The consultation on the Fourth Money Laundering Directive

On the 15th September 2016, HM Treasury published a Consultation on the Fourth Money Laundering Directive, inviting views and evidence to inform government on the transposition of the directive into UK law.

Relevant businesses and individuals in the UK are currently subject to the Money Laundering Regulations 2007 (3MLD) which seeks to mitigate the risks of money laundering and terrorist finance. The 2007 regulations apply to the conduct of business and transactional work in the UK, affecting credit and financial institutions, auditors and accountants, legal professionals, estate agents, high value dealers and casinos. The regulations require a number of measures relating to due diligence, monitoring, verification, registration, record keeping and employee training. The regulations are superintended by various regulatory bodies and subject to criminal sanctions. For more information see Practice note, Money laundering: offences under the Money Laundering Regulations 2007.

The Fourth Directive

The Fourth Money Laundering Directive (4MLD) was published in the EU Official Journal on 5 June 2015. The directive seeks to give effect to the updated Financial Action Task Force (FATF) standards. 4MLD  introduces a number of new requirements on relevant businesses and changes to some of the obligations under 3MLD.

The following amendments are proposed:

  • The adding of virtual currency exchange platforms to the list of regulated entities. Virtual currency exchange platforms will become subject to the obligation to implement preventive measures and report suspicious transactions.
  • Restricting the use of anonymous pre-paid cards, by lowering the thresholds from €250 to €150 to which due diligence measures apply and removing the exemption from online use.
  • The harmonising of the approach to high risk jurisdictions from EU members, which will reduce the risk of “forum shopping” (see Legal update, HM Treasury publishes advisory note on money laundering and terrorist financing controls in overseas jurisdictions).
  • Setting out rules for the identification of beneficial owners, including providing public access to companies.
  • Increased interconnection between competent authorities to identify beneficial owners through access to national central registers, and giving greater powers to financial intelligence units.

In addition, the new Fund Transfer Regulation (FTR) accompanies the directive. It updates the rules on information on payers and payees accompanying transfers of funds, in any currency, for the purposes of preventing, detecting and investigating money laundering and terrorist financing, where at least one of the payment service providers involved in the transfer of funds is established in the EU.

All EU Member States have two years to transpose the requirements of the directive into national law which will, where necessary, amend or replace the existing regulations or legislation. The deadline is 26 June 2017.

The approach of the UK

The government has stated that there is a need to balance the discouraging of money laundering and terrorist finance with the proportionate burden on businesses. In respect of FTR, the government will consider the potential costs of the proposals for those affected in order to try and maintain a fair and proportionate anti money laundering and counter-terrorist financing regime and also ensure that the new regime does not put UK businesses at a competitive disadvantage compared with other EU businesses.

As a result, new legislation will need to be drafted and passed. The government is proposing the Money Laundering and Transfer of Funds (Information on the Payer) Regulations 2017 in order to transpose both 4MLD and the FTR. The current Money Laundering Regulations 2007 and Transfer of Funds Regulations 2007 would be revoked. The government intends that the new provisions will come into force in national law by 26 June 2017.

The consultation naturally acknowledges the EU referendum that took place on 23 June 2016 (see Blog, What does Brexit mean for business crime?) However, the consultation confirms that until exit negotiations are concluded, the UK remains a full member of the EU and all the rights and obligations of membership remain in force. Although the outcome of any negotiations after the invoking of article 50 will determine what arrangements apply in relation to EU legislation after the UK has left, it seems unlikely any money laundering legislation or regulations will be affected. To do so would certainly attract the attention of the FATF.

The Consultation

The consultation asks a total of 87 questions, all of which are set down in Appendix A. Some are general, others specific to particular industries. The questions likely to be of greatest interest to business crime practitioners are those in chapter 4, which consider changes to the due diligence proposals, in particular reliance on third parties, questions in chapter 6, concerning electronic payments, and questions in chapter 10, concerning beneficial ownership.

Although HM Government has agreed to consider and publish any non-confidential responses, and the finer points of implementation could be affected, it is clear that the broad changes proposed will be in force in UK law by June 2017. The key drivers are the emergence of on-line and virtual currency, Bitcoin being determined as money by a US judge earlier this week, the ripple effect of the Panama Papers (see Blog post, Our man in Panama) shining light on the lack of transparency in corporate entities and it connection with corporate wrongdoing, and the terrorist attacks in Paris in November 2015, that illustrated carnage could be cause by small amounts of money moved on pre-paid cards. The key drivers should however illustrate that the proposed changes are based on real life issues.

Transposition also forms a key part of the Action Plan for anti-money laundering and counter-terrorist finance, published in April 2016 by the Home Office and HM Treasury. Having so publicly committed itself to robust money laundering and terrorist finance control, it is unlikely to backtrack, particularly as preparations for the mutual evaluation of the UK by FATF, likely to take place in 2007, are in progress.

The consultation will close on 10th November 2016.

Practical Law David Bacon

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