Staying compliant with the Fourth Money Laundering Directive

December 11, 2015 by Mark Dunn

Countries and businesses across the European Union (EU) have two years to implement new rules around money laundering, after a directive passed its final legislative stage in the European Parliament.

The Fourth Money Laundering Directive replaces the Third Money Laundering Directive and became effective from June 26th, with countries required to integrate the new rules into national law by 2017.  EU member countries will be required to maintain a register detailing the ultimate beneficial ownership of all the companies and other legal entities, including trusts, within their jurisdiction. A key component of the new law is that the registers will be open and searchable to regulators and other organisations such as banks and auditors.  Other entities – including journalists and news organisations – will be able to see the information held within the registers, but will be required to demonstrate their interest is legitimate before being granted access.

Staying compliant with the directive

A major tightening of money laundering regulations included in the directive is the requirement for businesses to implement new customer due diligence checks and rules forcing them to report any suspicious transactions, as well as maintaining full payment records.  Firms will also have to implement internal controls that combat money laundering and activities which could indirectly provide finance to terrorist networks.

The new directive shifts the basis of the law from a reactive to a more proactive approach, by forcing companies to demonstrate that they are properly assessing the risks they face and they have adequate resources in place to offset them.  National regulatory authorities do not escape the reach of the directive; while individual companies will be held to account over decisions they make under the new risk-based approach, countries will also have to carry out risk assessments of the issues that they face and implement measures to offset them.

Companies that fail to adhere to the rules of the directive could potentially face significant fines.  The directive introduces a new maximum fine of one million euros, or a fine that is at least twice the amount of the value an organisation is assessed to have received from the breach if it would be greater.  Furthermore, a maximum fine of five million euros or ten per cent of annual turnover can be levied on legal entities, with a fine of at least five million euros for individuals.

Beneficial ownership rule tightening

The directive is the latest round of rule tightening around ultimate beneficial ownership, and several national parliaments have already passed legislation requiring companies to declare their ultimate ownership information. Transparency International recently highlighted Britain's efforts to clamp down on shell companies with amendments to the Companies Act, but although it is becoming increasingly difficult to hide company ownership when trading within Europe, the use of entities registered in territories abroad is still a matter of concern.  Transparency International highlighted the use of entities registered in Britain's Overseas Territories as of particular concern.

The new European rules do, however, go some way to tackling this, with requirements on firms to implement them both at branch level and in majority-owned subsidiaries in member states and third countries.  Meanwhile changes to cross-border cooperation mean that financial intelligence across national boundaries will be reinforced.

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