AMLD5 brings new challenges for ‘obliged entities’ including financial institutions, tax professionals, providers of virtual currencies and those trading in luxury goods – such as art dealers.
The European Union (EU) has implemented the 5th Anti-Money Laundering Directive (AMLD5) as it seeks to drive financial transparency across the continent.
A provisional agreement on AMLD5 was published in December 2017. On 19 April 2018, the new directive was formally adopted by the European Parliament, amending the 4th Anti-Money Laundering Directive (AMLD4) in a move designed to strengthen the fight against money laundering and terrorist financing. EU member states have up to 18 months from the implementation date to transpose these rules in their national legislation.
AMLD5 will increase transparency about who really owns companies and trusts to help erode opaque structures that fuel criminal activity. In a sign of the times, it will also tackle terrorist financing risks linked to anonymous use of cryptocurrencies and pre-paid instruments.
With all EU member states now responsible for beneficial ownership, all Know Your Customer (KYC) information should be readily available in a much more harmonised system.
What are the main changes related to AMLD5?
Improved transparency on the real owners of companies.
The beneficial ownership registers for legal entities will be public, enhancing public scrutiny and preventing the misuse of legal entities for money laundering and terrorist financing purposes. National registers will also be interconnected to facilitate cooperation and exchange of information between member states.
Improved transparency on trusts.
The access to data on the beneficial owner of trusts will be accessible without any restrictions to competent authorities, EU Financial Intelligence Units, the professional sectors, and other persons who can demonstrate a legitimate interest.
Enhanced powers for the Financial Intelligence Units.
The Financial Intelligence Units will have access to more information through centralised bank and payment account registers or data retrieval systems. The Financial Intelligence Units from different EU countries will also be able to cooperate more easily, as well as with other competent authorities.
Enhanced cooperation between financial supervisory authorities.
In light of the revelations of the Panama Papers, AMLD5 will further enhance the exchange of information and cooperation between financial supervisory authorities in respect of their confidentiality rules.
Anti-Money Laundering and counter terrorist financing rules extended to virtual currencies, tax related services, and works of art.
The rules will now apply to entities which provide services that are in charge of holding, storing and transferring virtual currencies, to auditors, external accountants and tax advisors which are already subject to AMLD4, and to persons trading in works of art. These obliged entities will have to identify their customers and report any suspicious activity to the Financial Intelligence Units.
New responsibilities for art dealers
The final point is particularly pertinent as it pulls a number of new actors into obliged entity status. This includes art dealers, who need to start operating more like traditional financial institutions. Art dealers buy and sell, and so must carry out due diligence and keep everything on file. It’s one thing finding out if someone has the money, but who is behind the money?
Being in control of your KYC process is much more than the identification and verification of a client to help prevent money laundering and terrorist financing. Being in full control also means that you abide by the right set of policies to ensure a solid KYC system that stands its ground in the long term.
You will need to comprehensively describe the activities you will perform to mitigate the risk of being involved in money laundering and terrorist financing. TMF Group works with specialist legal counsel to help you effectively compile the information required about your clients and counterparties.
The information that you need to first collect will depend on the nature of the client (private individual or entity). If you are dealing with a private individual, the following documents are required:
- a certified copy of their passport
- a clear description of their activities, and information about the countries where these activities are performed
- a source of wealth declaration, and documents proving that source of wealth.
If you are dealing with an entity, you will need additional information, including:
- ownership structure (economic and voting rights), dated and signed
- documents verifying the relevant structure of the client company and Ultimate Beneficial Owner (UBO)
- a clear description of the activities of the entity, and information about the countries where these activities are performed
- certified copies of the passports of board members and UBOs
- articles of association, with the notary’s stamp
- a source of wealth declaration for the entity, and documents proving that source of wealth.
You then need to check if the person that claims to be your client or counterparty is really who they claim to be. In the case of dealing with entities, is the UBO really the UBO? The publicly-available beneficial ownership registers mandated by AMLD5 will help with this, and so can we.
If the client or counterparty passes the identification and verification stage, you should then consider a so-called adverse media check, which is commonly performed in the financial industry. This entails screening them against a detailed database that contains public media coverage and criminal records in order to check they don’t pose a risk based on historical information about their previous activity.
It’s also best to cross reference them against sanctions lists and a PEP (Politically Exposed Person) list to find out if they have functions which are more vulnerable to corruption. It’s perhaps an obvious point but having access to the most up-to-date and accurate data is crucial. There are various providers of this information on the market. You should be aware that this is a time-consuming activity, which also requires the information to be filed carefully.
The international art market isn’t regulated like the financial markets. However, it’s anticipated that countries will seek to appoint a regulatory body to supervise a consistent approach to identification and verification checks and screening of clients and counterparties.
It’s therefore important to keep screening results safe and maintain an audit trail of your KYC process – taking into account the new requirements of General Data Protection Regulation (GDPR), which came into force on 25 May 2018. The information can be stored in hard copy or in an electronic database.
The latter has the advantage that it’s easier to re-use the information of clients who do multiple transactions.
In the financial markets, you are allowed to delegate the KYC process to a partner, so long as you remain ultimately responsible for final decisions. We expect this will also apply to the art market.[i]
And we all thought Brexit meant no more EU rules!
[i] Reproduced with permission from Mondaq