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Financial Institutions FSDR e-briefing: The EUs Fourth Money Laundering Directive

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    • Financial institutions - Briefings and articles

    12-07-2013

    The EU's Fourth Money Laundering Directive

    Introduction

    The European Commission (the “Commission”) published its proposal for the Fourth Money Laundering Directive (“4MLD”) on 5 February 2013. The draft legislative proposals seek to strengthen the European Union’s (“EU”) anti-money laundering regime. Michel Barnier, the EU Internal Market and Services Commissioner, explained the rationale for amending and updating the EU’s anti-money laundering framework, stating that the EU is at the “forefront of international efforts to combat the laundering of the proceeds of crime.”

    The Proposals

    The proposals take account of, and were created as a response to, the recommendations of the Financial Action Task Force[1] (“FATF”) in February 2012. One such recommendation was that anti-money laundering controls be implemented using a risk-based approach, rather than a prescriptive approach. The 4MLD introduces such a risk-based approach, allowing for greater responsiveness and acknowledgement of the need to adjust measures taken according to the risks presented in specific jurisdictions and sectors. This risk-based approach is one which is familiar in the UK as it has been a key part of the UK anti-money laundering framework for a number of years.

    The inclusion in the 4MLD proposals of provisions relating to politically exposed persons (“PEPs”) also implement recommendations made by FATF. As well as clarifying that enhanced due diligence is always appropriate when transactions involve PEPs, the 4MLD also widens the definition of a PEP to include ‘domestic PEPs’. These are individuals who hold prominent public positions in the home country. Prominent public positions include, amongst others, heads of state, members of parliaments, judges of supreme courts and senior executives of state-owned corporations. PEPs are held to represent a higher risk in respect of money laundering as a result of the positions they occupy. The proposals make it clear that the controls relating to PEPs also apply to family members and close associates of PEPs.

    The 4MLD aims to increase transparency around the beneficial ownership of companies and trusts. The threshold level for determining beneficial ownership of companies will not change, being those who own or control 25 per cent or more of a business, but companies will be required to maintain records evidencing their beneficial ownership. This information will be made available to parties conducting due diligence on them. It is not clear whether some member states will interpret this widely, as an obligation to hold the information publicly, or more narrowly, as an obligation to provide the information on a transactional basis only.  

    The proposals also include a specific reference to tax crimes for the first time in the EU, though these are already crimes under UK legislation, and extend the requirements for customer due diligence to the entire gambling sector; broadening from merely casinos. In the spirit of increased cross-border co-operation, the proposals also strengthen co-operation between different member states’ Financial Intelligence Units[2].

    Impact in the UK

    The changes are not expected to be implemented until around 2015 in the UK. The proposals must be considered by the European Parliament and the Council of Ministers and then the draft directive will need to be implemented separately in the UK. Although the 4MLD contains a number of new obligations for member states, the UK’s anti-money laundering regime incorporates the majority of these rules already. The impact of the directive in the UK is therefore likely to be substantially less than in other member states.

    [1] FATF is an inter-governmental body that promotes the effective implementation of measures to combat money laundering.

    [2] Every member state is required to have a national Financial Intelligence Unit (“FIU”) pursuant to Article 21 of the Third EU Money Laundering Directive 2005. The FIU is responsible for receiving, analysing and disseminating to competent authorities, disclosures of information concerning, amongst other issues, potential money laundering.

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