The Fourth EU Anti-Money Laundering Directive (EU 2015/849) (AMLD4), which came into force on 26 June 2015, will replace the Third Anti-Money Laundering Directive (2005/60/EC) and must be transposed into the national law of member states by 26 June 2017. On 5 July 2016, in response to terrorist attacks in Europe in 2015/2016 and the leak of the Panama papers, the European Commission (Commission) published proposals to amend AMLD4 including bringing the transposition date forward to 1 January 2017. At this point, it is difficult to envisage how this earlier target date might realistically be met, particularly in view of the fact that the proposed amending directive has not yet been finalised.
AMLD4 is the latest significant upgrade to the EU legislative programme in this area which commenced in 1991 and has the aim of further strengthening the EU’s defences against money laundering and terrorist financing; and ensuring the soundness, integrity and stability, and confidence in the financial system as a whole. AMLD4 implements recommendations by the Financial Action Task Force (FATF), which is considered a global reference for rules against money laundering and terrorist financing. On some issues, AMLD4 expands on FATF’s requirements and provides for additional safeguards. AMLD4 is a minimum harmonising directive, providing member states with the scope to adopt more stringent provisions.
Key amendments for funds industry
AMLD4 applies across a wide range of financial and other institutions (known as “obliged entities”), including investment fund companies. The key amendments to the existing regime insofar as they affect the investment funds industry are as follows:
Risk-based approach and customer due diligence
Central to AMLD4 is greater emphasis on a risk-based approach to addressing money-laundering and terrorist financing risks. This emphasis is reflected in changes to the current rules on customer due diligence (CDD). At present, certain automatic exemptions are available from the requirement to carry out simplified due diligence (SDD) e.g. if the customer/investor is a credit institution in the EU or third country with equivalent AML measures or is a listed company. These important automatic exemptions will no longer be available under AMLD4. Instead a decision to apply SDD must be based on the obliged entity’s assessment that the relationship or transaction represents a lower degree of risk. Minimum lower-risk situations are set out in Annex II of AMLD4.
Enhanced Customer Due Diligence (EDD) must be carried out when dealing with natural persons or legal entities established in third countries identified by the Commission as high-risk third countries and other cases of higher risk identified by member states or obliged entities. The Commission has, by way of delegated Regulation effective 23 September 2016, published an initial list of high-risk third countries. Minimum potential higher-risk situations are set out in Annex II of AMLD4.
EDD measures do not need to be invoked automatically with respect to branches or majority owned subsidiaries of EU obliged entities where these branches or subsidiaries fully comply with group-wide procedures and policies in accordance with AMLD4.
By 26 June 2017, the European Supervisory Authorities (ESAs) must issue guidelines on the risk factors to be taken into consideration where SDD and EDD is appropriate. Draft guidelines were published in October 2015, both generic and sector specific, including for the investment management and investment funds sector.
EDD is required to be carried out in respect of politically exposed persons (PEPs). AMLD4 widens the net of PEPs to include domestic (not just foreign) PEPs and also defines “family members” and “persons known to be close associates”. Obliged entities must have a procedure for identifying PEPs. Where a person ceases to have the characteristics of a PEP, the obliged entity must, for a period of at least 12 months thereafter, consider the continuing risk posed by that person and apply appropriate and risk-sensitive measures until such time as the person is deemed to pose no further PEP-specific risk.
As regards reliance on third parties carrying out initial CDD measures, AMLD4 specifically prohibits reliance on third parties established in high risk third countries identified by the Commission, except in the case of branches or majority owned subsidiaries of EU obliged entities where these branches or subsidiaries fully comply with group-wide procedures in accordance with AMLD4.
As part of its proposals to amend AMLD4 and ensure greater harmonisation of EDD measures across the EU, the Commission intends to impose minimum EDD procedures on obliged entities.
Beneficial ownership registers
In order to address perceived deficiencies in transparency around beneficial ownership, corporate and legal entities, trusts and similar structures will be required to hold adequate, accurate and current information on their beneficial ownership.
Beneficial ownership is defined as any natural person who ultimately owns or controls a corporate or legal entity and/or on whose behalf the entity is conducting its activity. In the case of corporate entities it relates to a natural person who ultimately holds a shareholding/controlling interest or ownership interest of 25% plus one share or ownership interest. Under the proposed amendments to AMLD4, the 25% ownership threshold is reduced to 10% in the case of entities that present a real risk of being used for money laundering and tax evasion. Member states must ensure that the information on beneficial ownership is held in a central register in each member state and that it must be accessible to competent authorities and financial intelligence units (FIUs), obliged entities when carrying out customer due diligence measures and those who can demonstrate a “legitimate interest” in the information. Access to the information shall be in accordance with data protection laws and may be subject to online registration and the payment of a fee. In its proposals to amend AMLD4, the Commission has proposed a requirement that details on beneficial ownership be made publicly available.
Trustees will also be required to obtain and hold information on beneficial owners. Where the trust gives rise to “tax consequences” member states must also ensure that the beneficial ownership information held by the trustee is held on a central register.
Other changes brought about by AMLD4 are that the Commission, member states and obliged entities must carry out their own assessments of the risk of money laundering and terrorist financing. The ESAs are required to issue joint opinions on AML risks and the first joint opinion must be produced by 26 December 2016 with subsequent opinions to be issued every two years thereafter. AMLD4 also includes an increased range of sanctions imposed for breaches by obliged entities of their AML/CTF obligations.
Although draft legislation to transpose AMLD4 in Ireland has not yet been published (it is however expected to be published within the current legislative term) and other ancillary measures at EU level have not yet been finalised, boards and promoters of investment funds and their administrator/transfer agent should take steps now to ensure timely compliance with AMLD4.