Anti-Money Laundering  enters the Fourth Age

comment - 07 October 2015

Anti-Money Laundering enters the Fourth Age

The Fourth Directive must be transposed by Member States by 26 June 2017 and will introduce strict new controls over the investment funds sector.

This change will not only impact new funds, but also existing funds as AML materials collected from investors come up for renewal and managers and investors alike will need to develop a strategy for managing the on-going disclosure process.

Everyone in the investment funds industry should be familiar with the key regulatory requirements of the Third Directive, namely, verifying the ownership and control of investors on a look-through and risk-weighted basis, identifying the source of monies and / or wealth where circumstances dictate and revalidating any information supplied periodically. The importance of these AML requirements in safeguarding the financial system from facilitating money laundering and terrorist financing is critical and regulators have become increasingly strict in policing their application. The Fourth Directive will now introduce a number of important changes.  

Registering the Ultimate Beneficial Owner: The Fourth Directive introduces new measures to increase transparency by requiring companies, at national level, to hold information about their UBO and to make such information available to third parties via a public register. The purpose of these measures is to create publicly accessible, interconnected UBO registers for companies.

Definition of Beneficial Owner: The definition of UBO from the Third Directive has been retained, but revised clarification is given as to how such persons are to be identified: “a percentage of 25% plus one share, which shall be evidence of ownership or control through shareholding and applied to every level of direct and indirect ownership.” The Fourth Directive further states, “the natural person(s) who exercises control over the management of a legal entity through other means will be deemed the beneficial owner”. If there is still doubt as to who the UBO is, the Fourth Directive provides a third strand: “the natural person(s) who holds the position of senior managing official(s)” will be deemed the UBO. Trusts are not obliged to provide information on beneficiaries as part of a public register, even though information on the settlor, the trustee, the protector (if any), the beneficiaries and any other natural person exercising effective control over the trust must be obtained by trustees and competent authorities and financial intelligence units may gain access to this information.

Specific Responsibility of Senior Management: Senior management must take responsibility for the policies and procedures they put in place to monitor money laundering activities. Senior management is defined in the Fourth Directive as “an officer or employee with sufficient knowledge of the institution’s money laundering and terrorist financing risk exposure and sufficient seniority to take decision affecting its risk exposure, and need not, in all cases, be a member of the board of directors.”

Increased Sanctions for Non-Compliance: The Fourth Directive sets out various sanctions that Member States should apply when firms systematically breach key requirements, such as customer due-diligence, record-keeping, suspicious-transaction reporting and internal controls. In respect of financial institutions, examples of penalties are public reprimands, withdrawal of authorisation, fines of up to 10% of the total annual turnover of a legal person in the preceding business year, fines for individuals of up to EUR 5 million, or fines of up to twice the amount of the benefit derived from the breach, where that benefit can be determined.

New Requirement of Written Risk Assessments: Firms are required to have policies, procedures and controls in place to mitigate and manage effectively the risks of money laundering and terrorist funding. Article 8 requires obliged entities to document and keep up-to-date risk-assessment policies, procedures and controls. 

Simplified Due Diligence will be Individually Assessed: The Fourth Directive has removed the automatic right to use Simplified Due Diligence (SDD) when obliged entities deal with specified customers and products. However under Article 15, firms may be able to apply SDD if they are convinced that the relationship or transaction offers a lower degree of risk. Relevant risk factors are set out in Annex II and include customer risk factors, product, services, transaction or delivery channel risk factors and geographical risk factors. Article 17 provides that guidelines on the risk factors will be issued to competent authorities, credit institutions and financial institutions.

Broadening the Scope of Enhanced Due Diligence: Firms are obliged under the Fourth Directive to undertake Enhanced Due Diligence (EDD) when dealing with companies in selected “high-risk” countries. When considering the risk of money laundering and terrorist financing, firms are required to take into account the factors set out in Annex III. These include customer risk factors, namely; product, services, transaction or delivery channel risk factors and geographical risk factors.

Politically Exposed Persons: Article 20 extends the Politically Exposed Persons (PEP) definition to domestic PEPs. The Fourth Directive requires EDD to be applied for 18 months (as opposed to 12 months under the Third Directive) after the individual leaves office. Under the Fourth Directive, PEPs are a key anti-money laundering consideration and businesses need to ensure they can identify domestic PEPs and put place correct EDD requirements for such clients.

There is no doubt that the Fourth Directive will increase pressure on firms and senior management to ensure ever stricter policing of investors and professional investors should be prepared for this and develop a strategy for managing disclosure. This is because firms will have little scope to accommodate commercial sensitivities and could be forced to increasingly reject investors or withhold distributions where records are incomplete.

 

previous comment / Rylee Muddle

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