In a little over two years tough new legislation designed to combat money laundering and terrorist financing will be introduced across Europe.

The fourth money laundering directive, which replaces the third directive, was agreed in December 2014 following a deal struck between the European Parliament and the European Council.

Despite the legislation not taking effect until mid-2017 firms are advised that they need to take as many steps as they can to be ready for the changes.

The amendments largely mirror recommendations introduced by the global standard setter, the Paris-based Financial Action task Force in February 2012.

At the heart of the new regime is the move towards a more risk-based approach where firms would have to properly assess the risks they face and put in the appropriate resources and steps to offset them.

This shift away from a purely rules based approach is one that creates additional work for firms. Compliance officers and money laundering reporting officers will not have the default position of deferring to the rulebook when implementing the new regime.

1. Firms will be held accountable by regulators for any decisions they make under the risk based approach.

2. Countries will also be expected to undertake risk assessments of issues and take measures to offset those risks.

3. Firms’ policies and procedures will need to reflect these risk assessments.

The new rules are designed to be evolutionary rather than revolutionary but firms would do well to note the prevailing climate of anger against banks with lax antimony laundering controls. This has led to big ticket fines in the U.S. and increased regulatory scrutiny in the UK, for example, the European Commission is clear in its stance:

• “Massive flows of dirty money can damage the stability and reputation of the financial sector and threaten the single market, and terrorism shakes the very foundations of our society. In addition to the criminal law approach, a preventive effort via the financial system can produce results,” it said.

The risk based regime does not mean that firms will automatically have to drop risky clients; rather they will need to rationalise and set out the reasons for accepting a new client’s business. Eugene McConville, ex-head of financial intelligence at the Serious Organised Crime Agency, said that firms could take on ‘riskier’ clients as long as the risks are acknowledged and stay on the radar.

• “The rules are that it is risk based; it is not you turn everyone down. Ultimately, you look at someone, you make a decision, and you record it,” he said. Jaap Van der Molen, managing director of VDM Associates, said that amendments to the due diligence regime were one of the biggest areas of change for firms under the new legislation and reflected the shift towards a risk-based regime.

The changes, which will be given the final seal of approval by the European parliament in April 2015, will also introduce important changes concerning beneficial ownership. Under the deal beneficial ownership information will be stored in a central register accessible by competent authorities, financial intelligence units, and other obliged entities such as banks.

Campaigners had hoped that the registers would be fully and publically available but a last minute compromise means that the information can only be accessed by people who can demonstrate that they have a ‘legitimate interest’ in reading the data.

Journalists, for example, would be able to access the information, which will include names, dates of birth, nationality and residency information. Exemptions to access would only be granted on a case-by-case basis, in “exceptional” circumstances. It is thought that the UK, France, Denmark and the Netherlands will allow full public disclosure of beneficial ownership.

The threshold for beneficial ownership remains unchanged at 25 per cent ownership of a company or an entity.

• “The new rules…will provide much greater transparency of the shadowy business structures that are at the heart of money laundering schemes, as well as schemes used by businesses to avoid their tax responsibility,” said Judith Sargentini, civil liberties committee rapporteur.

INCREASED FOCUS ON PEPS

1. The legislation also includes changes to the politically exposed persons (PEPs) regime, which follow FATF’s new approach. Firms will no longer be able to treat foreign and domestic PEPs differently under the new regime. At the moment firms have to apply enhanced due diligence measures to account for the risks posed by foreign PEPs but not for domestic PEPs. The 4MLD will change this, although in reality most large firms take a blanket approach to assessing the risks posed by PEPs from the UK and overseas.

2. The importance of the PEPs issue is reflected by recent Financial Conduct Authority scrutiny in this area. The regulator has expressed deep concern at the way some firms have handled PEPs and this has led to fines and other sanctions. The focus in this area is expected to continue.

NEW REQUIREMENTS

1. The 4MLD will also bring in new due diligence requirements for traders in high value goods for transactions involving cash payments of €10,000 or more, a reduction from the present threshold of €15,000.

2. Providers of gambling services will also be brought under the new regime. For gambling services posing higher risks, the legislation requires service providers to conduct due diligence for transactions of €2000 or more. In low-risk circumstances, member states may exempt certain gambling services from some or all requirements, in strictly limited and justified conditions. Such exemptions will be subject to a specific risk assessment. Casinos will be included under the changes.

3. Tax crime, for the first time, will also be included as a predicate offence, under the new regime.

4. The 4MLD also introduces a tough new sanctions regime including a maximum pecuniary fine of at least twice the amount of the benefit derived from the breach or at least €1 million. A maximum sanction of at least €5 million or at least 10 per cent of the total annual turnover will apply to legal persons, while a maximum penalty of at least €5 million will apply in the case of natural persons.

5. One tricky issue firms will have to grapple with is the requirement for multinational firms to have group wide policies and procedures, including data protection policies and procedures, as well as policies for sharing information on anti-money laundering and combating terrorist financing. The Commission will expect firms to implement these policies at branch level and majority owned subsidiaries in member states and third countries. Lawyers have expressed concern that while firms will have high level group AML policies there is likely to be disparity between local regulatory requirements. This is something firms will need to iron out.

6. The proposed directive also sets out new requirements that deal with home and host responsibility for AML issues. The directive sets out new rules clarifying that branches and subsidiaries in other member states than the head office apply host state AML rules and reinforce co-operation between home and host supervisors. Cross border co-operation between financial intelligence units will also be strengthened under the changes. Member states will also have to carry out risk assessments at a national level and take measures to mitigate the risks.

ACT NOW

Firms would do well not to wait until 2017 to put the changes in place. To stay ahead of the game institutions need to assess their risk based approaches and in particular their approaches to client onboarding and risk assessments of existing customers. The Commission could not be clearer:

1. “Dirty money has no place in our economy, whether it comes from drug deals, the illegal guns trade or trafficking in human beings.
2. We must make sure that organised crime cannot launder its funds through the banking system or the gambling sector.
3. To protect the legal economy, especially in times of crisis, there must be no legal loopholes for organised crime or terrorists to slip through.
4. Our banks should never function as laundromats for mafia money, or enable the funding of terrorism,”

said Cecilia Malmström, European Commissioner for Home Affairs.

BY MARTIN COYLE, AML AND FINANCIAL CRIME EDITOR, THOMSON REUTERS http://tmsnrt.rs/1GtaxGE