On the 19th of June 2018, the European Parliament and the Council of the European Union (EU) agreed on the scope of the 5th Anti-Money Laundering Directive.1 With the enforcement date of January 10, 2020 passed, the EU member states are required to identify, understand and mitigate the risks relating to money laundering and terrorist financing.2 Recent terror attacks bring to light emerging risk trends, as well as highlighting new and innovative ways of funding sophisticated and illicit operations.
This blog post summarises key changes as a result of the 5AML Directive and the potential impact to banks and financial institutions.
What is the 5AML Directive?
This new Directive introduces changes to the 4th Money Laundering Directive, further-preventing financial systems from being exploited for money laundering and terrorist financing. These changes and new provisions should strengthen and enrich the existing preventative framework, whilst encouraging European countries to adhere to international standards set by the Financial Action Task Force (FATF).
Additions to Obliged Entities
The Directive has broadened the scope of review to include virtual currencies and fiat currencies as well as custodian wallet providers and art traders. This means that additional organisations are required to implement robust Anti-Money Laundering (AML) policies in these areas. Organisations that are already compliant with the previous directive, are now required to carry out a further risk assessment of entities that transact within these categories.3
Any existing issues around high volume of false positives (e.g. transaction monitoring) may be exacerbated by the extension of the obliged entities list. The large volume of false positives created can be managed by taking a risk-based approach. Benchmarking of data, recalibrating risk settings and deploying solutions to reduce the level of false positives can help firms improve their operational effectiveness and customer experience. Training is also key for staff in both the risk and operations areas on this topic.
FIU’s and Information Sharing
The Directive recognises that information sharing between Financial Intelligence Units (FIUs) is vital to fighting money laundering and terrorist financing. It is proposed that member states maintain registers of beneficial owners of corporate and other legal entities.4 These registers should be accessible in an immediate and unfiltered manner to national FIUs. As an example, the UK has created a register of Persons of Significant Control and provided guidance for companies and their obligations in maintaining record details of their beneficial ownership structure.5
This means that FIUs could invest in innovative technology using data-driven and network analytics solutions. Such solutions can provide an entity with a ‘resolved’ view of a customer that can be collaboratively verified and accessible in a timely manner. This provision in the Directive should expand the scope of data sources that can be leveraged by financial institutions to manage their risk and gives FIUs the authority to obtain this information even if a Suspicious Activity Report has not been filed.
The Directive champions the use of digital identity and electronic verification in the customer onboarding process and mandates that electronic verification should be used wherever possible.6 As a result, financial services firms can now invest in technological infrastructure to develop transformation roadmaps from traditional physical identification and verification methods to digitally verify identity.
Politically Exposed Persons (PEPs)
To introduce consistency in the treatment of PEPs, the European Commission aims to compile and publish a single list of all prominent public functions, gathered from lists provided by member states.7 Professional PEP List Providers should make it easier for consumers to communicate directly with research teams to offer feedback and subsequently, banks should expect to receive list updates in a timelier manner. Innovative technologies such as Entity Resolution, Network Generation and Advanced Analytics could be leveraged to show PEP associates and linked entities.
The new Directive requires customer due diligence to be expanded to identify holders of pre-paid cards at a reduced threshold of €150 and any remote payment transactions over €50.8
Hence, financial services firms may need to perform a recalibration of their payment systems to allow the new thresholds to trigger customer due diligence measures. In addition, an operational capacity planning assessment may be required to review impacts on process changes, employee workloads, reporting and training.
Enhanced Due Diligence in High Risk Jurisdictions
The Directive attempts to create a common interpretation of the measures to be adopted when conducting enhanced due diligence for an individual/entity associated with a high-risk jurisdiction.
This should reduce the need for local interpretation, which can be variable and result in inconsistent levels of compliance. Knowledge of regional information sources and ability to conduct checks in languages other than English is essential when dealing with overseas entities. Impacted financial entities should work with specialists who know the local market and its intricacies to help uncover insightful information.
The 5AML Directive is moving towards greater transparency and with a focus on technology as a response to the ever-changing landscape of terrorist financing, evolving cyber risks and escalating financial crime. Organisations should not be myopic to this existential threat and should take steps to prepare their AML ecosystem to avoid non-compliance through technology enhancements, alert fatigue and organisational planning. Ultimately, organisations should protect their respective businesses from wider and illicit threats that pervade today’s financial space.
For more information on the topic, please contact us:
- “Directives (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018,” Official Journal of the European Union, June 19, 2018. Access at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L0843&from=EN
- “‘People with Significant Control’ Companies House register goes live,” Gov.UK, June 30, 2016. Access at: https://www.gov.uk/government/news/people-with-significant-control-companies-house-register-goes-live.
- “Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018,” Official Journal of the European Union, June 19, 2018. Access at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L0843&from=EN.
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