The Directive (EU) 2018/843 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (“AML 5“) 1 entered into force on July 9, 2018. EU Member States were required to transpose (i.e., implement into national legislation) AML 5 into national law by January 10, 2020. 2
AML 5 further strengthens the EU’s anti-money laundering and combatting the financing of terrorism (“AML-CFT“) regime in multiple ways, including: increasing transparency regarding the beneficial ownership of companies; enhancing cooperation and information sharing between financial supervisory authorities; introducing stricter controls of transactions with customers located in high-risk third countries; restricting the anonymous use of virtual currencies; allowing for better identification of politically exposed persons (“PEPs”) and extending the scope of sectors and firms subject to AML-CFT obligations. 3
I Beneficial owners
AML 5 requires EU Member States to ensure that national registers of beneficial ownership 4 of legal persons (except trusts)5 established by the Fourth AML Directive 6 are publicly accessible. Obliged entities are required to provide “adequate, accurate and up-to-date” information on their beneficial owners to ensure accuracy of beneficial ownership registers.7
Obliged entities should therefore ensure (through dedicated processes) the publicity, data quality and accessibility of beneficial ownership information of all their legal entities, within national beneficial ownership registers, consistent with national law.
II Cooperation and information sharing between regulators
AML 5 also strengthens cooperation and information sharing between financial supervisors.8 It requires EU Member States to establish centralized bank account registers or retrieval systems, for identifying the holders of bank accounts and payment accounts. Such registers and systems would be available to Financial Intelligence Units (“FIUs“) from the various EU Member States (such as Tracfin in France), to facilitate better cooperation with each other, as well as with other competent authorities.
III High-risk third countries
AML 5 introduces a harmonized enhanced due-diligence regime when transacting with high-risk third countries, identified by the European Commission as demonstrating deficiencies in their AML-CFT framework 9 For any transactions with customers located in these countries, additional information on the customer, the beneficial owner and the nature of the business relationship, approval of senior management for business relationships, and enhanced monitoring of the business relationship, will be required.
In response to these provisions, obliged entities should establish appropriate compliance procedures and controls when dealing with customers located in high-risk third countries as defined by the European Commission.
IV Prepaid cards
AML 5 lowers the threshold for which financial services providers have the obligation to identify transactions in electronic money with prepaid cards. The anonymous use of prepaid cards will only be permitted in the following two circumstances: (1) for customers making in-store purchases below EUR 150, lowering the previous threshold of EUR 250 and (2) when a customer makes an online transaction with a prepaid card below EUR 50. 10
EU Member States are also required to ensure that anonymous prepaid cards issued outside the European Union are not used on European territory unless they meet requirements equivalent to those mentioned above.
V Enhanced identification of PEPs
AML 5 also introduces a more efficient method of identifying PEPs through the publication of a consolidated list of prominent public functions by each EU Member State and accredited international organizations.11 Organizations subject to AML-CFT obligations must ensure that effective compliance procedures and controls are in place when engaging in transactions involving PEPs.
VI Extended scope of sectors and persons subject to AML-CFT obligations
AML 5 extends the scope of application of the previous EU AML directives 12 to the following additional persons 13 :
- custodian wallet providers;
- providers engaged in exchange services between virtual currencies and fiat currencies;
- art traders (when the amount of the transaction is superior or equal to EUR 10,000);
- auditors, external accountants and tax advisors as a principal professional activity; and
- estate agents acting as intermediaries in the letting of property (where the monthly rent exceeds EUR 10,000).
Given the extension of scope, entities should determine whether, based on their business activities and monetary thresholds, they may now be subject to the EU’s AML-CFT regime. 14
Entities subject to AML-CFT obligations should review their compliance programs and strengthen their KYC policies in order to meet the standards imposed by national legislators in their respective countries. Failure to comply may result in enforcement actions and penalties imposed by competent authorities (i.e., national regulators, such as the ACPR in France) in the relevant EU Member State.
Finally, in-scope entities should also take note of new criminal law provisions related to money laundering and the financing of terrorism that complement AML 5. For additional information on these provisions, please refer to our previously issued client alert on Directive (EU) 2018/1673 on combating money laundering by criminal law.15
1Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU.
2As of January 10, 2019, only eleven countries (Belgium, Bulgaria, Ireland, Greece, Croatia, Italy, Latvia, Luxemburg, Austria, Finland and Sweden) have indicated on the EU portal (updated weekly) that they have implemented AML 5 into their legislation, However, other countries may have partially or fully transposed it but may not have indicated the status of implementation on the EU portal.
3 Previously, entities subjected to AML 4 included: credit and financial institutions, designated non-financial businesses and professions, such as auditors, external accountants, tax advisors, notaries and lawyers, and in certain circumstances, estate agents, traders in goods (e.g. precious metals and stones, when payments of EUR 10,000 or more are made in cash) and providers of gambling services, as summarized by the EU
4 Article 3 paragraph 6 (a) (i) of Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing defining beneficial owners as natural person(s) who ultimately own or control more than 25% plus one share or more than 25% of ownership.
5 Access to registers of beneficial ownership of trusts will require demonstration of “legitimate interest” as defined in national law.
6 Chapter III of Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.
7 Paragraph 25 of the Preamble of AML5.
8 Paragraph 16 of AML 5.
9 See Press Release, European Commission adopts new list of third countries with weak anti-money laundering and terrorist financing regimes, February 13, 2019
10 Article 1 paragraph 7 of AML 5.
11 Paragraph 23 of the Preamble of AML 5.
12 See footnote 3 above.
13 Article 1 paragraph 1 of Directive (EU) 2018/843 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.
14 In France, as per article 2 of the ordonnance n° 2016-1635 of December 1, 2016, virtual currency providers were already subject to AML-CFT obligations.