Out-Law News | 07 Jan 2020 | 5:37 pm | 3 min. read
The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (the MLR 2019), which were laid before parliament shortly before Christmas, implement the EU's fifth AML directive (5MLD). The MLR 2019 amend the existing Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017).
Specialists in corporate crime and financial services regulation at Pinsent Masons, the law firm behind Out-Law, said the reforms extend existing customer due diligence (CDD) obligations, increase reporting requirements for many businesses, and also introduce new duties to carry out risk assessments, and that there is a regulatory imperative that individual senior managers ensure their firms comply with the regulations.
David Hamilton said that CDD requirements have been extended to letting agents and art market participants, such as galleries, dealers and auctioneers, as well as businesses active in the cryptoasset market – specifically platforms through which cryptoassets and fiat currencies can be exchanged and 'custodian wallet providers' that safeguard cryptoassets or private cryptographic keys on behalf of customers.
Hamilton said: "One of the main changes requires that art intermediaries now carry out CDD checks if a transaction or linked transactions amount to €10,000 or more, regardless of the method of payment. Previously that obligation only applied to cash transactions of €10,000 or more. This will undoubtedly add to the cost of compliance for such businesses."
"The reforms also require letting agents to apply CDD in cases where they have leasehold transactions lasting one month or more at a monthly rent – during any part of the lease’s life – of €10,000 or more," he said.
Hamilton said that more onerous enhanced due diligence (EDD) requirements will also apply under the new regime.
"While the existing framework requires entities to examine the background and purpose of business relationships and transactions with customers established in high-risk third countries, the MLR 2019 imposes more prescriptive measures, including requirements to obtain additional information on the customer and its beneficial ownership, the customer's source of funds, as well as implementing enhanced monitoring of the ongoing relationship," Hamilton said. "However, the government has elected not to require companies to apply EDD with respect to business relationships or transactions involving high-risk third countries – it previously expressed concern that 'involving' may be too broad a concept."
Hamilton also flagged new provisions requiring companies to perform risk assessments prior to the launch or use of new products or business practices, including new technologies. He said parent companies must also ensure they have group-wide policies on the sharing of information about customers, customer accounts and transactions for AML and CTF purposes.
Under the new regulations, companies subject to the rules will be required to report to Companies House any discrepancies in beneficial ownership between official register data and materials obtained during the process of conducting 'know your customer' checks.
Although not due to be implemented until 10 September 2020, the new regulations also now require that a central automated mechanism be established to enable law enforcement agencies to request customer information from banks, building societies, credit unions and safe deposit boxes, and for institutions to respond to such requests.
In preparation for the new regime, the UK's Financial Conduct Authority (FCA) has highlighted some of the specific areas of reform financial firms might need to be aware of, including the new thresholds for CDD that apply to electronic money (e-money).
Three European supervisory authorities have also issued joint guidelines explaining how financial regulators will be able to cooperate and exchange information on AML and CTF matters. Last month, the Council of Ministers, which is made up of representatives of the governments of the countries that make up the EU, set out strategic priorities on AML and CTF, including calling on the European Commission to address restrictions on information exchange and cooperation.
David Heffron of Pinsent Masons said: "Anti-money laundering is a clear area of focus for the FCA, as well as European bodies, in the coming year. The FCA identified in its annual report on AML that effective customer risk assessment and customer due diligence are key to reducing opportunities for money laundering – the new CDD requirements brought in by these regulations support this."
"Firms will need to ensure that they have appropriate policies and procedures in place to identify, monitor and assess money laundering risks within their business and that these are updated to reflect the additional high-risk factors in relation to enhanced due diligence, the e-money thresholds and beneficial ownership information requirements, as relevant to their business," he said.
Alice Hallewell, also of Pinsent Masons, said: "In light of the Senior Managers and Certification Regime (SMCR) and the FCA’s statement in its annual report that accountability and ownership of money laundering risk in the first line of defence needs to increase, rather than being viewed as a compliance or back-office responsibility, senior managers who hold responsibility for countering financial crime should be aware of their potential personal liability in relation to firms’ failings in this area, and take steps to be confident that new requirements under the amended regulations have been addressed."
Further reforms to AML regulations could follow. The sixth EU AML directive (6MLD) was adopted in late 2018, with EU member states required to transpose it into national law by 3 December 2020. It is not yet clear whether the UK government will proceed to implement the legislation in the event of a 'no deal' Brexit.
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