On January 10, 2020, the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (MLR 2019) came into force transposing the European Union’s (EU) 5th Money Laundering Directive into UK law. MLR 2019 incorporates international standards set by the Financial Action Task Force (FATF) and bolsters Anti-Money Laundering (AML) regulations following high profile issues such as the Panama Papers exposure and terrorist activities in the past few years.
This update summarizes some of the key changes that firms need to comply with effect from January 10, 2020.
Expanded Scope of Obliged Entities
Regulation 11(d) expands the definition of a ‘tax advisor’ to include firms and sole practitioners who arrange material aid, assistance or advice about the tax affairs of other persons.
Regulation 13 expands the scope of obliged entities within the property sector to include letting agents involved in high value transactions with monthly rent of EUR 10,000 or more. Letting agency work includes introductory services, lets only, rent collection, commercial lettings, full property management, etc. Customer due diligence (CDD) will have to be completed before a business relationship is established, which will be before the first deposit or rent payment is made above the EUR 10,000 threshold.
Businesses carrying out crypto asset activities are now in scope of the MLR 2019 by way of Regulation 8. This means firms will have to fulfil CDD obligations, assess money laundering and terrorist financing risks, and report suspicious activities. These CDD measures must be completed before the point at which a business relationship is established (or before carrying out an occasional transaction worth over EUR 10,000). These firms will have to register with the Financial Conduct Authority (FCA) during 2020.
Art market participants involved in transactions exceeding EUR 10,000 or more are now also considered obliged entities. This includes all transactions exceeding EUR 10,000, not just cash transactions. Once again, CDD will have to be completed prior to the transaction taking place.
E-money is a store of monetary value on a device such as a prepaid card. Regulation 38 lowers the thresholds at which e-money firms must conduct due diligence to EUR 150 prior to processing a payment, down from EUR 250, meaning e-money firms will now have to conduct due diligence on a higher number of users of electronic money.
The new rules limit the conditions under which firms can apply the CDD exemption. The following conditions must all be met in order to apply the exemption:
- the maximum amount that can be stored electronically is EUR 150;
- the payment instrument is not reloadable or has a maximum limit on monthly payments for EUR 150 which can only be used in the UK;
- the payment instrument is used exclusively to purchase goods and services; and
- anonymous e-money is not used to fund the payment instrument.
Customer Due Diligence
Regulations 27, 28 and 29 introduce new explicit requirement to understand the ownership and control structure of the customer as part of the CDD obligations. Furthermore, there is a new explicit requirement to determine the constitution and full names of the board of directors and the senior persons of a body corporate when the beneficial owner cannot be identified. Previously, firms only had to take reasonable measures to do so.
Firms will now have to cease transactions and consider filing a Suspicious Activity Report where they cannot apply the necessary CDD obligations.
The rules set out circumstances under which secure, remote or electronic identification processes may be considered when conducting CDD. Nothing in the existing UK regulations precludes the use of electronic means of identification, however the addition of this explicit reference provides greater clarity for firms.
Reporting Discrepancies to Companies House
Regulation 30A imposes a new requirement for firms to report any discrepancies they find between the information they hold on their customers and that in the Companies House Register, including differences in ownership structure, beneficial owners and directors.
Enhanced Due Diligence (EDD) for High-Risk Factors
MLR 2019 sets out new requirements under Regulation 33 involving high-risk situations. Under the new rules EDD requirements may apply where at least one of the following criteria is met:
- 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 property, government bonds or investment in corporate entities;
- non-face to face business relationships or transactions without certain safeguards; and
- 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.
In these situations, the following EDD procedures will apply:
- Firms are required to obtain additional information on the customer and beneficial owners, the intended nature of the business relationship, the source of funds of the customer and the reasons for the intended transactions;
- Firms will have to carry out enhanced monitoring of any business relationship or transaction involving a high-risk third country, rather than only those established in a high-risk third country;
- Firms will have to obtain senior management approval before establishing or continuing a relationship involving a high-risk third country. This was previously only required for credit and financial institutions.
Transparency of Beneficial Ownership of Corporates
Regulation 28 requires firms to update their records relating to the beneficial ownership and must ensure information on beneficial owners of corporate and other legal entities is stored in a central registry and is up to date. Firms also need to understand the ownership and control structure of their corporate customers, and record any difficulties encountered in identifying beneficial ownership.
Transparency of Ownership of Trusts
Under Regulation 45, all trustees or agents of all UK and some non-EU resident express trusts will have to register those trusts with a Trust Registration Service.
Under MLR 2019 the UK government now requires firms to disclose specific data about trusts and their beneficial owners to be held on the central register to law enforcement agencies or Gambling Commission upon request using central automated mechanism.
Whilst the MLR 2019 does not specify a full list of types of express trusts, the onus is on the trustees to determine whether their trust is an express trust or not.
Existing trusts must be registered by March 31, 2021. For new trusts created on or after April 1, 2020, the requirement is to be registered within 30 days of creation.
Bank Account Registry
Under Regulation 45, the UK government must establish a central registry which allows identification of natural and legal persons which hold or control bank accounts, payment accounts, or safe-deposit boxes held by credit institutions within the UK. The information must be accessible upon request and searchable and will include:
- the name of the customer account holder, and any person acting on behalf of the customer;
- the names of beneficial owners of the account;
- IBAN numbers of the bank or payment account, along with dates of when the account was opened; and
- the names of lessees of any safe deposit boxes, and duration of the lease period.
Duty to Respond to Requests for Information About Accounts and Safe-Deposit Boxes
Regulation 45A now requires firms and providers of safe custody services to establish and maintain systems which enable them to respond, using a central automated mechanism, to a request for information from law enforcement authorities or the Gambling Commission. Law enforcement authorities or the Gambling Commission may request details related to accounts and safe-deposit boxes including name, date of birth, address of the holder(s) or beneficial owner(s), the IBAN of the account or any other number by which the individual account is identified, the date of opening/closure of the account and any other information that may be used to verify that individual’s or corporate’s identity.
Compliance under MLRs
On December 23, 2018, the FCA published a new webpage highlighting some of the key changes introduced by MLR 2019 to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and set out its expectations. The FCA states that it expects firms to comply with the new amended regulations from January 10, 2020. In assessing its approach to firms that may not be compliant on that date, the FCA will consider evidence that they have taken sufficient steps before that date to comply with the new obligations.
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