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4th European Anti-Money Laundering Directive comes into force

European Anti-Money Laundering DirectiveThe fourth European Anti-Money Laundering Directive came into force on 26th June 2015. It is only now that the UK is transposing its requirements into local law. The Treasury hopes the UK legislation will be passed in time for the 26th June 2017 deadline.

The two UK laws in need of updating are the Money Laundering Regulations and the Proceeds of Crime Act 2002.

The Directive includes significant changes to the anti-money laundering procedures at law firms. These include:

  • Changes to customer due diligence (CDD).
  • A central register for beneficial owners.
  • An increased focus on risk assessments.
  • No automatic exemption from enhanced CDD.
  • Enhanced measures for local PEPs.

With timely preparation and training, the transition to the new framework should be straightforward for most firms.

What do the changes involve?

Changes to CDD.

Customer due diligence will now be required by anyone trading goods in cash with a value over €10,000 (current level is €15,000).

Central register of beneficial ownership.

Under the directive, corporates and other legal entities will be required to maintain accurate and current information on their beneficial ownership. They must provide that information to the government. That information on beneficial ownership will be held by each member state in a central register that will be accessible to banks, law firms and “any person or organisation that can demonstrate a legitimate interest”.

These interconnected registers will contain the names, dates of birth, nationality, country of residence and the nature and extent of the beneficial owners’ interests in the transaction.

This is potentially good news for law firms. A primary requirement, and administrative burden, of CDD at the moment is identifying beneficial owners. Access to a pan-European register will likely make CDD research much easier.

European Anti-Money Laundering DirectiveRisk assessments.

Every law firm will be required to have written AML/CTF risk assessments, policies and procedures. They will also need a process by which they can test how effective these are.

This requirement should be implemented in a manner which is proportionate to the size of the law firm. Uk Law Societies already provides assistance to firms in developing risk assessments, policies and procedures.

For law firms this will mean:

  • Demonstrating and documenting that risk assessments are conducted and kept up-to date;
  • Written money laundering policies and procedures;
  • Internal audit teams, where necessary, to test the internal policies, controls and procedures; and
  • Money laundering training on how to conduct a risk-based CDD and ongoing monitoring.

No automatic exemption from enhanced CDD.

Under the Third Directive and the current Money Laundering Regulations, firms are able to automatically apply simplified CDD in the following circumstances:

  • Credit or financial institutions subject to the requirements of the Money Laundering Directive or similarly compliant local legislation;
  • Companies whose securities are listed on a regulated market subject to specified disclosure obligations;
  • UK public authorities; and
  • UK pension schemes.

Under the Fourth Directive, firms will be able to use these circumstances as part of a justification for simplified due diligence after conducting a risk analysis. However, the exemption from enhanced CDD will not be automatic. Any decision to apply simplified CDD will need to be backed up by documentation.

UK Law Societies have raised concerns that some of these situations will create an undue burden on firms. Especially firms which use pooled client accounts.

Enhanced measures for local PEPs.

Enhanced due diligence for politically exposed persons (PEPs) is being extended. This means you will need to consider if a beneficial owner is a PEP. People with high level appointments in the UK will now be a PEP, and enhanced measures will need to apply for at least 18 months (rather than the former 12) after a PEP leaves office.

The directive includes notes castigating firms for refusing the business of a PEP:

“The requirements relating to politically exposed persons are of a preventive and not criminal nature, and should not be interpreted as stigmatising politically exposed persons as being involved in criminal activity. Refusing a business relationship with a person simply on the basis of the determination that he or she is a politically exposed person is contrary to the letter and spirit of this directive and of the revised FATF Recommendations.”

Timeline.

The Directive has suffered many delays, but the likely timeline is:

  • First half of 2016 – Consultation document, three months to respond and open HM Treasury events – now over.
  • Second half of 2016 – Draft regulations.
  • Early 2017 – Guidance finalised.
  • June 2017 – Regulations come into effect.

European Anti-Money Laundering Directive

What does this mean for law firms?

There are three key points:

  • A potentially easier CDD process with access to a register of beneficial owners. Although firms will not be allowed to rely solely on the register for CDD.
  • Firms and banks will no longer be able to apply simplified due diligence to pooled client accounts.
  • The directive places significant weight on national risk assessments by member states. The recent UK national risk assessment found that law firms are high-risk targets for money laundering and that CDD processes and policies were weak. This new regime will likely bring even more scrutiny to processes at law firms.

What should law firms do to prepare?

  • Money laundering reporting officers (MLROs) should perform and document an internal risk assessment;
  • MLROs should update policies to reflect changes to the directive and incorporate a risk-based approach;
  • MLROs should consider adding an audit function to test procedures;
  • All new policies should be reviewed and approved by senior management; and
  • Plan to roll out new AML courses in early 2017, once the transposition is complete. The training should include:
    • Changes incorporated in the Fourth Directive;
    • How to perform and document a risk-based assessment of money laundering; and
    • How to access the beneficial ownership registry.

You can get further information on both the Law Society of England’s and The Law Society of Scotland’s websites.

Mike O’Donnell, April 2017.

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