Fifth AML Directive requires companies to provide more transparency
The Fifth Directive (EU) was adopted in May 2018 and Member States were required to transpose changes to their national law by the beginning of 2020. Changes include adding more obligated entities and encouraging electronic identification means to achieve the ultimate goal — transparency — in order to successfully fight financial crime.
The need to make verification processes more efficient and secure gradually moves companies towards automation. The time, pace and scope are being pushed further in a very competitive business environment. To manage the growing volumes, manual labour needs to be replaced by software wherever possible. The highly skilled specialists should be decision-makers and in order to make weighted thorough business decisions they need automated business tools.
The Fourth Directive, improved and toughened
The Fifth Directive has very important changes — new obligated entities, additions focused on enhanced due diligence regarding high risk third countries, transparency for politically exposed persons and ultimate beneficial owners.
There is the constant need to further increase the overall transparency of the economic and financial environment of the European Union. The prevention of money laundering and terrorist financing cannot be effective unless the environment is hostile to criminals seeking shelter for their finances through non-transparent structures. Fifth Directive aims not only to detect and investigate money laundering, but also to prevent it from occurring. Enhancing transparency could be a powerful deterrent.
New obligated entities added
Fifth Directive broadens the circle of obligated entities. The added obligated entities, who have to fulfil the requirements to prevent money laundering and terrorist financing, are:
- providers engaged in exchange services between virtual currencies and fiat currencies;
- custodian wallet providers;
- persons trading or acting as intermediaries in the trade of works of art, including when this is carried out by art galleries and auction houses, where the value of the transaction or a series of linked transactions amount to EUR 10 000 or more;
- persons storing, trading or acting as intermediaries in the trade of works of art when this is carried out by free ports, where the value of the transaction or a series of linked transactions amounts to EUR 10 000 or more.
- Obligated entities have to have effective internal rules and tools to fulfil the obligations that arise from the directive and national law (e.g. knowing the background of your business partner).
During the upcoming years we will probably see more entities added to the list. Our business environment is changing and with possibilities always comes responsibility. The responsibility to comply with regulations and prevent financial fraud.
Automated electronic means become more important
Fifth Directive clearly promotes identification via electronic identification means. Identifying a customer and verifying the customer’s identity on the basis of documents data or information obtained from a reliable and independent source, where available, should be made through electronic identification means.
Transparency applies to beneficial owners as well
Obligated entities have to identify the beneficial owner(s). Fifth Directive specifies that if the beneficial owner is the senior managing official, obliged entities shall take the necessary reasonable measures to verify the identity of the natural person who holds the position of senior managing official and shall keep records of the actions taken as well as any difficulties encountered during the verification process. As a rule, data regarding beneficial owners has to be up to date and easily accessible to the public, Member States have to ensure that. Knowing the beneficial owners are especially important to attain transparency which is important in fighting against the terrorism and money laundering.
Customer due diligence is not a one-time task
Fifth Directive clearly sets forth that obligated entities must apply due diligence measures not only to all new customers but also at appropriate times to existing customers on a risk-sensitive basis, or when the circumstances of a customer change. Each customer should be assigned a risk level and according to internal procedures, customer due diligence measures, based on risk level, should be updated regularly. Customer due diligence is especially important when dealing with high-risk third countries — with respect to business relationships or transactions involving high-risk third countries, obligated entities have to apply enhanced customer due diligence measures.
Prominent public functions shall be specified
The Fifth Directive set forth that each Member State shall have to issue and keep up to date a list indicating the exact functions which, according to national laws, regulations and administrative provisions qualify as prominent public functions. Member states also shall have to request each international organisation accredited on their territories to do the same. The abovementioned lists shall be sent to the EU Commission and may be made public.
The Commission as well shall have to compile and keep up to date the list of the exact functions which qualify as prominent public functions at the level of Union institutions and bodies. As a result, the Commission shall assemble a single list of all prominent public functions and that list shall be made public. It is a great initiative for transparency but it will undoubtedly take time. Meanwhile, obligated entities still have to mitigate risks involving politically exposed persons and once again, good sources are hard to come by.
Keep up with the regulation and use the best tools on the market
It is crucially important to identify and verify private persons and legal entities — the integrity of the financial system is dependent on the transparency of corporate and other legal entities. Being non-compliant with the requirements results in fines and reputational loss, which may ruin a company.
The world is constantly evolving, we need to evolve with it. It is never too late to adapt and why not to lead the anti-money laundering world. Protecting your business from fraud and harm to reputation should be a goal for every business owner, under regulations or not.
Entify provides a fully automated ‘know-your-customer’ solution to the businesses whose clients and partners are other businesses. The Entify solution enables companies to get acquainted with the regulations for the prevention of money laundering before starting business relationships and in the course thereof and to prevent fraud. Today, Entify is used in such areas as production, factoring, payment and crypto, investment, and insurance companies. More information: entifyme.com
