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Tuesday, 23 April 2019

Brexit Britain To Gold-Plate 5th EU Money Laundering Directive

Anyone who still dreams that Brexit spells the end of the UK's ménage à trois with bureaucracy and regulation must read the Treasury's plans to implement the fifth EU directive on anti-money laundering.

The UK has always created an EU rod for its own back not only by adding its own weight to the regulatory burden, but also by effectively insisting on literal interpretation of EU law that was only intended to be construed according to its purpose.

This results in directives having a broader impact than they would otherwise have done (known as 'regulatory creep'), saddling British businesses - and ultimately British consumers - with costs they could otherwise avoid.

That is not to say that the UK's approach is always wrong - or is necessarily wrong on this occasion - but the 'blame' for this approach should land in Westminster not Brussels.

In this case, the government proposes to amend the The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 ("MLRs") in the ways I've summarised below. Responses to the consultation paper are due by 10 June 2019 and new regulations must take effect in the UK by 10 January 2020.

Tax advisors
  • The definition of “tax advisor” in the MLRs to include firms and sole practitioners who by way of business provide, directly or by way of arrangement with other persons, material aid, assistance or advice about the tax affairs of other person.
 Letting agents
  • There are numerous options for applying the MLRs to letting agents.
  • The MLRs will apply to service providers engaged in exchange services between cryptoassets and fiat currencies, and wallet providers in a way that includes exchange tokens, security tokens and utility tokens and so would also capture crypto-to-crypto exchange service providers; peer-to-peer exchange of both fiat-to-crypto and crypto-to-crypto between prospective “buyers” and “sellers”); cryptoasset ATMs; issuance of new cryptoassets (including ICOs); and the publication of open-source software (which includes, but is not limited to, non-custodian wallet software and other types of cryptoasset related software).
 High Value Dealers
  • High value dealers are to include art intermediaries for transactions exceeding €10,000, including art galleries, auction houses and free ports/zones (currently none in the UK) regardless of whether they are paid for in cash (raising many questions in the consultation).
  • Exemptions for low value e-money instruments will be narrower, as all of the following conditions must be met: the maximum amount that can be stored electronically is €150; it either can't be reloadable or must have a maximum limit on monthly payments of €150 which can only be used in that Member State; used exclusively to purchase goods and services; can't be funded with anonymous e-money; and any single cash redemption or remote payment cannot exceed €50. In addition, EEA acquirers can only accept payments made with anonymous prepaid cards issued in non-EEA countries that impose equivalent AML requirements; and Members States may prohibit payments carried out using anonymous prepaid cards.
E-identification services
  • The new requirement for electronic identification processes is for them to be “regulated, recognised, approved or accepted at national level by the national competent authority” which raises questions about which forms in the UK are implicitly within scope.
Companies and officers
  • Firms will be required to determine and verify the law to which a body corporate is subject, its constitution and the full names of the board of directors and the senior persons responsible for the operations of the body corporate.
Where beneficial owner cannot be identified
  • If a firm has exhausted all possible means of identifying the beneficial owner of a body corporate and hasn’t succeeded, the firm must keep written records of its actions, but such firms will now need to take further measures to verify the identity of the senior person in that body corporate and keep written records of those actions.
Understanding the customer's business/structure
  • Firms will be required to understand the nature of their customer’s business and its ownership and control structure (rather than just being required to take "reasonable measures" to do so).
Filing SARs when due diligence fails
  • Firms must cease transacting and file a suspicious activity report (SAR) when they cannot apply their due diligence or additional or enhanced measures.
Proof trust/company register was searched
  • Firms must also collect proof of registration or an excerpt of the register from the company or the trust that is subject to beneficial ownership registration requirements before a new business relationship is established.
Apply due diligence when beneficial ownership must be reviewed
  • Firms must apply due diligence when they have any legal duty in a calendar year to contact the customer for reviewing their relevant beneficial ownership information.
Enhanced due diligence where high risk countries involved
  • Firms must apply a newly defined set of enhanced due diligence measures, and monitoring, to business relationships and transactions involving high-risk third countries.
Lists of PEP functions to be taken into account
  • The responsibility to apply enhanced due diligence on Politically Exposed Persons (PEPs) will be able to be be discharged by applying the FCA’s July 2017 guidance on how firms should take into account a list of functions in determining whether an individual is a PEP for the purposes of the MLRs.
Information on beneficial owners to be publicly available
  • The government must ensure that information on the beneficial ownership of corporate and other legal entities is accessible by members of the general public and “mechanisms” must be in place to ensure that the information held on the central register is adequate, accurate, and current; while the UK must also take appropriate actions to resolve any reported discrepancies in a timely manner and, if appropriate, include a specific mention in the central register in the meantime.
Trusts to be registered
  • Trustees or agents of all UK and some non-EU resident express trusts must register those trusts with the Trust Registration Service, whether or not the trust has incurred a UK tax; and the government must share data from the register with a range of persons under certain circumstances.
Bank account registries
  • The UK must establish a centralised registry or online retrieval mechanism which allows identification of natural and legal persons who hold or control bank accounts; payment accounts; or safe-deposit boxes held by credit institutions within the UK - including names and account/identification numbers.
Pooled client accounts of unregulated operators
  • The government wants further evidence on the administration of checks relating to the use of pooled client accounts (PCAs) under the MLRs, especially those held by non-regulated businesses and any evidence of abuse; and the practical barriers industry face in implementing the current framework and it could be 'enhanced'.
AML risk assessments for new products, practices and channels
  • Firms will need to undertake AML risk assessments prior to the launch or use of new products, new business practices and delivery mechanisms.
Provision of Information by branches and subsidiaries
  • Firms must have policies relating to the provision of customer, account and transaction information from their branches and subsidiaries.

The UK will not require that "whenever a customer makes their first payment involving a designated high-risk third country, that payment is carried out through an account in the customer’s name with a credit institution subject to the Directive’s customer due diligence standards."

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