EU Member states are required to bring into force the laws, regulations and administrative provisions necessary to comply with The Fourth (4th) Money Laundering Directive EU/2015/849 (MLD4) published on June 5, 2015 until June 26th 2017.
MLD4 continues to apply a risk-based approach to AML/CFT and enhances the required compliance measurements. MLD4 focuses on the areas that are most open to money laundering and define procedures and actions to identify, assess, understand, mitigate and manage them effectively.
Definitions are Introduced and Clarified
The Fourth Directive expands the definitions contained in the Third Directive in order to enhance the level of certainty. In particular the new Directive provides a revised definition for the following:
Politically Exposed Persons (PEPs): The Fourth Directive includes domestic as well as foreign PEPs for the first time. PEPs are defined such as heads of state, government and parliament or similar legislative bodies’ members, members of the governing bodies of political parties , members of the judiciary such as members of supreme courts, of constitutional courts or of other high-level judicial bodies, other persons holding a governmental position, members of courts of auditors or of the boards of central banks, ambassadors, chargés d'affaires and high-ranking officers in the armed forces, senior figures within international organizations such as board of directors, executives of state-owned enterprises, directors, deputy directors and members of the board or equivalent function of an international organization and their family members and persons known to be close associates.
The Directive also stipulates that Enhanced Customer Due Diligence (CDD) is always appropriate when transactions involve PEPs.
Beneficial Owners: Further clarification is provided in relation to ownership of companies and trusts. The previous threshold for beneficial ownership set out in the Third Directive remains the same; namely a shareholding of 25 per cent plus one share or an ownership interest of more than 25 per cent. The Fourth Directive however goes further by introducing the necessity for businesses to maintain records evidencing who the beneficial owners are. The extent of this record keeping is presently unclear and is likely to be interpreted independently by each Member State.
Gambling Services and Relationships: The Fourth Directive has increased the requirement for certain bodies to implement CDD. The gambling sector is now included as well as high value goods traders.
Extends the range of the persons and activities subject to the Directive
The scope of persons who qualify as “Obliged Entities” (OE) has been extended. Details of the persons now subject to the obligations outlined in the Directive can be located at Article 2 and include Credit and Financial institutions, Estate Agents, Auditors and tax advisors as well as other entities.
Includes “Tax Crimes’”
The Directive introduces tax crimes as a predicate offence for money laundering. The Directive does not include a specific definition for which offences would amount to a ‘tax crimes’ so it will be for Member States to specify this in national law. Sone jurisdictions have included tax crimes as a predicate offence for some time; other jurisdictions have not included it in the same way.
Refines the Risk Based Approach
There is a strong focus on the risk based approach and requires each jurisdiction to assess the level of risk and implement appropriate measures. The Fourth Directive calls for a risk assessment to be undertaken by the European Commission under the following Articles:
Article 6: Stipulates that the Commission shall assess the risks of money laundering and terrorist financing affecting the internal market and relating to cross-border activities. The Commission is required to produce a report making recommendations to the MS. This report must be updated every two years.
Article 9: The Commission is also obliged to identify High-Risk Third Countries (HRTC) in order to protect the proper functioning of the internal market. A HRTC is a jurisdiction which has strategic deficiencies in their national anti-money laundering and counter terrorism regime that pose a significant threat to the financial system of the Union. Identifying a HRTC automatically triggers enhanced CDD provisions for OE.
In addition to the Commission’s powers, the MS have duties under the following Articles:
Article 7: MS have a duty to identify, assess, understand and mitigate the risks of money laundering and terrorist financing. MS must have in place a mechanism or authority which would organize the national response to the risks identified. Details of this body must be available for the Commission and other MS and European Supervisory Authorities. MS are obliged to produce a report with the view to improving and better understanding the risks for that MS. It will also be used to improve the Anti-Money Laundering and Counter Terrorist Financing Law 2010.
Article 8: OE are required to take appropriate steps to identify and assess the risks of money laundering and terrorist financing. Certain risk factors must be taken into account including customers, countries or geographical areas, products, services, transactions or delivery channels. OEs are required to document this assessment and ensure records are kept up to date; these records must be made available to relevant persons.
MS must ensure OEs have in place policies, controls and procedures to mitigate and manage effectively the risks identified by the Commission, the MS and the OE.
Refines Simplified and Enhanced CDD
OEs are obliged to establish rules in order to determine which simplified or enhanced CDD measures are to be taken. OE will be required to justify their CDD decisions.
Simplified CDD Measures: The Third Directive enabled MS to exempt certain entities from CDD where there was a low risk of money laundering or terrorist financing. The Fourth Directive enables OE to adapt their measures to low risk situations [Article 15].
Before applying the simplified measures, OE must be sure the business relationship or transaction presents a lower degree risk. In doing this they must consult the lower risk situations set out in Annex II [Article 16].
The Fourth Directive clarifies situations where simplified CDD is appropriate. OE must take into account the factors set out in Annex I of the Fourth Directive when undertaking CDD. The factors include the:
- Purpose of an account or relationship
- Level of assets to be deposited by a customer or the size of the transactions undertaken and
- Regularity or duration of the business relationship
Enhanced CDD Measures: The focus remains on the risk based approach, therefore in order to determine whether enhanced CDD measures are appropriate, OE must consult the factors listed in Annex III which include higher risk factors [Article 18] .
Requires Cooperation between Financial Intelligence Units (FIU) and the EC
The Fourth Directive includes provisions in Article 52 for MS to ensure co-operation between FIUs at all levels. This co-operation extends to the provision of information “spontaneously or upon request” from any FIU [Article 53]. Prior to the Fourth Directive there was an informal framework for co-operation. This Directiveimposes teamwork and cross border support between the FIUs and the European Union.
The Fourth Directive requires MS to ensure that OE are held liable for breaches. Details relating to the sanction provisions can be found in Articles 58 to Article 61. MS have power to determine levels of sanctions and when they should be applied. However Article 59 stipulates that in certain situations sanctions must be applied. For example, for serious, repeated, systematic (or a combination thereof) breaches in relation to CDD, suspicious transaction reporting, record-keeping or internal controls must be sanctioned. The sanction imposed for the above breaches must include at least the following:
- A public statement
- An order requiring the specific conduct to stop
- Withdrawal or suspension of authorization (where appropriate)
- A temporary ban from exercising managerial functions in OE
- A maximum administrative pecuniary sanction of at least twice the amount of the benefit derived from the breach or at least EUR 1.000.000,00.
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