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Fifth Money Laundering Directive implemented in the UK

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management

06-01-2020

On 20 December 2019, the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (“MLR 2019”) were laid before Parliament.  The MLR 2019 gives effect to the EU Fifth Money Laundering Directive[1] and amends the existing Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLR 2017”).

With some minor exceptions, the MLR 2019 comes into force on 10 January 2020.  Key changes implemented by the MLR 2019 include:

  • the scope of “regulated persons” being expanded to include letting agents, art market participants, cryptoasset exchange providers and custodian wallet providers;
  • a requirement to have policies, controls and procedures to assess and mitigate money laundering and terrorist financing risk when adopting new products, business practices and technology
  • a requirement to provide training to agents as well as employees;
  • a positive obligation on regulated persons to use electronic verification, as opposed to a traditional reliance on paper documents, when verifying identity and to ensure the electronic verification tool is reliable, secure from fraud and provides an appropriate level of assurance;
  • changes to enhanced due diligence requirements when dealing with a person established in a high risk third country;
  • amendments to obligations on supervisory authorities, including confidentiality requirements; and
  • the creation of a central automated mechanism for making and responding to request for information from relevant authorities.

Full details of these changes can be found below:

1.     New regulated persons

The MLR 2017 will now apply to the following entities and it should be noted that any person who is the beneficial owner, officer or manager of such entities must apply to their relevant supervisory authority for approval to hold such a position by 10 January 2021:

A.     “letting agents”

Defined as a firm or sole practitioner who, or whose employees, carry out letting agent agency work (when carrying out that work only).  The MLR 2019 defines “letting agency work” as: work done in response to instructions received from another person who wishes to rent or let land (i.e. prospective landlords and tenants) where an agreement is concluded for the letting of land for a term of a month or more and where the rent is at least EUR 10,000 a month (or equivalent) during at least part of the term.  This should eliminate most residential lettings but will impact on some commercial letting agents.  The MLR 2019 makes it clear that when conducting relevant lettings agency work customer due diligence must be conducted on both the tenant and landlord. 

The MLR 2019 importantly provides details of certain activities which does not constitute regulated activity by a letting agent and this includes:

  • publishing advertisements or disseminating information;
  • providing a means by which a prospective landlord or a prospective tenant can, in response to an advertisement or dissemination of information, make direct contact with a prospective tenant or a prospective landlord;
  • providing a means by which a prospective landlord and a prospective tenant can communicate directly with each other; and
  • the provision of legal or notarial services by a barrister, advocate, solicitor or other legal representative communications with whom may be the subject of a claim to professional privilege or, in Scotland, protected from disclosure in legal proceedings on grounds of confidentiality of communication.

Relevant letting agents will be supervised by HMRC for the purposes of compliance with the MLR 2017.

B.     “art market participants”

Defined as a firm or sole practitioner who:

  • by way of business trades in, or acts as an intermediary in the sale or purchase of, works of art and the value of the transaction, or a series of linked transactions, amounts to EUR 10,000 or more; or
  • is the operator of a freeport when it, or any other firm or sole practitioner, by way of business stores works of art in the freeport and the value of the works of art so stored for a person, or a series of linked persons, amounts to EUR 10,000 or more.

The MLR 2019 does not itself define what constitutes a “work of art” but instead refers to the Value Added Tax Act 1994 and states that anything deemed to be a work of art for the purposes of section 21(5)(a) of that Act is a work of art for the purposes of the MLR 2019 – this includes:

  • any mounted or unmounted painting, drawing, collage, decorative plaque or similar picture executed by hand;
  • any original engraving, lithograph or other print which was produced from one or more plates executed by hand without using any mechanical or photomechanical process and which is the only one produced or is limited edition;
  • any original sculpture and certain sculpture casts;
  • any tapestry or other hanging made by hand from an original design and which is the only one made or is limited edition;
  • any ceramic signed by the individual who executed it;
  • any enamel on copper which is executed by hand, is signed, is the only one made or limited edition and which is not comprised in an article of jewellery; and
  • any mounted or unmounted photograph which was printed by or under the supervision of the photographer, is signed and is the only print or is limited edition. 

For information on freeports and the risk of money laundering associated with them please see our previous article which can be found here.

Art market participants will be supervised by HMRC for the purposes of compliance with the MLR 2017.

C.     “cryptoasset exchange providers”

Defined as a firm or sole practitioner who by way of business exchanges, arranges or makes arrangements with a view to the exchange of cryptoassets for money, money for cryptoassets or for one cryptoasset for another or who operates a machine which utilises automated processes to effect such exchanges.  Such providers will be required to register with the Financial Conduct Authority which is required to maintain a register of providers. 

The MLR 2019 defines “cryptoassets” as “ a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored or traded electronically”. 

Cryptoasset exchange providers will be regulated by the FCA for the purposes of compliance with the MLR 2017.

D.     “custodian wallet providers”

Defined as a firm or sole practitioner who by way of business provides services to safeguard and/or administer cryptoassets on behalf of its customers or private cryptographic keys on behalf of its customers in order to hold, store or transfer cryptoassets.  Such providers will be required to register with the Financial Conduct Authority which is required to maintain a register of providers. 

Custodian wallet providers will be regulated by the FCA for the purposes of compliance with the MLR 2017.

E.     Expansion of the definition of a “tax adviser”

The MLR 2017[2] originally defined this as a firm or sole practitioner who provided “advice about the tax affairs of other persons”, however, the MLR 2019 now amends this so that a tax adviser is now defined as a firm or sole practitioner who provides “material aid, or assistance or advice, in connection with the tax affairs of other persons, whether provided directly or through a third party”.  Unhelpfully, the terms “material aid” and “assistance” have not defined been within the MLR 2019 and we await to see if guidance will be issued from relevant regulators as to when these thresholds will be deemed to have been met.

2.     Policies, controls and procedures

The MLR 2017 is amended so that regulated entities are now required to have policies, controls and procedures which ensure that appropriate measures are taken to assess and mitigate money laundering and terrorist financing risk when new products, business practices (including new delivery mechanisms) and new technology are adopted, as opposed to just when new technology is adopted as per the original MLR 2017. 

3.     Training requirements

Training requirements are now expanded so that they now apply to agents as well as relevant employees, meaning that any regulated person which utilises agents to conducts its regulated work must now ensure that it takes steps to provide training to those agents and that appropriate records of such training are held. 

4.     Customer Due Diligence (“CDD”)

Regulation 28 of the MLR 2017 sets out CDD measures which must be applied by regulated persons.  These measures require the verification of certain information including, customer identity and ultimate beneficial owner information.  The term “verify” is stated to mean “verify on the basis of documents or information ….obtained from a reliable source which is independent of the person whose identity is being verified”.  The MLR 2019 provides further clarity and states that information may be regarded as obtained from a “reliable source which is independent of the person whose identity is being verified” where it is obtained by means of an electronic identification process which is “secure from fraud and misuse and capable of providing an appropriate level of assurance” of identity. 

Whilst this amendment has initially given rise to a school of thought that electronic identification is now an absolute requirement, there remains in the MLR 2017 the ability to rely on documents “issued or made available by an official body”.  As such, traditional reliance on paper documents such as passports and driving licences is, in our view, still permissible albeit other third party confirmations of identity (for example, a letter from an accountant or lawyer confirming identity) are unlikely to be suitable.  Where electronic verification tools are used there is now a positive obligation on regulated entities to ensure the tool is secure from fraud .  We had already seen an expectation from regulators, particularly the FCA, that regulated persons would understand how their electronic tools work and would carry out reviews and testing to ensure that it was fit for purpose.  Regulated persons must now ensure that they have sufficient oversight of third party electronic tools rather than simply rely on the third party provider to ensure suitability and compliance with legal and regulatory requirements, if they are to ensure compliance with the MLR 2017 (as amended).

A new regulation 30A also requires regulated persons to obtain proof of registration or an excerpt of the register from companies and certain partnerships which they are entering into a business relationship with.  Regulated persons will be required to report to a relevant registrar any discrepancies it identifies in relation to beneficial ownership information between information it collects during the course of conducting CDD and information included in any obtained extract from the company register.

5.     Enhanced Due Diligence (“EDD”)

The MLR 2017 required EDD in specified situations, including in any “business relationship or transaction with a person established in a high-risk third country” (as defined by the European Commission (see our recent article here).  The MLR 2019 has amended this so that the requirement for EDD now applies in any “business relationship with a person established in a high risk third country or in relation to any relevant transaction where either of the parties to the transaction is established in a high risk third country”. 

The MLR 2019 states that in such circumstances the EDD which must be undertaken must include the following:

  • obtaining additional information on the customer and on the customer’s beneficial owner;
  • obtaining additional information on the intended nature of the business relationship;
  • obtaining information on the source of funds and source of wealth of the customer and of the customer’s beneficial owner;
  • obtaining information on the reasons for the transactions;
  • obtaining the approval of senior management for establishing or continuing the business relationship; and
  • conducting enhanced monitoring of the business relationship by increasing the number and timing of controls applied, and selecting patterns of transactions that need further examination.

Regulated businesses will already be familiar with conducting EDD where their customer is established in a high risk third country but now must also consider the location of those parties with whom their customers may engage in transactions (if they were not already doing so).  In our view, where a customer is intending on making or receiving a series of connected payments to or from a party established in a high risk third country, it may be appropriate to conduct EDD in respect of that series of transactions with a review period and relevant controls being imposed.  Where individual transactions are engaged in to and from parties established in high risk third countries, EDD will be required for each transaction. 

6.     Simplified Due Diligence (“SDD”)

In respect of SDD, the MLR 2019 reduces the threshold for electronic money from EUR 250 to EUR 150.                  

7.     Miscellaneous changes

Other changes include:

  • the creation of a central automated mechanism for making and responding to requests for information from relevant authorities in respect of accounts held with credit institutions and safe-deposit boxes held with any provider of safe custody services;
  • amendments to obligations on supervisory authorities including confidentiality requirements;
  • amendments to the information and investigation powers granted to the FCA, specifically to deal with the inclusion of cryptoassets within the scope of the MLR 2017;
  • minor amendments to enforcement provisions; and
  • consequential amendments to related primary legislation including the Terrorism Act 2000, the Proceeds of Crime Act 2002 and the Companies Act 2006

Next steps

The government’s consultation on the transposition of the EU Fifth Money Laundering Directive closed back in June 2019 and the Government has not issued any response to the consultation prior to laying the MLR 2019 before Parliament however, we understand that a response will be issued and relevant guidance documents will be updated in due course.

It is vital that relevant businesses review existing AML frameworks to ensure they are compliant with the new requirements.  Businesses which did not previously fall in scope but which will be regulated persons as of 20 January 2020 must also act to ensure they have appropriate systems and controls in place.


[1]    (EU) 2018/843

[2]    Regulation 4(2) MLR 2019

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