5th AML Directive — EU Anti-Money Laundering Directive

The European Parliament regularly passes Directives, which are forms of legislation “directed” at the 28 member states. They typically focus on results, allowing each country to define the best path to success for their jurisdiction.

The directives are designed to tackle international threats, like global warming and corruption, more effectively. In 1990, the European Union passed the 1st anti-money laundering Directive (1AMLD) in order to constrict the flow of illegally acquired money back into the financial system.

The key change introduced by the first AML directive was that entities now needed to perform customer due diligence checks before doing business. This measure was designed to ensure that all transacted funds were acquired legally.

Since the 1990s, the legislation has been continuously revised and improved in order to minimize the threat of money laundering. The 4th AML Directive (4AMLD) was passed in 2015 and came into force in 2017. It introduced a raft of new measures including enhanced scrutiny for politically exposed persons (PEPs), a lower threshold for customer due diligence and stricter requirements regarding beneficial ownership.

With this context in mind, let’s now look at the most recent piece of legislation: the 5th AML Directive (5AMLD).

What is the 5th AML Directive?

The 5AMLD was published on the 19th of June 2018 and provided a major update to the 4AMLD passed three years previously.

The new legislation was crafted in the context of the Paris and Brussels terrorist attacks, as well as the leaked Panama Papers in April 2016. As a result, 5AMLD introduced significantly stricter due diligence requirements for entities, and ended the anonymity of bank and savings accounts.

Let’s look at the most important changes in more detail.

5AMLD for Cryptocurrency Platforms

The 5th AML Directive represents a major update for cryptocurrency platforms and provides more clarity on compliance requirements. 5AMLD includes:

• A legal definition of virtual currencies, namely: ”a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.” Interestingly, this definition could also apply to baseball trading cards. We will see if 6AMLD provides more clarity.
• Platforms holding customers’ private keys are considered “obliged entities”, and consequently need to follow the same compliance requirements as traditional financial institutions under 4AMLD. As a result, all relevant cryptocurrency platforms will be required to perform customer due diligence and submit suspicious activity reports. Additionally, they will have to be registered with the appropriate national authorities, BaFin in Germany for example.
• 5AMLD significantly increases the power of the Financial Intelligence Unit (FIU), which will have the mandate to obtain the addresses and identities of token holders. How this will be achieved isn’t explained and it is still unclear how it would be possible.

Clearly 5AMLD is going to have a huge impact on cryptocurrency platforms, but legislation also paves the way for new innovation. The more guidance we receive from the EU and others, the less uncertainty entrepreneurs have to deal with.

The key is to operate in good faith and try to maximize transparency with both your customers and the regulator.

5AMLD on High-Risk Countries

Individuals from Tunisia, Vanuatu, Ethiopia and other countries deemed “high-risk” by the EU will be subject to even greater due diligence check when using European businesses. 5AMLD compels EU member states to treat prospective customers from high-risk states with extreme caution.

The full list of countries is:

• Afghanistan
• Bosnia and Herzegovina
• Guyana
• Iraq
• Lao PDR
• Syria
• Uganda
• Vanuatu
• Yemen
• Ethiopia
• Sri Lanka
• Trinidad and Tobago
• Tunisia
• Pakistan
• Iran
• Democratic People’s Republic of Korea

When dealing with individuals from any of these countries, entities are obliged to:

• Collect and record the personal information of the customer and the Ultimate Beneficial Owner (UBO). Additionally, the entity needs to collect and record the reason for the proposed transactions, as well as the origin of the individuals wealth.
• Receive approval from a member of the executive team or senior management to accept the customer. Of course the executive should first understand the risks involved and be in full possession of the transaction details.
• Continuous screening to ensure that the business relationship is not being misused for money laundering or terrorist financing.
• Lower thresholds on cumulative transaction amounts, meaning platforms should collect further information if an individual transacts a significant amount of funds.

With all this in mind, entrepreneurs and business owners need to be aware which countries are listed as “high-risk” and treat residents with enhanced due diligence.

5AMLD on Politically Exposed Persons (PEPs)

Although 4AMLD began the process of focussing on PEPs, 5AMLD continues this legislation. The 5AMLD requires that EU member states create and publicly release a functional list of PEPs. The list features the name of the positions that are considered to be politically exposed but does not actually name the person who is occupying the position as that changes periodically. The purpose of this is make it easier for compliance teams to identify the PEPs that they should be screening and monitoring for changes to risk.

Keeping and maintaining a functional PEP list does require a significant amount of administration, so companies need to take care that they are meeting compliance expectations.

5AMLD on Ultimate Beneficial Ownership (UBO)

When it comes to Ultimate Beneficial Ownership (UBO), 5AMLD continues to build on the groundwork laid by 4AMLD. UBO refers to the person who benefits from ownership of an asset (such as a company or real estate) or has the power to influence or vote on transaction decisions regarding the asset. 5AMLD takes the following measures in regards to UBO:

• UBO lists (originally created under 4AMLD) are to be made available to the public. This is an important step in detecting the movement of illicit funds.
• UBO national registers have to be inter-connected at an EU level. This is to ensure the exchange of information and to facilitate cooperation between member states.
• Verification methods used by EU member states are to be strengthened, ensuring that the information they have is reliable and accurate.
• Member states have to introduce separate UBO registers for bank accounts. These lists will not be publicly available (unlike company UBO registers) and are only accessible by authorities.
• Trusts must also observe beneficial ownership regulations. Similarly to companies, that information will be available to authorities or others who demonstrate legitimate interest.