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European Parliament backs stronger rules to combat money laundering and terrorism financing

May 28th, 2015 - Posted by Mark Dunn in Anti-Bribery And Corruption

The 4MLD is primarily designed to address changes in global AML standards reflected in the revised Financial Action Task Force (FATF) Recommendations published in 2012 and also to bring greater consistency to the application of the directive across EU Member States. Among a number of changes outlined are:

Politically Exposed Persons

  • Long a requirement under AML rules due to corruption and other high risks posed by government figures, conducting PEP checks has been extended to include not just international but also domestic PEPs. FATF published guidance to support this change.
  • Former PEPs deemed to have lost that status are also to be monitored for at least 18 months afterwards as opposed to the current 12 months obligation.

Due to the risks in dealing with PEPs and their associates, for many financial institutions these changes already reflect best practice given little distinction is made between international or domestic PEPs. Also, in many cases the adopted policy is "Once a PEP, always a PEP" regardless of jurisdiction and current occupation to ensure as little exposure to ongoing risk as possible.

Beneficial Ownership

As with PEPs, identifying and verifying the identity of beneficial owners behind a company entity has also long been an AML customer due diligence requirement. However, conducting such checks has always been a challenge as few governments mandate the filing of beneficial ownership information leading to a scarcity of data in the public domain. To help tackle this issue and ultimately the abuse of corporate vehicles to facilitate tax evasion, organised crime and wider criminal activity, the proposed rules require companies to hold information on their beneficial owners:

  • This information should be made available to both competent authorities and obliged entities.
  • For legal arrangements, trustees are required to declare their status when becoming a customer and information on beneficial ownership is similarly required to be made available to competent authorities and obliged entities.
  • The 25% ownership threshold which triggers identification of the beneficial owner remains. However, further clarity is given to outline what the 25% threshold means when conducting due diligence on corporate and legal entities.

Scope of Directive

Several additional measures also amend the scope of existing legislation including:

  • Extending scope for the gaming industry from casinos to the broader gambling sector to cast the net wider
  • Including tax crimes as a predicate offence to help address tax evasion for direct and indirect taxes
  • Reducing the scope and customer due diligence thresholds for traders in high value goods from EUR 15 000 to EUR 7 500 for cash transactions

Risk-based approach

Applying a risk-based approach to meet existing AML requirements is already widely adopted by firms and is best practice for related processes such as anti-bribery & corruption. The directive provides further clarity for consistency and to encourage proportionate supervision. New "evidence-based measures" are introduced across three main areas:

  1. EU Member States will be required to identify, understand and mitigate the risks facing them through national risk assessments supplemented by specific criteria or guidance produced by European Supervisory Authorities and shared with regulated entities.
  2. Companies and other entities subject to AML compliance will also be required to identify, understand and mitigate their risks, and to document and update the assessments of risk that they undertake enabling regulators to clearly identify the approach adopted and the reasoning behind decisions taken.
  3. Through the above measures, regulators and other supervisory authorities will be able to apply a risk-based approach to supervision and better focus resources on areas of higher risk, as required, while enabling firms with a lower risk to implement processes proportionate to the size and nature of the obliged entity.

This latest version is expected to come into force by mid-2017. Publication of the new measures in the Official Journal of the EU is expected in the next couple of months after which Member States will have two years to review the steps necessary to meet the requirements of the directive.

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