.

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Set out below is a summary of the key amendments contained in the Proposal which the UK, and other Member States, will be required to implement (in addition to the existing provisions of 4MLD).

Changes to the proposed disclosure regime for information on beneficial ownership

1. The original text of 4MLD required all legal entities to hold and maintain current and accurate registers of their beneficial ownership. This information will be held in a central register for each Member State and must be provided to regulatory authorities, entities that are required to undertake CDD on the entity in question, and any other person or organisation that can demonstrate a legitimate interest in obtaining the information.
2. Such persons demonstrating a legitimate interest shall be provided with, at least, the beneficial owner’s name, their month and year of birth, their nationality and the country of residence as well as the nature and extent of their beneficial interest.
3. Under the Proposal, access to such information will no longer be restricted to those that can demonstrate a legitimate interest but instead will be provided to the public on demand (subject to Member State-determined exceptions where disclosure of the information would expose the beneficial owner to the risk of fraud, kidnapping etc.). Such information shall be available on the central public register for a maximum of ten years after the company has been struck off the register. The Proposal provides that public disclosure provides additional reassurance to third parties wishing to deal with a company and “also allows greater scrutiny of information by civil society… and contributes to preserving trust in the integrity of business transactions and of the financial system.”
4. UK incorporated companies and LLPs have, since 6 April 2016, been required to keep a register of beneficial ownership information following the introduction of the statutory register of “persons exercising significant control” (or “PSC register”).
5. Since 30 June 2016, companies and LLPs have been required to file beneficial ownership information at Companies House when submitting their annual confirmation statement.
6. Although both the UK requirements in relation to PSC registers, and the new requirements contained in the Proposal, take ownership of more than 25% as their starting point for registration, as set out in more detail below, the Proposal also includes an amendment to 4MLD reducing this threshold to 10% in relation to “Passive Non-Financial Entities” (broadly, intermediaries).
7. If the Proposal is approved as drafted, and depending on the way in which the UK opts to transpose any amended requirements into national law, UK entities may therefore see a change in the UK’s PSC register requirements in order to accommodate this reduced threshold. The UK government’s response to the 2015 consultation on PSC registers noted, in any event, that BIS intended to seek views on certain developments to the PSC register in order to be compliant with 4MLD.

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8. Therefore, while there will be no immediate change in the information to be filed at Companies House and/or the frequency with which this information must be provided, UK companies should continue to monitor the situation and be aware that the requirements may change in due course.
9. The Proposal also provides for a similar public disclosure regime in relation to trusts that carry on commercial or business-like activities.
10. Trusts that are used for alternative purposes, e.g. charitable or community-focused trusts, will only be required to provide beneficial ownership information where the requesting party can demonstrate a legitimate interest in such information. The Proposal has further clarified the criteria for demonstrating a legitimate interest.

Additional monitoring/due diligence requirements

1. 4MLD sets the threshold for identifying beneficial owners of legal entities when carrying out CDD at 25% plus one share (or an ownership interest of more than 25%).
2. The Proposal lowers this threshold to 10% in respect of “Passive Non-Financial Entities” (entities which function as intermediary structures, do not create income on their own and mostly channel income from other sources).
3. As noted above, if adopted, this part of the Proposal would also affect the level of beneficial ownership information to be made available for public disclosure.
4. The Proposal places an additional monitoring requirement on firms in respect of trusts, by requiring them to review information in relation to the beneficial ownership of existing customers on a systematic and structured basis. This requirement is in addition to the well-established requirement to carry out CDD on a risk-sensitive basis.
5. In addition, the Proposal further clarifies that the Member State responsible for holding adequate and up-to-date information on trustees is the jurisdiction where the trust is administered.

Harmonisation of the approach to EDD for high-risk third countries

1. The Proposal also suggests changes in order to harmonise Member States’ approaches to EDD. Article 18 4MLD requires obliged entities to apply EDD measures when dealing with natural or legal entities established in those countries appearing on an EU-compiled list high-risk third countries (due to be adopted in July 2016).
2. The Proposal would require firms, when dealing with natural persons or legal entities established in listed high-risk third countries, to apply a minimum (EU) standard of EDD measures, compliant with the list of actions set by the Financial Action Task Force. Such measures include, but are not limited to, obtaining additional information on:
   1. (i) the customer,
   2. (ii) the intended nature of the business relationship,
   3. (iii) the customer’s source of funds or wealth, and
   4. (iv) the reasons for the transaction(s), as well as enhanced monitoring of the business relationship.
3. In addition to the above, the Proposal also sets out a number of additional measures that Member States may require firms to take in relation to these higher-risk natural persons or legal entities, together with a number of measures that Members States may themselves adopt in relation to all entities or persons from such jurisdictions (including, among others, prohibiting financial institutions from establishing branches or representative offices in the country concerned and/or requiring financial institutions to review and amend, or, if necessary terminate, correspondent banking relationships with the country concerned).

Changes to information powers available to Financial Intelligence Units

1. Currently, FIUs in certain Member States are only able to request information from firms where a prior suspicious activity report has been filed. The Proposal alters this position by explicitly stating that FIUs are able to obtain information from firms for the purpose of preventing, detecting and effectively combatting money laundering and terrorist financing, even if a report has not been filed. Member States will retain the right to define the conditions under which such requests for information may be made.
2. 4MLD originally contained (in Recital 57) an encouragement to Member States to put in place registries or systems that would provide FIUs with access to information on the ownership of payment accounts. Such mechanisms already exist in a number of Member States, however, the Proposal would require Member States to put in place centralised mechanisms allowing the identification of natural or legal persons holding or controlling both bank and payment accounts held by credit institutions within their territory.
3. The information available must include the name of the customer account holder or anyone purporting to act on their behalf, the beneficial owner of the account holder, related CDD information and the identification number for the account (IBAN number) as well as the dates at which the account was opened and (if applicable) closed. Member States may decide whether to
   1. (i) set up a central registry containing such data or
   2. (ii) facilitate a centralised data retrieval system in order to meet this new obligation.

Other proposed amendments

1. In addition to those amendments dealt with above, the Proposal also impacts a number of other sections of the 4MLD. These include:
   1. reducing the maximum transaction limits for pre-paid cards, below which Member States may permit firms not to apply CDD measures, from €250 to €150, and removing the CDD exemption in respect of online use of prepaid cards;
   2. the designation of virtual currency platforms and custodian wallet providers as “obliged entities” within the scope of 4MLD’s provisions; and
   3. the clarification of a number of existing provisions including those relating to the concept of competent authorities, the exclusion of closed loop cards from the definition of e-money and the consistency of provisions surrounding electronic identification.

Next steps – implementation of the Proposal

1. The Proposal has been proposed by the European Commission under the Ordinary Legislative (‘Co-Decision’) Procedure which means that the Proposal will now be submitted to the European Parliament where it may be approved in full or amended.
2. The approved or amended text will then be submitted to the European Council for a similar process of review. Should a final text not be approved by both institutions following a second round of review, a conciliation committee will be appointed, with delegations from both institutions, in order to agree on a final wording for 4MLD.
3. Once this process has begun, both institutions are required to pass the final text of 4MLD within a defined timeframe. As the Proposal has not yet been scrutinised or approved by either the European Parliament or the European Council, there remains scope for amendment.

Original source of information – http://bit.ly/29O2UWo