5th Anti-Money Laundering Directive: The Salient Points

by , on Feb 28, 2020 12:45:44 PM

The 5^th Anti-Money Laundering Directive, Directive (EU) 2018/843 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (5AMLD) was published on the 19^th June 2018, which Member States were required to transpose by 10^th January 2020.  The 5 AMLD amends the 4^th Anti-Money Laundering Directive and addresses growing trends in alternative finance with the scope of combating the use of these technologies for the financing of terrorism. This article outlines the principal changes brought about by the 5 AMLD.

Beneficial owners

The 5AMLD seeks to increase trust in the financial system and allow for greater scrutiny by the public. Under the 4^th AMLD, Member States were obliged to establish beneficial ownership registers and information was provided when legitimate interest was demonstrated. The 5AMLD removes this requirement and grants the general public access to beneficial ownership information including the name, birth date, country or residence and nationality and the nature and extent of the beneficial interest of legal entities. The Directive also introduces the requirement for Member States to set up a beneficial ownership register for trusts and similar legal arrangements, which unlike legal entities, will be subject to the legitimate interest requirement with regards to disclosure. This information will eventually be available across the EU through a unified system of national registers and subject persons are obliged to keep beneficial ownership information updated. Mechanisms will also be introduced whereby competent authorities may report incorrect or outdated information found within registers.

Virtual Currencies

The 5AMLD brings the provision of exchange services between virtual currencies and fiat currencies as well as custodian wallet service providers into scope, by providing definitions of virtual currencies and custodian wallet providers. Virtual currencies are defined as “digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal person as a means of exchange and which can be transferred, stored and traded electronically”. Currencies used on a limited network among a small number of users do not constitute virtual currencies. Custodian wallet provider is defined as “an entity that provides services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies.” Such service providers must be registered with the relevant authorities in their Member States and are subject to the same obligations as other obliged entities.

Financial Intelligence Units

Financial Intelligence Units (FIUs) will have access to central registers and central electronic data retrieval systems in order to enhance their powers. These centralized automated mechanisms will allow FIUs to identify the holders, proxy holders and beneficial owners of bank and payment accounts and safe-deposit boxes held by a credit institution within the jurisdiction.

Some of the information which must be accessible through the centralized mechanisms includes:

• The name and identification number of the account holder;
• The name and identification number of the beneficial owner of the account holder;
• The IBAN number and opening and closing date of the bank or payment account; and
• Name and identification number of the lessee and duration of the lease period of a safe-deposit box.

In order to increase cooperation between FIUs in the EU, registers storing beneficial ownership information must be interconnected through the European Central Platform, with the appropriate technical measures and specifications being adopted for each register. FIUs may request and obtain information promptly from other Member States even if no prior report is filed, and each Member State must designate a contract person to receive and handle such requests.

High risk third countries

Prior to the 5AMLD, individual member states had discretion as to which measures to implement with regards to financial transactions involving high risk third countries. 5AMLD provides a harmonized approach through enhanced due-diligence (EDD) measures which must be applied when transacting with any one of the 23 countries identified as high risk third countries by the European Commission. The Directive imposes particular EDD measures which must be implemented in the case of business relationships or transactions involving high-risk third countries, which include obtaining information on:

• The customer and beneficial owner;
• Intended nature of the business relationship;
• Source of funds;
• Source of wealth; and
• Reasons for intended or performed transactions.

Other measures which must be implemented include obtaining approval from senior management of the business relationship and monitoring the relationship by increasing controls and identifying patterns of transactions requiring further investigation.

With regards to transactions involving high risk third countries, mitigating measures which may be implemented include applying additional measures of enhanced due diligence, enhancement of reporting mechanisms and systematic reporting of financial transactions, and overall limitation of relationships or transactions involving natural or legal persons from high risk third countries.

Member states may also prohibit the establishment of subsidiaries, branches, and representative offices of obliged entities from such countries, or prohibit obliged entities from establishing subsidiaries in such countries. Increased supervision and external audit requirements may also be required for branches or subsidiaries of obliged entities in third countries. Member States may also request credit and financial institutions to review, amend, and even terminate relationships with institutions in such countries.

Prepaid Cards

While general purpose prepaid cards are used for legitimate purposes, anonymous prepaid cards pose risks in financing terrorism. Thus, the 5AMLD reduces the limit for exemption from applying customer due diligence for general purpose prepaid instruments to EUR 50. Exemption from CDD measures in the issuance of electronic money with regards to non-reloadable payment has also been lowered from Eur 250 to Eur 150. Furthermore, anonymous prepaid cards issued outside the EU may only be used  in the EU if they are compliant with the requirements set out by EU law.

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• Topics:
• AML