The European Commission released its proposals for a 4th Anti-Money Laundering Directive on 5 February 2013.
fourth money laundering directive (4th Directive)

The proposals are a response to changes made to the requirements issued by the Financial Action Taskforce (FATF) in February 2012 and a review conducted by the Commission on the implementation of the third money laundering directive (3rd Directive).

Changes to the law in the UK are likely to occur later in 2014

What stays the same

The scope of activities undertaken by legal professionals that are within the 4th Directive and the protection of legal professional privilege has not changed.

The key components of client due diligence and the money laundering offences also stay the same.

Key changes

Key proposals of interest to legal professionals are:

Risk assessments

Every law firm will be required to have written AML/CTF risk assessments, policies and procedures, as well as a process by which they can test how effective these are.

This requirement should be implemented in a manner which is proportionate to the size of the law firm.

Enhanced due diligence

Enhanced due diligence for politically exposed persons (PEPs) is being extended, so you will need to consider if a beneficial owner is a PEP. People with high level appointments in the UK will now be a PEP, and enhanced measures will need to apply for at least 18 months (rather than the former 12) after a PEP leaves office.

The enhanced due diligence measures to UK based PEPs will be on a risk sensitive basis. Where a PEP is a beneficial owner of a company it appears that it is the source of wealth and funds being used in the transaction that are to be assessed, which may be the company’s funds rather than necessarily requiring an assessment of the PEP’s wealth.

Simplified due diligence

Entities which are regulated for AML/CTF compliance have not been included in the list of clients which should generally be considered as lower risk, despite the recommendation from FATF that they should be.

Simplified due diligence provisions are not now specifically contained in the 4th Directive, although individual countries may permit simplification following an evidence based assessment within their jurisdiction. This could result in a range of different simplification options being permitted for different types of institutions in different countries across Europe.

The removal of specific simplification provisions for lawyers’ client accounts could also undermine client confidentiality and result in disproportionate data processing by financial institutions.

The Law Society will be looking carefully at these provisions and making representations to ensure that the simplification measures do not actually result in an increase in red tape and compliance activity.

Record keeping requirements

There is an attempt to provide further clarity around the record keeping requirements, to make them more consistent with the requirements under data protection legislation.

The proposal that all supporting documents for a transaction must not be retained for more than ten years after the business relationship ends does not fully take into account the types of documents held by legal professionals (such as wills) or the consequences of limitation periods. We will be raising this with the Commission.

Minimum sanctions

Specific minimum sanctions for breach of AML/CTF requirements have been outlined, including public reprimands, removal from practice, financial sanctions of up to 10 per cent of total annual turnover or €5 million

The vexing issue of beneficial ownership

One final proposal, which may be of greater interest when advising clients, is the new requirement for all companies, legal entities and trustees to hold adequate, accurate and up-to-date information on their beneficial owners. They are also required to make this available to those doing AML/CTF due diligence and to law enforcement agencies.

It is not yet clear whether some countries will interpret this requirement to provide the information as a need to provide it publicly or merely on a transactional basis.