5MLD - Lifting the lid on anonymity with effective customer due diligence

Posted: 12th June 2018

On the 19th April 2018, MEPs voted 574 to 13 (with 60 abstentions) in favour of the fifth and latest EU agreement on anti-money laundering regulation.

The Council of the EU adopted the new 5MLD rules on 14th May 2018. Member states will have 18 months to transpose the Fifth Money Laundering Directive (5MLD) into national law, three days after its publication in the Official Journal of the European Union.

The agreement is partially due to a response following recent terrorist attacks and tax evasion scandals. In 2015, 151 people died, and 360 were injured following the terrorist attacks across the EU.

In November 2015, anonymous prepaid debit cards were used in the Paris terrorist attacks to conceal the identities of the attackers. In 2016, a significant leak of documents from a Panamanian company known as Mossack Fonseca – dubbed the ‘Panama papers’ – showed how clients used complex structures to conceal the ultimate beneficial owners of companies to launder money, evade tax and circumnavigate sanctions. 

The United Nations, Interpol and Europol reported that organised crime and terrorism are increasingly converging, and the links between these groups are a significant threat to the financial system and national economies.

‘Know Your Customer’ (KYC) principals and effective customer due diligence are paramount to preventing financial crime, and there is a common thread running through 5MLD that seeks to improve and expand on this kind of transparency. The directive will encourage firms to fully understand who their customers are and close off any opportunities for individuals to conceal their identity.

How the directive encourages transparency

1. Improve transparency on trusts and companies with beneficial ownership registers

In the wake of the Panama Papers leak, 5MLD will require member states to set up publicly accessible beneficial ownership registers for legal entities to prevent the misuse of companies and trusts to launder the proceeds of crime or finance terrorism.

The transparency of public information on beneficial owners of trusts and companies will allow greater scrutiny by civil society, for example; investigative journalists and non-governmental organisations (NGOs). These registers will also be interconnected across member states to simplify cooperation and enhance accessibility to key preventative information.

2. Lifting anonymity on prepaid cards and reducing thresholds

Anonymous pre-paid cards facilitate the financing of terrorism and assist with logistics for attacks. Member states will apply restrictions on pre-paid cards, with two new thresholds; the non-online retail purchasing threshold will be lowered from €250 to €150. Online transactions will be limited to €50.

3. Business relationships and transactions to high-risk countries

There will be increased scrutiny for member states with a business relationship with those countries that have significant weaknesses in the AML/CTF regime. Firms will need to apply mitigating measures with enhanced due diligence on their customers in high-risk third countries.

4. Customer verification for virtual currencies

The theme of eliminating anonymity in the directive continues with exchange services between virtual currencies and fiat currencies. Virtual currency exchange platforms and custodian wallet holders will be obliged to verify identification with adequate customer due diligence.

How firms must respond to 5MLD

What do you know about your customer?

The foundation of any effective financial crime prevention is understanding who exactly you are dealing with, to address any apparent risks with adequate controls.

5MLD enforces the message that not understanding or knowing your customers is detrimental in the fight against terrorist financing and money laundering.

Understanding the geographical risks with your customer, products and channels is an essential element of your risk assessment.

5MLD is unclear on the exact new payment methods of the future. However, there is a clear trend with faster payment technology, i.e. virtual currencies, which are highly likely to grow in popularity within mainstream markets. Some firms have de-risked in this area, however, managing the risks effectively can provide commercial advantage in a changing market.

Preparing for 5AMLD
 
Our tips:

• Firms should quality assure their customer due diligence process controls and ensure they are in line with current legislation and guidance
• Risk assessments should be periodically updated and ensure that high-risk jurisdictions are scrutinised with sanction, tax evasion, money laundering and corruption risks 
• Build and design effective controls to manage the increasingly complex threats of virtual currencies
• Ensure that your staff have the right skill set and tools to understand the ultimate beneficial owner with complex structures in less transparent jurisdictions

Ongoing maintenance of your customer database is crucial to preventing financial crime. KYC reviews should be conducted on a regular basis as they enable firms to understand their customers better. Firms frequently utilise a combination of financial crime expertise, strategic partnerships and technology such as robotic process automation (RPA) to help them automate KYC exercises to improve efficiency and fully understand their customers. 

Automating your KYC process and other AML obligations (e.g. sanctions, politically exposed persons and employee screening) will provide opportunities to reduce time and cost within your business. Firms that can adapt, align and automate the regulatory changes will accelerate and achieve in a challenging market.