The (quiet) extension of the AML regime: an overview

7 February 2020

Just as the Money Laundering Regulations 2017 are starting to bed in – along comes the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 incorporating the provisions of the EU’s Fifth Money Laundering Directive [5MLD] into UK law. Implemented on 10 January 2020 with relatively little fanfare (unlike its predecessor), whilst it is an iteration of the regime to date, rather than a wholesale overhaul, there are a number of significant changes which those in the regulated sector , both old and new entrants, need to know about and action.
 

The key changes for regulated entities (or relevant persons) are:

  • Mandatory reporting to Companies House of  discrepancies between beneficial ownership  information at Companies House and your own compliance checks  (it is unclear how this will work in practice);
  • Enhanced due diligence [EDD]-must now be applied in the following circumstances –
    •  transactions which are either complex or unusually large or an unusual pattern or have no apparent lawful or economic purpose (these are 4 defined and separate circumstances and they don’t all need to be present for EDD to be triggered as before)
    • any business or transactions involving a high risk third country. So EDD will be necessary when any party to a transaction (not just the customer)is involved with or established in a high – risk country (the European Commission has published a list of such countries)
  • Additional high risk flags-to consider when deciding if something or someone is high risk (and so EDD is required) -
    • the person is involved in the trade of oil, arms, precious metals, tobacco products, cultural artefacts and items of archaeological, historical,  cultural and religious importance or of rare scientific value in addition to ivory and protected species.
    • If there has been no face to face meeting and no electronic identity systems
    • the customer is seeking citizenship/residency in exchange for capital investment
    • the person is the beneficiary of a life insurance policy (if relevant to the retainer)
  • Documented risk assessments are required for AML/CTF purposes on any new products or business practice (not just new technology)
  • Data sharing policies are required for dealing with parent undertakings sharing information about customers (including accounts and transactions) to subsidiaries.  
  • Beneficial ownership requirements have been enhanced so that reasonable measures must now be taken to understand the ownership and control structure of a company or trust that is the beneficial owner of a customer. If the beneficial ownership cannot be established and all possible means of doing so have been exhausted then reasonable measures should be taken to identify and verify senior person responsible for managing the company. This must be recorded in writing.
  • Electronic identification for customer due diligence can and should now be used rather than just paper based ID such as passports or diving licences but such a process must be independent of the customer and secure from fraud and misuses (guidance is to be issued by HM Treasury)
  • Pre-paid cards if issued outside of the EU are prohibited (unless they were issued in a territory that has AML legislation equivalent to the EU’s standards)
  • Training in larger firms must conduct initial and periodic screening of relevant staff (which include compliance officers, front office staff, introducers of business, those who are customer facing). This screening will involve assessing the individuals skills, knowledge and expertise to ensure they are capable of carrying out their functions in addition to assessing their integrity
  • Agents -used for any regulated activity must receive AML training

Other changes to be aware of:

  •  All EU Member States must create a list of specific functions which qualify as “prominent public functions” to ensure that individuals who are potential PEPs are identified for due diligence purposes (the EU will then consolidate the lists from Member States)
  • Registers of Ultimate Beneficial owners must be created nationally (the UK has already done this for corporates). NB the beneficial-ownership threshold of 25% in the 4 MLD has been lowered to 10% for those non-financial entities that are not engaged in active business activity (this seeks to target those entities which are used as an intermediary structure  and which are often designed to create deliberate opaqueness)
  • Centralised automated mechanisms for identifying holder of bank accounts and safe deposit boxes by 10 September 2010. This will enable easy access by law enforcement agencies and AML Supervisors. So banks etc will be required to have systems in place to enable them to respond using a central automated mechanism to a request for information by a law enforcement agency. 
  • National registers to be connected via the European Central Platform by 10 March 2021.

New entrants into the Regulated sector and so bound by the Money Laundering Regulation 2019:

  • All express trusts (not just those with a UK tax implication) including those which own UK land or property or have a business relationship with UK entities such as solicitors, accountants, banks. Examples of trusts now included are discretionary trusts, bare trusts, charitable trusts, employee ownership trusts.  In addition some trusts now need to be registered with the Trust Registration Service (an online service set up by HMRC). There are various deadlines for registration depending upon the status of the trust. The onus is on the trustees to deal  with the registration and face stringent penalties if they fail to do so
  • Cryptoasset businesses  -which covers exchanges, ATMs, peer -to -peer  providers,  issuers of new cryptoassets  (e.g. Initial Coin Offerings), publishers of certain open-source software (e.g. non-custodian wallet providers)and custodian wallet providers. The 5MLD now defines cryptoassets as “digital representation of value that can be digitally transferred, stored or traded and is accepted .as a medium of exchange”. In addition these businesses if already in existence must be registered by the FCA by 10 January 2021. New business must register before conducting any business.
  • Art traders –this includes auction houses or other intermediaries and galleries. It applies to works of art over E10,000 or £8,580
  • Letting agents – where rent is for a property is over E10,000 or £8,580 per month.
  • Tax advisors – now include those providing material aid or assistance/advice on tax affairs of others.

2019 saw a record year for UK regulators investigating and sanctioning breaches of the Money Laundering Regulations. It is predicted that this will only increase as the UK’s drive to be seen to be a clean place to do business post-Brexit cannot be underestimated. Hence those that fall within the AML compliance regime – new or old – need to alive to their obligations and the consequences of failure to meet them.

This blog was first published by Compliance Matters on 28th January 2020

Further Information

For further information on the issues raised in this blog post, please contact a member of our criminal team.

 

About the Author 

Nicola Finnerty is a partner in the criminal litigation team. She has experience of fraud, corruption  (including the Bribery Act) and cartel matters, financial compliance, money laundering, asset seizure and confiscation cases, through to sexual offence casesdrugsmurder and offensive weapon crimes.

 

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