The Treasury is consulting on how to implement the fourth Money Laundering Directive into UK law by 26 June 2017, with responses due on 10 November 2016. Draft guidance from the European Banking Authority is also open for consultation. In parallel, a new EU Funds Transfer Regulation will take direct effect, updating the rules on information on payers and payees accompanying the transfer of funds in any currency.
The consultation is important, given that money laundering is also a key enabler of serious and organised crime, estimated by the Home Office to cost us £24 billion a year. Terrorists also tend to use the proceeds of crime as a means to obtain funding, but might also try to obtain finance from (unwitting) legitimate sources.
The current Money Laundering Regulations 2007 cover 150,000 UK businesses, with more likely to be covered due to a lowering of the threshold for eligible transactions in cash (or a series of transactions that appear to be linked) by persons trading goods, from EUR15,000 down to EUR 10,000 (probably about £1000 in 2017 money!); and an extension to include receiving as well as making payments in cash.
With the exception of money remittance, the government is able to exempt from the regulations some persons engaging in certain financial activities on an occasional or very limited basis where there is little risk of money laundering or terrorist financing:
- the financial activity is limited in absolute terms (the proposal is that the total annual turnover from the activity should not exceed £100,000);
- the financial activity is limited on a transaction basis (the proposed maximum threshold per customer and per single transaction, whether the transaction is carried out in a single operation or in several operations which appear to be linked, is £1,000);
- the financial activity is not the main activity of such persons (the proposal is that the activity should not exceed 5% of the total turnover of the natural or legal person concerned);
- the financial activity is ancillary and directly related to the main activity of such persons;
- the main activity of such persons is not an activity referred to in Article 2(1)(3)(a) to (d) or 2(1)(3)(f) of the directive; and
- the financial activity is provided only to the customers of the main activity of such persons and is not generally offered to the public.
The directive requires firms to verify the identity of a customer and any beneficial owner(s) before establishing a business relationship or carrying out a transaction, subject to certain thresholds. But the timing of the verification can be altered: (i) where there is little ML/TF risk and it is necessary so as not to interrupt the normal conduct of business, then verification can be carried out during the establishment of a business relationship - although it shall still be completed as soon as practicable after initial contact; and (ii) an account may be opened with certain institutions provided there are adequate safeguards in place to ensure transactions are not carried out by the customer or on its behalf until the necessary CDD measures are completed.
The directive also requires obliged entities to apply customer due diligence measures to existing customers at appropriate times, using a risk-based approach, as well as to new customers. In particular, such measures should be applied when the circumstances of a customer change, but it is not clear which circumstances are relevant ("e.g. name, address, vocation, marital status etc.") and how a firm would know they had changed. There is a non-exhaustive list of factors in Annex 1 of the MLD that must be taken into account when assessing the risk of money laundering and terrorist financing, raising some uncertainty as to what might constitute an exhaustive list in any given circumstances.
Certain thresholds for implementing customer due diligence apply, but the fact they are expressed in Euros highlights the significant problems posed by the volatility of the pound following the Brexit vote.
Simplified due diligence remains an option, but the list of products currently specified in Regulation 13 is to be replaced by a non-exhaustive list of factors in Annex II of the directive and further guidelines due from the EBA by June 2017 - heralding more uncertainty. In addition, pooled client accounts are no longer mentioned specifically in this context, meaning that the existing explicit option for an institution hosting another firm's client money account (or 'segregated' account or 'safeguarded' account) to apply simplified due diligence in connection with the beneficial owners of the funds in that account will no longer apply.
Enhanced due diligence measures must be implemented in certain circumstances, a non-exhaustive list of which appears in Annex III, with further details in the EBA consultation documents that the Treasury expects everyone to review separately... In fact, there are numerous instances where the various European financial authorities are to draw up regulatory technical standards, so watching that space is very important, as it could act as a brake on innovation.
There has been some increase in the scope of entities that can be relied upon to have conducted customer due diligence, and the Treasury is inviting further suggestions here, particularly to help reduce the regulatory burden. Here it would be very helpful if governments could actually work together to achieve, or at least support, formally 'reliable' ways of verifying the identity of each others' citizens, as envisaged by the eIDAS regulation (there is a single reference to electronic signatures as a means of reducing certain risks, in Annex III).
The new directive is more prescriptive on the internal controls that firms are required to implement, which must vary according to the nature and size of the business concerned. The Treasury is open to suggestions on the thresholds etc., particularly related to a compliance officer and independent audit functions.
There are separate chapters in the consultation specific to gambling, e-money, estate agents, correspondent banking; dealing with politically exposed persons (PEPs); and meeting the requirement for a central register of beneficial owners of corporate and other legal entities incorporated in each member state; as well as reporting, supervision and sanctions for breaches of the regulations.
Worth a read to know what's coming down the 'pike.