It's true to say that regulatory change waits for no firm.
Firms may have only recently factored in the EU's fourth money laundering directive (4MLD) into their practices, but it's now time to get ready for the next iteration, the fifth money laundering directive (5MLD).
Last month the UK government published a consultation paper on its proposal to enact 5MLD into UK law, and has invited the financial services industry to respond.
EU member states (including, as things stand, the UK) have until January 2020 to implement 5MLD into law.
As with everything Brexit related, whether the UK enacts the changes is dependent on the terms of any Brexit deal. But as the UK was a key driver in drafting the 5MLD rules, even if we leave the EU without a deal it's likely we'll still make the relevant changes to UK law.
The 4MLD introduced a number of wide-reaching changes to how a business approaches anti-money laundering. These included:
- The removal of automatic entitlement to apply 'simplified due diligence' on customers.
- Expansion of the risk-based approach to due diligence.
- The definition of a politically exposed person (PEP) being amended to include domestic PEPs, such as UK Members of Parliament.
- Traders in high value goods must carry out customer due diligence when dealing with cash transactions of €10,000 (or its sterling equivalent) or more.
Thankfully, the changes proposed in the 5MLD are not as extensive or as far-reaching as its predecessor.
What are the key changes?
Previously, money laundering regulations have mainly applied to firms such as banks, building societies, money service businesses and brokers.
5MLD brings other types of business into scope such as letting agents and art dealers, and perhaps crucially, tax advisers. (More on this later.)
The key changes from 4MLD are:
- Firms will be able to rely on electronic identification tools to complete customer due diligence.
- The introduction of an FCA national bank account register. This will be accessible by law enforcement authorities within the UK and EU member states.
- A clarification of what high-profile public functions meet the definition of a PEP.
- Tighter controls relating to firms carrying out business or opening subsidiaries in high risk countries.
- Increased transparency relating to the actual beneficial owner of a company.
- The use of anonymous safety deposit boxes will no longer be permitted.
- Customers wishing to purchase gift cards and other prepaid products with a value of more than €150 will be subject to due diligence.
Here's a more detailed summary of the changes that are likely to apply to financial planners, and the kind of issues you should be considering.
Customer due diligence
As you'll be aware, the identification and verification of clients must be based on documents from a reliable and independent source, that is, a copy of a driving licence, bank statements, council tax bills etc.
The 5MLD proposes that, where available, a firm should also consider electronic means of identification, as long as the supplier has been approved by the UK government.
For firms this will increase the number of options available to them to verify an applicant’s identity and is likely to lead to a shift in how we approach due diligence in the longer term.
With a view to cracking down on criminals disguising their illicit funds through businesses, 5MLD puts additional pressure on firms to identify the beneficial owners of firms with whom they are doing business with. A record of this needs to be held centrally and maintained.
As part of this, it's proposed that where a significant money laundering or tax evasion risk is identified, the threshold for identifying beneficial ownership of a business may be reduced from 25 per cent controlling ownership or voting rights to 10 per cent.
5MLD also introduces public access to these registers, which will increase scrutiny and potential reputational damage if businesses get it wrong.
Politically exposed persons (PEPs)
Following the 4MLD, the FCA published guidance on PEPs and how regulated firms should approach them.
The regulator says firms should take a case-by-case approach when identifying and applying enhanced due diligence to PEPs. The guidance also confirms UK PEPs should be treated as low risk, unless a firm has identified other issues which mean a PEP poses a higher risk to the firm.
As part of its consultation, the government is asking the financial services industry if the FCA’s guidance document is adequate. It is also asking whether the proposals relating to intergovernmental organisations with head offices in the UK are acceptable.
Should you provide services for domestic or international PEPs, you may wish to review the FCA’s guidance and respond to the consultation with any concerns.
As mentioned earlier, the definition of 'tax adviser' covers firms and sole practitioners who provide, directly or with others, assistance or advice on tax affairs.
If your firm gives tax advice, you may want to respond to the consultation setting out what the potential impact would be to you and your business if this definition is enacted.
Getting it wrong and next steps
Failure to comply with the 5MLD and the consequences are far-reaching:
- Fines of up to €5m or 10 per cent of total annual turnover, whichever is greater.
- Managers involved can be prevented from running a regulated business.
- The firm itself can be prevented from trading.
- A public statement of any breach will be issued, which could result in reputational damage.
The government's consultation closes on 10 June, and the deadline for member states to enact 5MLD is 10 January.
The regulatory focus on anti-money laundering isn't going away any time soon - in its business plan for 2019/20 the FCA has said it will be focusing its efforts on tackling financial crime.
And if the fifth version wasn't enough to contend with, there are already plans in the pipeline for the 6MLD, with a draft published by the EU. Watch this space…