Preparing for 4MLD

The Fourth Money Laundering Directive (4MLD) is designed to provide a robust framework to tackle money laundering and terrorist financing.

The UK has until 26 June 2017 to transpose 4MLD into national law, but this already sanguine timescale has been thrown into disarray by the European Commission’s proposal to expedite the deadline to 1 January 2017. This acceleration has disgruntled national authorities which – in conducting consultation on how best to balance strong AML safeguards with minimising any bureaucratic burdens on businesses – are already behind schedule. As a result, HM Treasury has indicated that, even if agreed upon, this new deadline is unlikely to be met.

The directive has been generally ill received, no doubt because the proposed changes will have a cascading effect on firms’ AML systems and controls. Firms are most likely to feel the effect of these legislative ripples in two key areas. First, the definition of politically exposed persons (PEPs) has been expanded to include domestic PEPs, requiring firms to update their enhanced due diligence toolkits. Second, member states will be required to keep information pertaining to beneficial ownership on a central register, and the onus to identify and provide contemporaneous information will be on firms. The UK has ‘gold-plated’ this development, launching a register of persons with significant control in April 2016.

There are, additionally, several thematic developments that transcend the new money laundering legislation.

Black list

The previous money laundering directive sought to identify jurisdictions that had ‘equivalent’ AML regimes to those of the EU and put them on a white list. UK firms could, for example, rely on due diligence reports produced by entities based in white-listed companies.

The new directive moves away from equivalence and produces a black list (also known as Commission Delegated Regulation (EU) 2016/1675), which names and shames countries that have strategic deficiencies in their national AML regimes. Countries not on this list are not automatically safe, but must be assessed by UK firms on a risk-sensitive basis.

Risk-based approach

The aim of 4MLD is to synchronise the EU’s AML regime with the Financial Action Task Force’s (FATF) 2012 revised recommendations, which are, in short, global standards promoting the implementation of a risk-based approach to combat money laundering. As a member of the FATF, the UK has already incorporated these recommendations into national law to meet those standards.

In some cases – such as scope, beneficial ownership, and sanctions – 4MLD goes beyond the FATF recommendations, but continues to echo that a risk-based approach is fundamental. As such, 4MLD is deliberately less prescriptive, so as to allow member states and obliged entities to apply preventative tools that correspond to risks particular to them. On a macro level, member states can, for example, carve out certain gambling entities from the scope of 4MLD. On a micro level, firms must have policies, controls, and procedures in place to mitigate and manage AML risks. The practical application of such a regime is unclear, and will remain so until guidance is issued by the European Supervisory Authorities and the Joint Money Laundering Steering Group.

Digital threats

The increased reliance criminals now place on technology, exemplified by recent terrorist attacks and the Mossack Fonseca leak in Panama, has resulted in member states seeking to further strengthen the AML regime. A new directive, pre-emptively named 5MLD, was proposed to bring virtual currency exchange platforms and custodian wallet providers within the scope of 4MLD. The European Banking Authority and the European Central Bank have welcomed this proposal because, as it stands, criminals are able to transfer money within virtual platforms with a degree of anonymity.

Brexit effect

However it happens, Brexit will have a negligible effect on our AML regime. First, despite the vote, transposition of 4MLD is mandatory. Once outside the bloc, the UK is unlikely to unravel all this AML regulation in its Great Repeal exercise, especially while seeking to retain equivalence with EU standards.

Second, a continuation of our current AML regime will ensure the UK remains compliant with FATF standards. The political will of the UK is to avoid being classified as a high-risk or non-cooperative jurisdiction in its next mutual evaluation and it has indicated in its action plan that working with the FATF is a pivotal AML priority. Third, money laundering is a global problem and demands a holistic approach. The new directive imposes obligations on member states, financial intelligence units, and firms to co-operate on a supranational level and the FATF encourages countries to have in place treaties and arrangements to enhance co-operation. The UK is therefore likely to continue to co-ordinate its AML systems with those of the EU, even when it loses its status as a member state.

Trudy Dargeviciute is a trainee solicitor at Pinsent Masons

@PinsentMasons www.pinsentmasons.com