Private Equity Administrators discusses the key impacts to the proposed Fourth European Anti-Money Laundering Directive (4th EAMLD)

We will just be recovering from the AIFMD rollercoaster when the time limits will be up for transposing the final text of the 4th EAMLD into UK law.

As AML resourcing and cost constraints continue to be at the top of senior management’s agendas, recipients of the 4th EAMLD would probably welcome the ability to focus resources where the risks were considered the highest. Echoing the Financial Action Task Force (FATF) recommendations, regulated activities will see an increased emphasis on the use of ‘risk based’ approaches. Firms will welcome the time savings for staff by simplifying procedures for low risk clients and organisations.

In a nutshell here are the main talking points of the proposed 4th EAMLD in some easily digestible bullets!

Risk Based Approach

When your organisation is assessing client suitability there will be an Increased emphasis on the use of the ‘risk based’ approach, echoing the Financial Action Task Force (FATF) recommendations to use a risk assessment to classify a client as being low or high risk to your organisation, and therefore understanding when simplified or enhanced due diligence needs to be applied.

The key differences are:

  • Member states will need to carry out a national level risk assessment.
  • Regulatory authorities will need to review and understand the decisions taken by their regulated sectors.
  • Regulated businesses will be asked for documented and updated risk assessments showing the identification, understanding and mitigation of the risks they undertake.
  • High or low risk clients will be defined through a series of risk factors e.g. customer, product, service, transaction, delivery channel and geographical risk, therefore, allowing resources to concentrate on areas where high risk is prevalent.
  • While Tax crimes are already defined as a predicate offence in the UK, the adoption of this by other member states will provide a more level playing field in which to conduct business. Your organisation should ensure your policies and procedures will identify tax crimes.
  • The rules regarding the identification of beneficial owners have changed. Under the existing rules if there are no beneficial owners that own or control 25% of the shares, voting rights, capital or profits then an individual who otherwise exercises control of the management of the body or trust can be identified, such as a dominant shareholder that directs activities. However the new rules have adjusted this so that a senior manager could be identified instead if no ultimate owner or controller can be found, and this would be sufficient for an organisation to meet its obligations.
  • Politically exposed persons (PEPs) will be divided into two categories:
    • ‘Domestic PEPs include PEPs within the European Union.
    • Foreign PEPs include PEPs from a third country.
    • The UK AML regime will include all UK PEPs.
    • The 4th EAMLD also proposes the development of a list of domestic PEPs for use by obliged entities. While useful, such a list is questioned as to its reliability and further verification of this information would probably still be required.
    • The introduction of public registries of beneficial ownership information for both companies and trusts throughout Europe is potentially a welcome development for regulated businesses, however, the ability for these registries to provide real-time accuracy is in question and the controversial nature of the access to trust information is still to gain support.
    • The most significant change and one which we have discussed before is the introduction of minimum sanctions that Member States should ensure are available for systematic breaches of the key requirements, namely client due diligence, record keeping, and suspicious activity reporting and internal controls. Public ‘naming and shaming’, removal of regulatory licences, and fines up to 10% of total annual turnover or a €5 million fine.

If you require further support with your AML undertakings, feel free to call James in Guernsey or Peter in Denmark:

James Orrick / +44 1481 730988 / jo@peadm.com

Peter Toyberg / +45 70 20 40 61 / pt@peadm.com

Further reading:

HMRC http://webarchive.nationalarchives.gov.uk/+/http://www.hmrc.gov.uk/news/mld-fourth.htm

AL GOODBODY http://www.algoodbody.ie/insightspublications/Proposal_for_a_Fourth_Money_Laundering_Directive_Overview

BDO http://www.hedgethink.com/regulation/fourth-european-anti-money-laundering-directive-mean-hedge-fund-regulation/

EUROPEAN PARLIAMENT http://www.europarl.europa.eu/news/en/news-room/content/20140307IPR38110/html/Parliament-toughens-up-anti-money-laundering-rules

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