In preparation for the mutual evaluation and transposition of the 4MLD, the UK’s HM Treasury published the National Risk Assessment (NRA) of money laundering/terrorist financing risks in October 2015 and is due to publish a consultation paper on how the Directive’s requirements will be implemented into national law. Here we describe some of the key 4MLD changes that all firms should be mindful of to ensure readiness for the Directive’s implementation by June 26, 2017.
Key 4MLD Changes
- Home and Host Responsibilities: Under the 4MLD, all branches and subsidiaries operating in other Member States will need to ensure that those establishments respect the UK national provisions. Firms will also be required to review their arrangements where reliance is placed on the head office to ensure compliance with host requirements.
- Risk Assessment: The European Commission will publish an EU level risk assessment report and each Member State will be required to produce an NRA every two years to ensure effective management and identification of money laundering and terrorist financing risks. The UK has already published its NRA and firms are expected to take it into account when updating their AML risk assessments.
- Written Risk Assessment: The 4MLD introduced new requirements on firms to take appropriate steps to identify and assess the risks of money laundering and terrorist financing and to document its methodology. These written risk assessments must be kept up to date and be available to the FCA upon request.
- Simplified Due Diligence: The 4MLD removed the automatic entitlement to apply SDD for specific customers. Firms will instead need to determine the level of risk posed by a customer prior to applying SDD and provide robust rationale and justification for it, which is likely to put customer risk assessments under enhanced regulatory scrutiny and to increase record keeping controls required in this area.
- Beneficial Ownership: Member States will be required to create a directory of the beneficial owners of corporate entities incorporated in their countries. Trusts will not be required to provide information on beneficiaries, settlers and protectors as part of the public register, however such information will have to be easily accessible by local regulators on short notice. The UK has already changed its national law to require all companies to report beneficial ownership information to a central register, increasing the reporting burden faced by individual firms.
- Politically Exposed Persons: The definition of PEP has been changed to formally encompass persons entrusted with a prominent public position domestically, as well as domestic PEPs who work for international organizations. In the UK, the standard industry practice has already been to capture all PEPs regardless of their country of origin, however firms will now also be required to apply EDD on PEPs for at least 18 months after the individual ceases to be a PEP.
- Suspicious Activity Reports: Firms will now be required to report any suspicious transactions, including attempted transactions, which will require changing AML/CTF reporting policies and procedures.
- Third Country Equivalence Regime: A list of ‘equivalent jurisdictions’ will be scrapped and instead, the European Commission will identify high risk non-EU countries with strategic deficiencies in AML/CTF standards, requiring firms to apply EDD when dealing with persons or entities established in these countries and further requiring such firms to review their country risk assessments.
- Record Keeping: Member States will still be required to ensure that firms retain client information for the maximum period of five years after the end of the business relationship with the client. However, there is now a provision for a potential extension of the retention period for up to an additional five years in certain circumstances. This will no doubt result in additional IT costs for firms.
- Tax Crimes: Tax crimes are now included as a predicate offence for money laundering for the first time in the EU. Firms will face an increased burden to ensure that their systems and controls are sufficient to identify tax crimes. Policies and procedures will need to be amended to include those tax crimes that fall under the definition of "serious crimes".
- Correspondent Relationship: The definition will be extended to include all relationships between two financial or credit institutions.
- High Value Dealers: The threshold of making and receiving cash payments was reduced to €10,000.
- Gambling: The 4MLD extends AML/CTF requirements to all gambling services rather than just casinos unless a country can demonstrate that their non-casino gambling sector is low risk.
- Financial Intelligence Units (FIUs): The 4MLD will strengthen the powers of FIUs and their cooperation with each other across borders. This will enable FIUs to take urgent action to suspend or withhold consent for a suspicious transaction going ahead.
How Duff & Phelps Can Help
Duff & Phelps is an award-winning global provider of compliance and regulatory consulting services to the financial services industry. Clients consult our team of specialists at every stage of their business lifecycle to meet regulatory obligations and navigate the rapidly changing regulatory landscape. Our multidisciplinary team is drawn from leading financial institutions, regulators, government authorities, legal and advisory firms.
Based in key financial centers, we are closely connected with regulators and industry associations so that our clients have the best available information on regulatory requirements and trends. We operate seamlessly across borders to provide clients with cross-jurisdictional advice and integrated expertise.
With deep 4MLD and regulatory expertise, we are uniquely placed to assist your firm to overcome a broad range of challenges through:
- Undertaking a detailed gap analysis of how your business will be affected by the 4MLD.
- Assessing current systems and controls, as well as advising on changes that will be required to ensure readiness in time for the implementation deadline.
- Providing technical advice relating to processes and procedures around customer due diligence, central register reporting, risk assessment and screening.