Fifth Money Laundering Directive

02.05.19

The Treasury published a consultation paper mid-April on its proposals for Transposition of the Fifth Money Laundering Directive (5MLD). Pursuant to 5MLD, the changes have to be brought into force by January 2020.

5MLD will introduce a number of significant changes to the money laundering regime; these are highlighted in the following paragraphs.

As with anything European, the impact of Brexit needs to be considered. The implementation date for 5MLD  is January 2020.For the purposes of the consultation, it is assumed that there is a Withdrawal Agreement with the EU and that 5MLD will take effect during the implementation period when UK law will reflect that of European law. However, it is also pointed out  in the consultation that 5MLD reflects much of the current approach of the UK Government anyway so it seems likely that Brexit will have no material impact.

  1. Scope

The Treasury in line with the terms of 5MLD is proposing that the scope of the anti- money laundering regime in the UK is extended.  This will mean that entities continuing business in the additional specified sectors will need to be registered and carry out client due diligence (CDD).  The proposed extension to these checks includes:-

  • Tax advisers – 5MLD extends the scope of those obliged to carry out money laundering checks (“obliged entities”)  to include any person who in the course of business provides material aid, assistance or advice about tax matters;
  • Letting agents- 5MLD extends the money laundering regime to include letting agents for property where the monthly rent equals or exceeds €10,000. As the consultation paper points out, estate agency work already falls within the scope of the current directive and the Money Laundering, Terrorist Financing  and  Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) which transpose  EU requirements into UK law, but 5MLD extends the scope more directly to those involved in letting activities only. The Treasury is looking into how it should define letting for these purposes and it may extend to include property management and rent collection.

The Treasury is consulting on which persons CDD should be carried out; landlords and tenants or landlords only, and at what point in the business relationship or transaction process the CDD should be carried out. The Treasury is also seeking views on whether the €10,000 threshold is too high and should be reduced further to cover a greater percentage of transactions;

  • Cryptoassets- 5MLD has widened the scope of obliged entities to include certain participants in the crypto markets; the Treasury is consulting on whether that should be extended even further in the UK. Under 5MLD, the scope of obliged entities has to be extended to include cryptoasset exchanges and digital wallet providers.

A cryptoasset exchange is defined for the purposes of 5MLD “as providers engaged in exchange services between crypto assets and fiat currencies”. A custodian wallet provider is defined as “an entity that provides services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies”. This means that persons engaged in these activities will in future have to carry out CDD, assess money laundering risks and report suspicious activities.

However the Treasury is considering extending the scope of the changes introduced by 5MLD so that new regulations will encompass all types of cryptoassets. This will include activities involving exchange tokens, securities tokens and utility tokens as it questions whether the definition of crypto assets produced in 5MLD is wide enough to cover all types of cryptoassets which present a money laundering risk. It is consulting on extending the range of 5MLD once implemented in the UK to include:-

  • Crypto to crypto exchange service providers;
  • Cryptoasset Automated Teller machines;
  • Issuance of new crypto assets, for example through ICOs;
  • The publication of open source software.

These proposals are based on the Treasury’s view of the risks involved in cryptoassets being used in money laundering.

  • Art intermediaries – this is another area where changes will arise as a result of 5MLD. Once transposed, it will bring within scope “persons trading or acting as intermediaries in the trade of works of art, including when this is carried out by art galleries and auction houses, where the value of the transaction or a series of linked transactions amounts to EUR 10,000 or more”. It will similarly extend the scope of regulation to art intermediaries when this is carried out by free ports, which is not a concept which currently exists in the UK. The Treasury is consulting on what exactly would be covered by the definition of art intermediary.

It is also consulting on who should be subject to CDD and when any requirements should be carried out, highlighting for example the difficulties of carrying out CCD on buyers at auctions and the fact that whether the price crosses the money laundering threshold of €10,000, may not be known when a relationship is established.

  1. Electronic Money

5MLD is proposing changes to the scope of regulation of e–money providers so that more transactions will be regulated. As the consultation paper notes, the current MLRs, based on the Fourth Money Laundering Directive, exempt obliged entities from some CDD measures in respect of transactions where the following conditions are met in relation to electronic money:  

  • the maximum amount that can be stored electronically is €250 (or if the amount is only used in UK ) €500;
  • the payment instrument is not reloadable or subject to a maximum limit of €250 per month for use in the UK only;  
  • it can only be used to purchase goods and services; 
  • the e- money wallet is loaded from an identifiable source; and
  • any redemption in cash does not exceed €100.

5MLD seeks to impose further limitations on these derogations from the requirements for CDD. Under 5MLD, all the following conditions must be met before CDD may be reduced:

  • the maximum amount that can be stored electronically will be €150;
  • the payment instrument is not reloadable or has a maximum limit on monthly payments of €150 which can only be used in that Member State;
  •  again it may only be used in payment of goods and services and may not be funded by an anonymous sources; and
  • any redemptions in cash or remote payment transactions should not exceed €50.

There will also be limits on the acceptance by financial institutions within the EU of anonymous non-EU prepaid cards; the countries of issue must impose restrictions similar to those that exist with 5MLD.

The Treasury has posed a number of questions as to whether it should adopt 5MLD as it is or adopt stricter requirements in this area.

  1. Enhanced Due Diligence (EDD)

The Treasury notes in the consultation paper that the application of EDD measures will in future operate on a more harmonised basis and 5MLD sets out a series of requirements to this effect. There will be an EU list of designated high risk countries (dealing with which triggers the requirement for enhanced due diligence) and even if the UK does leave the EU fully, there are powers in the Sanctions and Money Laundering Act 2018 to replicate these.

5MLD expands the scope of EDD requirements so that in future it must be carried out by reference to “business relationships or transactions involving high-risk third countries” rather than

 “natural persons or legal entities established in the third countries”.

The new EDD measures include the requirement to obtain additional information on:-

  • the customer and beneficial owner;
  • intended nature of the business relationship;
  • source of funds and wealth of the customer and beneficial owners;
  • rationale for transactions.

There are also requirements to carry out enhanced monitoring of any business relationship or transaction involving a high- risk third country. The consultation paper notes the distinction from the current requirement, where this is focused on transactions established in a high- risk third country.

As the consultation paper also notes, there will also be a requirement for senior management to approve the establishment or continuation of a business relationship of this nature.

The Treasury also refers to the option contained in 5MLD which allows a member state to require that the first payment involving a designated third party country, is made through a credit institution subject to CDD no less robust than that contained in 5MLD. The Treasury will not transpose this option.

Finally the Treasury notes that one or more additional mitigating measures must be implemented when carrying out transactions involving high-risk third countries, including:-

  • applying additional elements of enhanced due diligence;
  • introducing an enhanced reporting mechanism or systemic reporting for financial transactions;
  • limiting business relationships etc with high risk countries.

The Treasury notes one of the questions that it will need to address in the implementing regulations is what is meant by the term “involving” a designated third country as 5MLD does not clarify.

Although no direct changes are being adopted to the Politically Exposed Persons (PEP) regime, 5MLD imposes a requirement that the UK adopts a list of persons who qualify as a PEP. The Treasury is proposing that it adopts the current FCA Guidance as to who in the UK falls within that term.

  1. Trust Registration Service

5MLD expands the scope of the Trust Registration Service to include all trustees or agents of express UK trusts (that is, by the Treasury’s definition, a trust deliberately created by a settlor usually by a written trust deed).

The Trust Registration Service is a register maintained by HMRC which previously included details of those involved with all trusts which have a tax consequence - ie where the trust has to pay a tax such as income tax or capital gains tax. As noted above, the registration process will now extend to all express trusts. The Treasury seeks to clarify in the consultation paper what type of trust will be within scope.

Under 5MLD, the UK Government will have to disclose information held as a result of the registration process to law enforcement organisations as required under existing law. However, 5MLD also extends information sharing to:-

  • obliged entities which are now required to collect registration details at the time of entering into a business relationship with the trust;
  • other persons who can show a legitimate interest.

The Treasury would prefer that the requirement for obliged entities to seek information on a trust’s registration, should be met by the trust itself providing registration details rather than such details being made available by HMRC directly to obliged entities.

The Treasury consults at some length as to who may have a legitimate interest to request details held on the Trust Registration Service. It focuses on persons having involvement in anti- money laundering or counter- terrorist financing activity and has reason to believe the trust has some connection with such activity. The Treasury states that the UK Government will set up a process which ensures that data will only be released when this threshold is achieved.

The Treasury also sets out at some length the type of information or data that will be gathered for registration. The expected deadline for registration is proposed as 31 March 2021 for trusts in existence on 10 March 2020. If the Trust is created after 1 April 2020, it will have 30 days to register.

  1. Register of Bank Account ownership

5MLD requires the UK to establish a centralised automated mechanism which allows identification of natural or legal persons who hold or control bank accounts and payment accounts (identified by IBAN) and safe deposit accounts. 5MLD specifies the type of data set that the register must maintain and the Treasury is also consulting on what specific information would be included in these datasets.

The Treasury is proposing that the information would be submitted by credit institutions and payment institutions themselves.

However the Treasury is considering enhanced implementation. This would require the following to each submit information to the register:-

  • UK incorporated credit and payment institutions that issue credit cards;
  • e- money issuers that issue prepaid cards;
  • credit unions and building societies that issue accounts without an IBAN

The Treasury wants to weigh up the risks inherent in the use of these types of accounts and payment instruments against the costs and administrative burdens that registration would impose.

The other important area of consultation is who would be given access to this information and how this would be policed to stop unauthorised access.

  1. Other issues

Other issues covered in the consultation paper include:-

 Pooled client accounts- the Treasury is looking at how client accounts should be subject to CDD for businesses which themselves do not fall within the AML regime;

Beneficial ownership requirements – The consultation discusses the provisions under 5MLD which apply to obliged persons  in relation to conducting CDD on entities  such as companies or trusts which are  subject to  beneficial owner registration requirements. 5MLD requires that whenever an obliged person enters into a new business relationship with such a company or trust, that person must collect registration data. In the case of companies, these are subject to the recently introduced Register of Persons with Significant Control (“PSC Register”) regime and as highlighted above, trusts are subject to the Trust Registration Service.

The Treasury is proposing that under the implementing MLRs, the obligation to collect proof of registration or an excerpt of the register from the company or trust should apply before a new business relationship is initiated. The obligation will not therefore apply to existing business relationships at the time 5MLD is transposed. An obligation will fall on the trust or company to provide information, albeit the PSC information is available on a public register.

Changes to PSC regime- a mechanism is proposed to allow obliged entities to report to Companies House, any discrepancies on beneficial ownership details between information held on the PSC Register at Companies House and information that their own due diligence procedures have uncovered.

There is a lot to digest in the Treasury proposals. Once again the obligations imposed on those operating in the financial services and related industries, are likely to lead to additional regulatory and administrative burdens, so businesses should be planning how to adapt to these changes.