Immediate action required to meet new AML legislation

At the end of last year, the Government introduced the Fifth EU Money Laundering Directive (5MLD), which will come into force on 10 January 2020.

As part of the ‘The Money Laundering and Terrorist Financing (Amendment) Regulations 2019’, the new regulations update the UK’s Anti-money laundering (AML) administration and will integrate international standards set by the Financial Action Task Force (FATF).

While this is an amendment to existing legislation, the new directive will require instant action from businesses operating in the financial services sector if they have not already implemented the required changes. It aims to close any remaining loopholes, and areas open for interpretation, that could be found in 4MLD – the previous iteration of AML legislation.

Accountancy firms, along with other professional service firms, will be required to enhance their due-diligence checks and install AML training for their staff, as well as make use of electronic verification ‘wherever possible’, meaning paper checks can still be used in some circumstances. Failure to do so will result in prosecution and heavy fines.

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When can an organisation use paper documents? The ICAEW explains:

• • The document or information can either be paper documents provided by the client, or can be from electronic sources
  • 5MLD clarifies that electronic identification processes can be regarded as a reliable source if certain criteria are met, in particular that the electronic process is free from fraud and misuse and capable of providing an appropriate level of assurance that the person claiming a particular identity is in fact the person with that identity
  • This means that paper based checks will continue to be perfectly acceptable, but accountants who wish to use electronic identification processes can do so as long as they satisfy themselves that they are a reliable source.

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Rhys David, CEO of identity verification specialist Credas, said: “In the last two years we’ve seen a great deal of businesses being able to plead ignorance when it comes to AML investigation, and many sectors have been slow to get up to speed with the requirements.

“However, it looks like all of those loopholes have now been sewn up and what we’re left with is a watertight interpretation of right and wrong. Now is the time to get your AML processes in order, because if businesses aren’t in good shape now, they will struggle even more come January.”

Electronic verification

The new wording in the legislation states that businesses must use electronic verification for anti-money laundering checks wherever possible, as opposed to only looking at paper documents such as passports and driving licenses.

The wording says:

“(19) Information may be regarded as obtained from a reliable source which is independent of the person whose identity is being verified where […]

(a) it is obtained by means of an electronic identification process, including by using electronic identification means or by using a trust service (within the meanings of those terms in Regulation (EU) No 910/2014 of the European Parliament and of the Council of 23rd July 2014 on electronic identification and trust services for electronic transactions in the internal market(11)); and…

(b) that process is secure from fraud and misuse and capable of providing an appropriate level of assurance that the person claiming a particular identity is in fact the person with that identity.”

Martin Cheek, managing director of SmartSearch, an AML compliance provider, said: “The Fifth Money Laundering Regulations coming into law may well catch a number of people by surprise, happening, as it has, so close to Christmas.  It comes into effect on 10th January, so companies will not have long to prepare.

“It is the need for electronic verification that is likely to take most people by surprise. Any legal or other professional services companies who do not already have a trusted means of doing this will need to implement this immediately to ensure they are compliant and save themselves from a heavy fine.

“The regulations are designed to help tackle rising levels of fraud and eliminate money laundering, things that are likely to be a key priority for everyone this year.”

Customer due diligence

The new regulation stipulates that when assessing the need to enhance due diligence and seek additional information and monitoring in certain cases, firms will need to consider a number of high-risk factors, including:

• There are relevant transactions between parties based in high-risk third countries
• The customer is the beneficiary of a life insurance policy
• The customer is a third-country national seeking residence rights or citizenship in exchange for transfers of capital, purchase of a property, governments bonds or investment in corporate entities
• Non-face to face business relationships or transactions without certain safeguards, for example, as set out in regulation 28 (19) concerning electronic identification processes.
• Transactions related to oil, arms, precious metals, tobacco products, cultural artefacts, ivory or other items related to protected species, or archaeological, historical, cultural and religious significance, or of rare scientific value.

Amendments to the regulation also outline situations when firms can forego customer due diligence:

• The maximum amount which can be stored electronically is €150 (previously €250)
• The payment instrument used in connection with the electronic money (the relevant payment instrument) is:
• Not reloadable, or
• Is subject to a maximum limit on monthly payment transactions of €150, which can only be used in the UK (previously €250)
• The relevant payment instrument is used exclusively to purchase goods or services
• Anonymous electronic money cannot be used to fund the relevant payment instrument

Firms will also be required to update their records relating to the beneficial ownership of corporate clients, understand the ownership and control structure of their corporate customers and record any difficulties encountered in identifying beneficial ownership.

Any discrepancies between information a firm holds on their customers compared with the information held on Companies House should also be reported to the OPBAS (Office for Professional Body Anti-Money Laundering Supervision), which sits within the Financial Conduct Authority (FCA).

The new regulation will mean more work for professional “enablers”, a term used to describe firms in the financial services industry when it comes to money laundering, but is seen as a necessary step to cracking down on the UK’s dirty money problem that is officially estimated to run into the hundreds of billions of pounds.