The 5th EU Anti Money Laundering Directive: A Far Reaching Legal Document

Updated: Sep 20

The Fifth European Union Anti Money Laundering Directive (5th EU AML Directive) on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing has been adopted by the European Parliament on Tuesday 19th of June 2018, with member states having 18 months from publication to incorporate it in national law.


Introduction

The Fifth European Union Anti Money Laundering Directive (5th EU AML Directive) on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing has been adopted by the European Parliament on Tuesday 19th of June 2018, with member states having 18 months from publication to incorporate it in national law.

This Directive has come to replace the 4th EU AML Directive, which was one of the most extensive AML/CTF legal documents that had brought forth substantial changes in how obliged entities ought to identify, assess, understand and mitigate AML/CTF risks.

By the time the 4th AML Directive was issued, the essence of battling Money Laundering and Terrorist financing had dramatically changed with a number of money laundering scandals being brought to the surface such as Panama Papers, Luxembourg Leaks, Paradise Papers, Bahama Leaks and the list goes on. Recent years have shown that jurisdictions are becoming more aware of the risks of money laundering and have united to build more substantial counter measures.


These scandals have allowed officials to acquire an in-depth knowledge into how the international monetary frameworks can be abused and, thus, discover better approaches and devise new procedures to mitigate AML.CTF risks.

The 5th EU AML Directive while it seems as less extensive than its predecessor, with only a series of amendments focused on transparency and direct access to information nonetheless its impact is far reaching.

The most important modifications made through the adoption of the 5th AML Directive affect the areas of virtual currency, beneficial ownership, prepaid cards and enhanced due diligence along with other noteworthy alterations which we try, for your benefit, to outline in more detail below.


Virtual Currency

Since virtual currency is all the rage for some time now, the EU is trying to regulate these cryptocurrencies and apply checks and control to both virtual currency service providers as well as electronic wallet providers to tackle their inherent risks.

Cryptocurrencies including Bitcoin, Etherium, BitcoinCash and many more have raised problems in regards to the prevention of money laundering and have been shown to be widely exposed to financial crime. The anonymity of virtual currencies enabled criminals to move funds cross border without Suspicious Transaction Reports (STRs) being generated.

In order to better regulate transactions of virtual currencies the 5th EU AML Directive has introduced Cryptocurrency exchanges and custodian wallets as obliged entities and will therefore have to carry out all checks and monitoring that any other obliged entity has carried out in the 4th AML Directive (CDD, Ongoing Monitoring, Report Suspicious activity etc.)


Beneficial Ownership

In the 4th EU AML Directive a system of central registers was introduced to store information of beneficial ownership of legal entities within the EU on a national level by each member state.

Arguably the main focus of this directive is greater transparency and direct access to information. Therefore the 5th EU AML Directive with the aim to allow greater public scrutiny, it has introduced a scheme to allow public access to the information stored within these public registers. This means that the general EU public will be granted access to beneficial ownership information such as name, date of birth, country of residence and nationality. Each member state shall decide on a national level whether additional information will be made publicly available.

The 5th EU AML Directive also expands this scope to include trusts and other similar legal arrangements with the additional requirement that the information will be accessible to any “natural or legal person who can demonstrate a legitimate interest”. What is this legitimate interest and how this is demonstrated remains to be seen.

It is expected that public access to these records will help prevent the misuse of legal entities for money laundering and terrorist financing purposes.


Prepaid Cards

Prepaid Cards have been linked with terrorist financing in recent years due to the lack of access in traditional banking. The 4th EU AML Directive first tackled the risks of prepaid cards by setting a 250Euro threshold. To further reduce financial crime the 5th EU AML Directive has now lowered the threshold for transactions on such instruments at 150Euro per month.

Identification and verification of the prepaid card holders will need to be carried for any transaction over 150Euro. Furthermore, anonymous prepaid cards issued outside of EU can be used only where they can be considered compliant to standards set out in the 5th AMLD.


Enhance Due Diligence (EDD)

The 4th EU AML Directive allowed member states to determine their own level of EDD measures towards high risk third countries.

With the introduction of the 5th EU AML Directive a standardized treatment and measures will be implemented on EU level in dealing with high risk third countries. Enhanced due diligence measures to be applied require obligated entities to obtain additional information on the customer and the beneficial owner; on the intended nature of the business relationship; on the source of funds and wealth of both customer and beneficial owner and on the reason for transaction that is about to be performed. Furthermore, senior management’s approval should be obtained in order to establish or continue the business relationship

Cyprus

EU governments and lawmakers agreed on the new rules three years ago and then formally adopted them, as aforementioned, in 2018 with a deadline of transposition into local law by 10th of January 2020. However, Cyprus, Hungary, the Netherlands, Portugal, Romania, Slovakia, Slovenia and Spain have not yet turned them into national laws.

Legislative gaps occurring in one Member State have an impact on the EU as a whole and for this failure letters of formal notice have been sent to the aforementioned jurisdictions, including Cyprus, by the European Commission (EC). That was the first corrective measure taken by the EC and if non-compliance would persist that could have led to fines or other disciplinary measures.

Very recently Cyprus has received a final warning letter by the EC and is set to align its national legislation with the 5th EU AML Directive ASAP.


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