AML4 - What’s next for the UK?
On June 26 compliance with the EU’s Fourth Anti-Money Laundering Directive (AML4) by Member States becomes compulsory, strengthening transparency rules to tackle tax avoidance, terrorism financing and money laundering throughout in the region. These regulations require consumers to provide identity, personal and financial data to regulated sector businesses under a process known as Know Your Customer (KYC).
The effects of these enhanced regulations on the financial services industry will be significant, presenting increasingly more complex challenges to both consumers and merchants - Customer Due Diligence (CDD), the vetting of Politically Exposed Persons (PEPs), risk assessments, the identification of beneficial owners to name a few.
AML4 contains a solid set of regulations that, regulators hope, will result in business making their customer due diligence processes more robust. Falling foul of the regulators could be costly, in terms of fines and sanctions, which for Financial or Credit institutions could be up to €5m or up to 10% of a holding company’s annual turnover.
How will this affect the way businesses comply with regulation?
The 4MLD impacts various Banks and Financial Institutions, Accountants and Auditors, Law firms, and the Gambling industry. 4MLD will bring into effect new customer due diligence checks, with additional requirements to report on suspicious transactions, as well as the on-going monitoring of counterparties. The reality is that the impacts of the 4MLD will not be hugely noticed by the policy makers in institutions. If an institution is already exposed to Money Laundering Regulations, changes will not have as high impact on the business, as many of these provisions are already incorporated in the UK law.
However, there are a few important alterations to consider that may impact institutions’ operations:
- Centralised Registers of Beneficial Owners – the creation of central registers for beneficial owners in institutions
- Risk Based Approach – a concept that has been very well understood, but unfortunately not as well applied
- Politically Exposed Persons – the extension of the definition of PEPs to include domestic PEPs as well
How will costs be carried?
The implementation of the 4MLD by FIs will have a bearing on the costs associated with it. The onus of managing the costs lies with the FIs. The fact that new technologies from Regtech players are disrupting the space coupled with new business models, FIs can expect the TCO to be affordable than in the past.
Where are FI’s are likely to look for assistance in compliance and implementation?
Politically Exposed Persons (PEP)
- Bespoke Screening Services would provide FIs with in-depth details of PEP as per 4MLD, and also support in carrying out EDD process.
- Skilled resources who understand the Risks associated with On-boarding PEP, and apply relevant EDD measures.
- FIs also can seek assistance to review the existing client portfolio to identify any domestic PEPs which can be applied for EDD remediation exercise.
Financial Institutions are constantly on the lookout for resources that completely understand the corporate structures and complexities of all legal entities including:
- Public/Private Limited Companies
- Regulated Companies
- Correspondent Banking
- Trust and Foundations
- Societies, etc.
Changes to Simplified Due Diligence (SDD)
FIs seek assistance in implementing SDD which requires deep understanding of the Risks associated with any customer, and how the corporate structures work, and all other Risk factors associated with such types of customers, Industry segments, geographic areas or customers countries, and particular products or services.
What is the impact on the consumer?
- As there is a change in the simplified due diligence, consumers who were earlier considered low risk could be considered medium or high risk level, which basically implies that the consumer will be asked to provide more documents and information towards conducting CDD.
- According to 4MLD, there is no discrimination between an international & Domestic PEP, which leads to an increase in performing enhanced due diligence for the consumers.
Is further regulation expected to follow in the UK/Europe?
Yes, the 5th Money Laundering Directive (5MLD) was released in late October 2016, the key changes include:
- Updating the definitions of ‘virtual currency’ and ‘custodian wallet provider’, which could bring more providers under the scope of the Directive.
- Reducing the threshold on identifying holders of pre-paid cards to €150 (from €250) and a requirement to conduct CDD on remote payment transactions over €50
- Additional due diligence measures by banks on financial flows from risky non EEA countries
- Beneficial ownership information relating to companies and trusts engaged in economic activities for the purpose of profit to be made publicly available
- Beneficial ownership information relating to trusts not engaged in such activities to be available to upon demonstrating a legitimate interest.
- Implementing these regulations will require businesses to re-think their current approaches to KYC as additional manpower, new technology, resource and improved process are called for.
Speak to us about how Cenza's highly skilled team of KYC Process experts can help your institution reduce operational cost and improve the quality and efficiency of your on-boarding process.