Today, the UK is introducing changes to its anti-money laundering regime to implement the provisions of the EU’s Fifth Money Laundering Directive (“5MLD”). The changes, introduced pursuant to the Money Laundering and Terrorist Financing (Amendment) Regulations 2019, are much less extensive than those introduced by the EU’s 4MLD. They bring new business types within the scope of the regulations, and clarify obligations for existing regulated entities. The key changes are as follows:
New categories of regulated persons
The scope of “relevant persons” covered by the regulations has been expanded to cover crypto asset exchange providers, custodian wallet providers, art market participants where the value of the transaction exceeds €10,000 including traders, intermediaries and freeports storing works of art, and letting agents where the monthly rent exceeds €10,000.
Enhanced due diligence
Relevant persons must perform enhanced due diligence (EDD) for business relationships with clients established in high-risk third countries or in relation to transactions where either party is established in a high-risk third country. This means relevant persons must consider not only the location of their clients, but also those of their clients’ counterparties. The regulations also specify the EDD measures to be taken in such situations, derived from a new provision in 5MLD designed to ensure consistency across the EU, as interpretations of EDD previously provided on a national level was varied. These measures include:
Obtaining additional information on:
The customer and the customer’s beneficial owner
The intended nature of the business relationship
The source of funds and source of wealth of the customer and beneficial owner
The reasons for the transactions
Obtaining senior management approval of the business relationship
Conducting enhanced transaction monitoring through additional and more frequent controls
Ownership
The regulations explicitly require relevant persons to “take reasonable measures to understand the ownership and control structures” of their customers. Electronic identification processes are permitted, under certain conditions.
Relevant persons must confirm the beneficial ownership of relevant legal entities before commencing a business relationship, and must report any discrepancies between the information provided to them as part of the due diligence process and that in the register of Persons of Significant Control to their local company registry. In the UK, Companies House issued its own ancillary guidance for obliged entities on 10 January.
Risk assessment
Relevant persons must take appropriate measures to assess and mitigate money laundering and terrorist financing risks before adopting any new products and business practices (including delivery mechanisms), as well as new technologies.
Group policies
The new regulations explicitly state that parent entities must have group-wide policies to share information on customers, customer accounts and transactions, for the purposes of tackling money laundering/terrorist financing.
Prepaid cards
Recognising the potential use of pre-paid cards for financial crime, the new regulations reduce the limit at which customer due diligence must be conducted on holders of pre-paid cards from €250 to €150.
Conclusion
These legislative amendments oblige existing regulated entities to consider whether their programmes are still in line with the regulatory requirements, given the expanded obligations and clarifying details in the new legislation.
However, the major impact of the legislation will be for companies which now classify as relevant persons for the first time, such as cryptocurrency firms, which must now take a more stringent approach to their financial crime risk management. For FinTech firms, the most relevant changes may be the EDD requirements involving high-risk transactions and the need for group policies as they expand beyond their home markets. FINTRAIL has significant experience in designing and developing compliance programmes for a wide variety of companies, including market entrants or newly regulated firms, and can assist with defining risk appetite, building risk assessments, and developing proportionate and effective due diligence processes.
If you would like to discuss the issues in this post, or wider anti-financial crime topics, please feel free to get in touch with one of our team or at contact@fintrail.co.uk.