With the Directive coming into effect, Aziz Rahman examines

its implications.

It seems to have been a long time coming but it has finally

come into effect. And it imposes many obligations on many in business.

The Fourth EU Money Laundering Directive (4MLD) came into

force on June 26, 2015 and had to be on the statute books of member states by

June 26 this year

It has been created to ensure a stronger risk-based approach

to preventing money laundering and the financing of terrorism. And it does this

by placing a number of obligations on banks and other financial institutions –

the organisations the Directive calls “obliged entities’’.

It is the latest in a series of EU efforts to tackle money

laundering that began 26 years ago. Its emphasis on a risk-based approach is

reflected in the levels of customer due diligence it expects to be carried out.

Due Diligence

4MLD removes the automatic right to exempt certain customers

or investors from due diligence checks if they are a credit institution in the

EU - or another country with equivalent anti-money laundering measures - or a

listed company.

There is now an obligation to carry out risk assessment and

monitoring on customers and enhanced requirements for due diligence when it

comes to people or organisations from what are classed as high-risk countries

under the Directive.

The Directive also extends the due diligence requirements

regarding politically exposed persons (PEP’s). It covers domestic PEP’s, not

just foreign ones, and their “family members’’ and “persons known to be close

associates”.

Obliged entities must have a procedure for identifying PEPs.

If a person no longer appears to meet the criteria for being classed as a

PEP, the obliged entity must, for at least 12 months afterwards, continue

assessing the risk posed by that person and apply appropriate measures. Such

measures should only be stopped when checks have deemed that the person is no

longer a PEP risk.

Beneficial Ownership

4MLD also requires corporate and legal entities, trusts and other

similar structures to maintain adequate, accurate and current information on

their beneficial ownership.

The definition of beneficial ownership under 4MLD extends

down to those who have a 25% or more stake in such a body. But, in

organisations deemed to pose a risk of money laundering or tax evasion, this

can drop to 10%. EU member states must ensure that the information on

beneficial ownership is held in a central register that is accessible to the

authorities.

Each EU state must also carry out a national risk assessment

every two years of its exposure to money laundering and terrorist financing.

Risk assessments must be documented, kept up to date and made available to the

relevant authorities and to each other member state.

Assessment

But what does all this mean if you are one of those

organisations classed as an obliged entity?

Firstly, you must consider how you will manage those clients

that deal in large amounts of money. This may mean making extra requests for

information on income or earnings and more ongoing checks. The Directive orders

that due diligence be carried out on customers whenever there is a cash

transaction of 10,000 euros or more. The previous limit was 15,000 euros.

The Directive also retains the obligation for firms to keep

their information on a client for five years after the end of the business

relationship - and this can now be extended to 10 years in certain

circumstances. It also extends the money laundering obligations that casinos

must follow to all gambling services.

To put it in the simplest possible terms, if your bank,

financial institution or other type of business is covered by 4MLD you have to

have made sure you are fully compliant with it. This means meeting your

obligations but also developing and maintaining a workplace culture whereby you

have procedures in place to identify and prevent money laundering.

By doing so, if you are investigated for money laundering

you will be able to show that you had acted to try and prevent it.

Checks

Checking the background and history of someone you are

looking to do business with is part of due diligence. 4MLD, like many

regulations that preceded it, is all about making checks and imposing

restrictions.

But if you are covered by the Directive, you also have to be

aware of the signs that someone may be looking to launder money.

Companies have to have procedures for staff to report

suspicions and must have a nominated officer to whom these concerns can be voiced.

And once these concerns have been raised, they have to be investigated and,

where necessary, acted upon.

If anyone covered by 4MLD does not know how they should comply

with it, or how they should recognise and act upon signs of possible laundering,

they need to take immediate legal advice.

The authorities, both in the UK and across the EU, are

constantly looking at ways to destroy the routes by which financial systems are

used to launder money.

4MLD is the latest attempt to toughen the financial world’s

resistance to those looking to disguise the proceeds of crime. Those obliged

entities that it covers cannot afford to fall short when it comes to meeting

the responsibilities it places upon them.