HM Treasury has published its consultation paper on the transposition of the Fourth Money Laundering Directive (4MLD). 4MLD entered into force on 25 June 2015 and it will repeal and replace the Third Money Laundering Directive (3MLD). All EU Member States have two years to transpose the requirements of 4MLD into national law (although the European Commission has published an amendment proposal which, if approved, would bring forward the transposition date to 1 January 2017).
Background to the 4MLD and key changes from the 3MLD
4MLD aims to further strengthen the integrity, stability and reputation of the financial sector as well as the EU’s defences against money laundering, terrorist financing and organised crime. It also ensures that the EU system remains aligned to the Financial Action Task Force’s (FATF) anti-money
laundering and counter-terrorist financing standards (which are the internationally recognised standards and which were adopted by the FATF in February 2012).
Some of the key changes from the 3MLD:
- E-money limits: Member States may (by derogation) dissapply the customer due diligence obligations in respect of low value e-money products that fall below certain value limits. These limits have been significantly reduced from those in 3MLD.
- Enhanced due diligence (EDD): 4MLD specifies certain high-risk situations (for example where customers are based in high risk third countries) where EDD must be applied. However, in relation to other high risk factors, 4MLD adopts a less prescriptive, risk-based approach that puts the onus for determining the appropriate level of due diligence on the obliged entity.
- Simplified due diligence (SDD): 4MLD does not specify particular product or customer categories that are automatically eligible for SDD. As with EDD, decisions on when and how to carry out SDD are to be made by the obliged entity, and must be based on the level of risk presented.
- Beneficial ownership and ownership directories: whilst the threshold for beneficial ownership will stay the same (i.e. those controlling more than 25 per cent of a business), companies will have to maintain records evidencing beneficial ownership. Member States will be required to ensure that such information is stored in a central database which is available to competent authorities and financial intelligence units.
- Politically Exposed Persons (PEPs): 4MLD broadens the scope of requirements in relation to PEPs so that there is no longer any distinction between a domestic and foreign PEP. Entities will be required to apply EDD measures to a wider scope of PEPs, as well as to family members and persons known to be close associates of PEPs.
Amendment to 4MLD following recent events
Following the series of recent terrorist attacks in the EU and the leak of the ‘Panama Papers’, Member States agreed to revisit some areas of 4MLD to strengthen the fight against organised crime, corruption and anti-money laundering. The European Commission adopted a proposal in July 2016 to amend the current framework of 4MLD (which includes further tackling the use of prepaid instruments and improving access to beneficial ownership information).
The key amendment measure, however, is the proposed early transposition date of 4MLD. This would require Member States to transpose both 4MLD and the amendments into national law by 1 January 2017. In its European Memorandum (dated 5 September 2016), HM Treasury stated that a large number of Member States had expressed concerns at the timetable and that it may be liable to change. Given that the amendments are still at a proposal stage, this seems reasonably likely.
The consultation invites views and evidence to inform government transposition of the 4MLD and the Fund Transfer Regulation (Regulation (EU) 2015/847, on a total of 87 questions across the various topics covered by the legislation. The consultation addresses 4MLD as originally adopted and
mentions, but does not specifically ask any questions in relation to the amendment proposal (although views are welcomed ‘where relevant’), instead assuming that compliance must begin on the original 4MLD deadline date of 26 June 2017.
The government is keen to ensure that a fair and proportionate approach is adopted. The consultation will play a key role in deciding the best way to transpose 4MLD into UK law in a way that appropriately balances the need for businesses to actively discourage money laundering and terrorist financing whilst considering the potential costs of the proposals for those affected.
The consultation confirms that the government intends to create Money Laundering and Transfer of Funds (Information on the Payer) Regulations 2017 in order to transpose 4MLD and the new Fund Transfer Regulation into UK law (the latter accompanies 4MLD and will come into force alongside 4MLD in all Member States). The proposed 2017 Regulations will revoke the Money Laundering Regulations 2007 and the Transfer of Funds Regulation 2007.
The consultation closes on 10 November 2016 and can be found here.