The insolvency profession has now largely got to grips with the provisions of the Money Laundering Regulations 2017 (MLRs) and implementing the Fourth Money Laundering Directive (4MLD) into UK law on 26 June 2017. But are we sufficiently prepared for yet another set of AML changes (5MLD) that are just around the corner? What do you need to do as an IP to prepare? Insolvency Support Services director Alison Curry sets out the issues.
In February 2016 (before it was even enacted) EU Member States agreed to revisit some areas of 4MLD, in light of revelations from the Panama Papers. This resulted in the 2018 Fifth Money Laundering Directive (5MLD), which the UK is committed to enacting into UK law by 10 January 2020, irrespective of any Brexit outcome.
Although the HM Treasury 5MLD consultation closed on 10 June 2019, at the time of writing, the outcome of that consultation is yet to be published, and the precise terms of implementation are far from fully crystalized. Given the general election, it’s clear that firms will have a very limited window to implement any necessary changes to their internal AML policies and procedures.
So how can we prepare?
Some changes are reasonably certain: the categories of AML-regulated business are to be extended; there must be greater transparency around beneficial ownership; express provision will be made for the risks presented by virtual assets (or cryptoassets) and enhanced due diligence (EDD) measures will need to be conducted more broadly where transactions involve high risk third countries. Some basic preparation can therefore be made in light of these known quantities.
5MLD mandates that electronic verification should be used wherever possible in the customer on-boarding process and firms will need to migrate from traditional physical identification procedures.
There will be increased expectations to conduct enhanced due diligence to assess business relationships and transactions involving high risk third countries. A good starting point will be to ensure staff access the ever-changing Financial Action Task Force (FATF) and EU High Risk lists online, rather than referring to downloaded lists that may not be current.
Member states will be required to develop public ownership registers and the UK has already implemented the Persons with Significant Control register. However, internal policies for identifying ultimate beneficial owners should be reviewed and robustly applied, particularly when dealing with high risk third countries or jurisdictions where there is a lack of transparency.
Member states must keep an up-to-date list of the exact functions that render an individual to be a Politically Exposed Person (PEP) and the prominent functions of any international organisations they host. This should make PEP identification simpler, provided that your service provider is working from current data. Remember also that PEP lists may not be available for countries outside the EU.
Expanded categories of regulated persons
The implementation of 5MLD will bring within the AML regime tax advisers, letting agents (where the monthly rent is €10k or more) and art dealers (when transacting in sums over €10k). These persons (legal or natural) will be conducting regulated activities and obligated to conduct Customer Due Diligence. 5MLD also ensures that all estate agency, book-keeping, accountancy and legal professionals across the EU are subject to regulation (which has been the case in the UK for some time). UK IPs will need to consider the risks presented in dealing with the insolvency of such businesses and any concerns about that business’s AML compliance.
Virtual assets and virtual asset service providers
5MLD will extend to virtual asset service providers, who will become regulated entities over whom the Financial Conduct Authority will assume supervisory responsibility. The regulations will also cover transacting in virtual assets.
However, combating money laundering and terrorist financing activity is a fast-paced global activity and whilst the UK is occupied in responding to incoming EU legislation, global bodies are busily publishing guidelines that render EU Directives potentially out-of-date before they are even enacted domestically.
On 21 June 2019, the FATF updated its recommendations for the application of its globally applicable standards to virtual asset activities and service providers, and the HM Treasury consultation posed the question whether the EU’s 5MLD definitions were sufficiently broad in the light of various more recent recommendations. Even the language has shifted from “virtual assets” to “cryptoassets”.
While there remains some uncertainty as to the precise form the new UK regulations will take, it is apparent that this sector and transactions involving cryptoassets will be formally classified as “high risk”. Your internal transactional risk assessments will need to be amended accordingly and staff made aware that this is red flag area. CDD of counterparties to cryptoassets transactions will be required and insolvent entities who have been transacting in cryptoassets will warrant closer scrutiny. The FATF updated guidance for a risk-based approach to virtual asset services providers and transaction will be a “must-read” for your MLRO.
Need help? Insolvency Support Services provide tailored training solutions for insolvency firms in AML and other key compliance areas. Contact us at firstname.lastname@example.org to discuss your firm’s requirements.