This past July, the Fifth Money Laundering Directive – also known as 5MLD or 5AMLD – went into effect. Members of the European Union must abide by the laws outlined in this regulation no later than January 20, 2020. As that timeline is now less than 12 months away, it’s critical that businesses have a firm understanding of the directives outlined in the new initiative.
What Is The 5AMLD?
The 5AMLD is an updated version of the Fourth Anti-Money Laundering Directive, which the EU had released only a couple of years prior. Initially, the EU Commission proposed the amendments after the 2016 terrorist attacks in Brussels and Paris. The Panama Papers, which exposed information about offshore accounts, also served as motivation for the 5AMLD.
There are a few critical changes set forth by the 5AMLD. First and foremost, the directive extends its scope to virtual currency providers, impacting cryptocurrencies. The initiative also provides the public with access to information regarding the ownership structure of companies based in the EU, promoting transparency.
Furthermore, the directive states that when these companies perform due diligence, they must consult a database, known as the beneficial ownership register. Other fundamental changes include the fact that member states must create a list of companies, offices, and functions flagged as politically exposed, again to promote transparency. The 5AMLD also no longer allows for anonymous:
• Bank Accounts
• Savings Accounts
• Safe Deposit Boxes
Promoting Transparency And Reducing The Chances Of Money Laundering
One of the ways the 5AMLD will be most beneficial is because it will establish a centralized and public register of companies, along with a list of the owners who benefit from their formation. The use of the log will hopefully cut down on money laundering through the use of shell companies. Doing so is critical, especially when considering that an estimated $2 trillion is laundered annually.
Shell companies exist to turn illegitimate money into legitimate money. Those looking to launder money will create a shell company, which exists solely on paper. The company processes cash obtained through illegal activity and turns it into a profit. However, the use of this practice should be significantly reduced thanks to the 5AMLD, as information about every EU company’s boards and shareholders will be open to public scrutiny.
Julian King, Commissioner for the Security Union, said at the time of the 5AMLD’s passing, “We need to hit terrorists and criminals in their pockets – cutting off their access to money is a vital part of preventing their crimes.”
The 5AMLD also states that the data held on these registers must pass comprehensive verification mechanisms. A clause in the directive says, “accurate identification and verification of data of natural and legal persons are essential for fighting money laundering or terrorist financing.” If companies have not done so already, they are going to have to invest in state-of-the-art, real-time identification technology to help prevent money laundering.
One of the other primary issues that the 5AMLD seeks to address is international cooperation for fighting crime and money laundering. Many of those engaged in unlawful activities use offshore accounts to hold their funds. There has been a noticeable lack of interinstitutional communication in the past, making this possible.
The 5AMLD stresses that European financial institutions must collaborate. The corporate ownership registers established in this initiative must connect. Every member state must be able to access records at any time. The EU seeks that cooperation among member states will go a long way toward protecting all states, especially those who tend to be more vulnerable than others. Countries who tend to be at an increased risk of laundering include:
The 5AMLD outlines specific criteria for how to deal with financial institutions in these countries. One of the most significant ways of doing so is by creating enhanced due diligence measures. For instance, when dealing with these countries, financial institutions must obtain additional information about the transaction and all persons involved. They must also receive approval from upper-level management to proceed with the deal.
What the 5AMLD doesn’t address, unfortunately, is cooperation between international states. The directive only considers those countries within the European Union. For instance, there’s no way that the EU can require the United States to participate in its anti-money laundering efforts. While the United States and other countries have their own regulations, perhaps one day we’ll see international rules enforced by an organization such as the United Nations.
Cryptocurrencies And Digital Prepaid Cards
One of the other areas that the 5AMLD seeks to address is digital currencies. These were not nearly as prominent when the 4AMLD went into action. But, digital wallets quickly rose in prominence, creating an anonymous way for illegal organizations to send and receive funds. The same goes for prepaid cards, which are debit cards not attached to any one cardholder. This allows organizations to use them anonymously.
When studying the 2016 terrorist attacks, it became clear that terrorists used prepaid cards because of the anonymity they provided. Now, under the 5AMLD, the maximum amount that any individual can hold on a prepaid card anonymously is 150 EUR. If an individual wishes to place more than that on the card, they are subject to strict regulations and identification verification from financial institutions.
Similar restrictions were put in place regarding cryptocurrencies. Owners of cryptocurrency wallets are now subject to the same regulations as other financial institutions. This includes, but is not limited to:
• Transaction monitoring
• Customer due diligence
• Suspicious activity reports
The 5AMLD also mandates that verifying institutions verify identities of digital wallet holders. The directive states, “To combat the risks related to the anonymity, national Financial Intelligence Units should be able to obtain information allowing them to associate virtual currency addresses to the identity of the owner of virtual currency.”
Financial institutions will need to invest heavily in KYC Initiation to ensure that they can do so. Fortunately, our team at AU10Tix offers fully-automated customer onboarding and KYC Initiation, ensuring you meet the regulations set forth in the 5AMLD.