By Ian Petts, Client Services Director, Equiom Monaco
In April 2018 the EU passed the 5th Anti-Money Laundering Directive (5MLD). EU member states adopted the legislation in July 2018 and had until the 10 January 2020 to transpose and implement into their national laws. Trusts and similar legal arrangements were impacted by the Directive from 10 March 2020 and bank accounts and safe deposit aspects of the law will be implemented by September 2020. 2020 is therefore the first year that the laws are applied in EU Member States.
5MLD builds on the 4th Directive (4MLD) preventing the use of the European Union’s financial system for the purposes of money laundering and terrorist financing and widens its application and scope. The law is aimed at combating the use of the financial system for the funding of criminal activities, terrorist financing and the large scale obfuscation of funds along with preserving trust in the integrity of business transactions and maintaining confidence in the financial system.
Many businesses may be unexpectedly impacted by the urgent implementation of these laws by Member States, the urgency of which is a consequence of events such as the financing of terrorist activities, the Panama papers leak, the Nice and Paris Terrorist attacks and the use of prepaid cards by terrorists.
Principle of transparency as a prevention driver
The European Commission (EC) has noted that a globally interconnected financial system has contributed to the ability of criminals, money launderers and terrorists to hide and move funds around the world. Its aim is to discourage criminals from seeking shelter for their finances through non transparent structures by increasing the exchange of information between Member States and widening the scope of ‘tax matters’. As a result, unpacking corporate ownership structures and identifying beneficial owners will become easier.
Increased scope of the law
As well as existing scope under previous directives, 5MLD now includes companies involved in crypto currencies and providers of custodian wallets. In the luxury sector, art brokers, galleries, auctioneers and art storage houses are now also covered by the law. A series of linked transactions amounting to more than €10,000 are targeted in the art industry, preventing money launderers from ‘smurfing’, where money launderers use a series of smaller transactions to prevent detection by systems and observers.
5MLD has also extended real estate to include rental properties, meaning letting agents who rent luxury properties with prices above €10,000 per month are also subject to the legislation.
Professional institutes such as the Institute of Chartered Accountants England and Wales have also issued guidance to their member firms, regarding increased compliance measures to take.
Lifting the anonymity on electronic money - prepaid cards and safe deposit boxes targeted
Prepaid cards have legitimate uses and constitute a useful instrument contributing to social and financial inclusion due to their multi-currency ability. Across the EU they are used to facilitate international travel for sales personnel and operational crew and are frequently used by yacht and jet management companies. However, the success of prepaid cards has also lead them to be used by terrorists for financing terrorist attacks and managing terrorist logistics.
The new 5MLD legislation requires stricter identification of clients for prepaid cards. 5MLD lowers the threshold requirement for Client Due Diligence to a maximum monthly payment limit and storage limit. The limit drops from €250 to €150, and to €50 for cash withdrawals. The EC notes it is important to ensure that anonymous prepaid cards issued outside the EU can be used in the EU, but only where they can be considered to comply with requirements equivalent to those set out in the 5MLD. The Directive allows States to prohibit transactions if they are not satisfied that the cards meet the requirements.
KYC and transparency of information relative to beneficial owners
5MLD outlines the electronic identity verification (EIV) mechanisms that have been approved by national authorities, for example gov.uk Verify. The regulation also requires enhanced due diligence when transactions are complex, unusually large or there is an unusual pattern of transactions.
Yachts and real estate are often purchased using companies, meaning the anonymity provided by those structures may not be guaranteed. EU Financial Intelligence Units (FIUs) will be given direct access to beneficial ownership information held by firms, and co-operation and information sharing will be improved. EU states will be required to keep this data for a minimum of five years.
Trust definitions are widened to include identification on the settlor, trustee, protectors and beneficiaries as well as anyone exercising control over the trust.
Safety deposit boxes are also mentioned in the legislation requiring identification of ultimate beneficial owners (UBOs) at a national level.
The Directive specifically mentions the fundamental rights of the European Union, to respect private and family life, the protection of personal data and the freedom to conduct a business. The EU recognise that too much disclosure could expose a beneficial owner to a number of risks, for example fraud or harassment, therefore they do propose that exemptions may be possible on a case by case basis after a detailed evaluation. Similar protection is provided to minors and legally incapable persons.
Members of the public with an interest, can now have access to beneficial ownership information held in the register for corporate and other legal entities and no longer have to demonstrate legitimate interest. In order to combat criminals from accessing the data, Member States may also require payment on a cost basis and online registration to identify people who request information from the registers.