In the past few years, many scandals related to money laundering have been recorded. For instance, the Panama Papers have shown how the rich and powerful use tax havens to hide their wealth. Big companies such as UBS and ABN AMRO are suspected of not complying with AML Directives by ignoring signals of high-risk clients' profile. Recently, the Commonwealth Bank has agreed to pay $700 m fine for committing anti-money laundering and terrorism financing law breaches.

These scandals reflect crucial issues faced by the modern financial system. The present article aims to give more insights on the current legal system with the proposal of the 5th AML Directive (AMLD 5).


What is AML ?

Anti-money-laundering is a set of procedures, laws and regulations designed to deal with practices related to income obtained from illegal activities.

Why adopting AML is a big deal for firms ?

A firm has the responsibility to make sure that its financial transactions with stakeholders, shareholders and third parties are not related to illicit actions. This practice helps it to not only to comply with legal arrangements but also to enhance multiple aspects of the company (reputational, operational, financial, compliance risks).

The Anti-Money Laundering European Directives framework

In July 2016, The European Commission, in the wake of terrorist attacks and the Panama Papers scandal, decided to strengthen the fight against terrorist financing and money laundering. Nowadays, modern technology services are becoming increasingly popular as alternative financial channels.
However, some remain outside the scope of law requirements, which might no longer be legitimate. This is the reason why an up-to-date legal system is necessary. First, it is worth noting that the 5th AML Directive is an amendment of previous directives.

In 1990, the European Union adopted the 1st anti-money laundering Directive to prevent the misuse of the financial system for money laundering. It stated that considered entities (banks and other obliged entities) should apply customer due diligence (identification of customers, monitoring of transactions and reporting of suspicious transactions) before entering and conducting any business transactions.

In 2001, the 2nd anti-money laundering Directive had been unveiled as an updated and amended version of the 1st Directive in order to refine existing provisions and fill the gaps with 40 recommendations suggested by the Financial Action Task Force (FATF),an intergovernmental organization founded in 1989 by the G7 to develop policies regarding anti-money laundering. The main changes were:

  • Establish which authorities of the Member States should receive details of suspicious transactions
  • Adopt a broader definition of money laundering which is caused by an initial offence (corruption, drugs trafficking...)
  • Broaden the scope of application: previous entities + currency exchange offices, money transmitters and investment firms
  • Identify the authority tasked to find, trace, freeze, seize and confiscate any property and any proceeds linked to criminal activities

Since its adoption in 2006, the 3rd Directive has tightened the European Union’s anti-money laundering system. Changes were made to:

  • Broaden the scope of application: previous entities + lawyers, notaries, accountants, real estate agents, casinos and encompassing trust and company services, exceeding €15,000
  • Include measures regarding the financing of terrorism
  • Establish technical criteria for assessing whether situations represent a low or high risk of money laundering or terrorist financing
  • Establish enhanced customer due diligence measures for politically exposed persons (persons holding a public office) and their immediate families or close associates, and simplified customer due diligence procedures for low-risk transactions

    The 4th Directive, a risk-based approach to AML, came to light in 2015. This approach assumes that risks related to ML and FT can take various forms. Thus, responses and measures cannot be uniform and should be tailored from case to case. It is worth noting the following modifications:

    • Adopt a broader definition of politically exposed persons: Foreign and local officials
    • Set up a central register which identifies the ultimate beneficial owner of companies and other legal entities for all Member States
    • Broaden the scope of application: previous entities + providers of gambling services
    • Curb payments/ donations in cash to €3,000
    • Establish a list of so-called “high-risk third countries” and conduct enhanced customer due diligence while dealing with natural persons or legal entities established in those countries

    What are the challenges and opportunities of the Fifth Anti-Money Laundering Directive (5AMLD) ?

    This year (2018), the 5th AML directive has been newly adopted by the Council of the European Union and should be implemented into national law of various Member States by January 2020. With an evolving financial landscape and especially the application of the General Data Protection Regulation, new challenges are faced by firms. The main amendments introduced are the following:

    • Extend AML and CTF to virtual currencies, tax related services and works of art
    • Improve checks on transactions involving high-risk third countries
    • Allow the anonymous use of electronic money products only in two situations
      • Directly in the shop for a maximum amount of €150
      • Online for a maximum amount of €50
    • Customers of a third country who apply for residence rights or citizenship in the Member State in exchange of capital transfers, should be considered as a factor indicative of a potentially higher risk
    • Establish a more transparent system on beneficial ownership
    • Build better connections between beneficial ownership registers to facilitate cooperation and exchange of information between Member States
    • Set up a centralized bank account register or retrieval systems
    • Enhance powers of EU Financial Intelligence Units and facilitate their cooperation
    • Enhance cooperation between financial supervisory authorities

    Requiring Assistance ?

    Member States including Belgium must bring into force their national regulations and administrative provisions to comply with the Fifth AML Directive by 10 January 2020 at the latest. Pideeco conducts independent Compliance reviews to provide financial institutions greater insights on their regulatory performance.
    Oscar Canario da Cunha - Pideeco Network Partner
    Oscar Canario da Cunha Managing Director
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