Building on the foundation established in the 4th AMLD, the 5th Money Laundering Directive (5AMLD) has issued new rules to tackle the present challenges of the European Union’s AML/CFT ecosystem. Considering the directive has been in effect for some time, let’s see what it changed and what it means for European businesses.
Who is brought into the scope
Besides the regulated entities under 4AMLD, there have been some additions to the obligated entities.
- Virtual currency providers and custodian wallet providers;
- Art traders (in case of transactions over €10,000);
- Estate agents (who act as intermediaries in the letting of the property with a monthly rent over €10,000);
- Services similar to auditors, external accountants and tax advisors (as their main business).
Now, let’s talk about the key amendments.
Cryptocurrency and crypto exchange regulation
By extending its reach to cryptocurrencies, 5AMLD brings more transparency and trustworthiness the industry that probably needs it the most. It even gives virtual currencies a legal definition that goes “a digital representation of value that can be digitally transferred, stored or traded and is accepted by natural or legal persons as a medium of exchange”. The directive partially eliminates anonymity, establishes new demands equal to those of financial institutions and demands crypto businesses to sign in with the local regulatory body.
- Pushing back on anonymity
The directive grants Financial Intelligence Units (FIU) the authorized right to access the information on the identity and the address of the crypto transaction owner.
- Getting in the same boat with financial institutions
In terms of AML/CFT requirements, cryptocurrency exchanges have adopted everything asked of financial institutions. SARs, customer due diligence (CDD), record-keeping and appropriate controls — all became a necessity.
- Registration with the local authority
From January, regulated crypto businesses must register with the applicable authority, such as FMA in Austria, FINMA in Switzerland and so on.
The regulation makes an effort to render European cryptocurrencies and exchanges more lawful and reach the same level of progress made in Asia, where in some parts, crypto transactions were effectively integrated into financial systems.
Electronic money and prepaid card thresholds
5AMLD made some of the previous limitations even harsher.
- Lower monthly threshold
The directive lowered the limit of monthly transactions made by anonymous prepaid cards to €150. It includes transactions, savings and balance refill. Cardholder with an over €150 balance will have to go through an identity check.
- Lower transaction limits
€50 is the new minimum value of anonymous remote transactions. Meaning, that transactions over €50 will also require an identity check.
- Ban on the use of non-EU issued cards
Prepaid cards issued outside the European Union can no longer be used unless the country it was issued in has similar AML/KYC standards.
Following these demands, E-money Licence holders will have to review and adjust to the new thresholds and controls. Like that, the allowed amounts of unidentified transactions shrink together with the room for lurking frauds.
Beneficial ownership (BO) registry
The following measures were enforced in regard to regulating ultimate beneficial owners.
- Public BO lists
Beneficial owner lists are to be available publicly within a year and a half of 5AMLD going into effect.
- New demands to trusts
Trusts or similar establishments have to comply with BO requirements and report the findings to the relevant authority.
- EU BO database
Member states will share BO registers across member states to benefit the communication and alert the nearby authorities.
- Bank account BO listings
Beneficial owners registers is a new must for bank accounts. Although, it won’t be access-free for authorities.
EU businesses are pushed to ameliorate and adjust the verification to the ultimate accuracy. As to the source of data on the BO, beneficial owners themselves are obliged to provide the information required of them.
Politically exposed persons (PEPs) registry
Similar to the requirements set to regulate UBOs, 5AMLD pays close attention to politically exposed persons, otherwise known as PEPs. Releasing public PEPs lists are aimed at assisting companies in identifying such potentially high-risk clients.
- Company-issued PEPs lists
Companies must list, publicly issue and regularly update PEPs registers.
- Public EU-level lists
The European Union will also publish their version of the PEPs registry featuring the list of politically exposed public offices and functions.
National and EU based PEPs will both need enhanced due diligence (EDD) in terms of KYC processing.
New measures to high-risk regions
5AMLD dictates that when a company is interacting with a high-risk third country, it must perform EDD to protect the company of the dangers that come with the vulnerability of such regulations.
- Gather data on UBO
Companies must identify clients, their UBOs, the source of wealth (SoW) of the UBO and the transaction purposes.
- Reporting to the senior management
Potential transactions with high-risk third countries must be reported beforehand and initiated only after the approval from senior management.
- Better controls
The 5MLD advises to adopt better tools and controls to identify troublesome transactions.
To stop ML/TF-related funds from entering the EU’s financial market, member states must err on the side of caution and limit their interaction with high-risk regions.
More high-value goods under the radar
It is no secret, that high-value items are often abused as the means of ML and TF, hence the further efforts to close the loopholes.
- Demands to art traders
Art traders or similar intermediaries have to follow CDD rules and file AML reports.
- AML checks for certain transactions
If a transaction or multiple connected transactions involve art of over €10,000, it requires going through an AML check.
Unlike 4AMLD, 5AMLD covers more ground in connection with high-value items such as art pieces, historical artifacts, precious metals, tobacco, and arms.
As a result of new demands, regulated businesses may want to review their control frameworks and identify any loopholes to address them accordingly. Meanwhile, the EU continues to improve what they have and strive towards the unification their legal controls.