Fourth EU Directive – evolution not revolution, and onto the Fifth…
Every four years brings an Olympic Games and it seems, on average, every six years brings a new European Union Money Laundering Directive (MLD), writes Lisa Osofsky of Exiger, but while the fourth rendering speaks to consolidation, albeit with some notable innovations, further legislation, perhaps a Fifth MLD, is imminent.
Back in 1992 the Barcelona Olympics coincided with the advent of the First Money Laundering Directive, at a time when EU member states numbered 15 and European national parliaments were balancing the prospect of loss of sovereignty against a greater pooling of powers relating to economic, financial and some social issues, all wrapped up in the ratification of the Maastricht treaty, known formally as the ‘Treaty on the European Union’. Alongside the greater fluidity that followed the free movement of capital, services and people, it was prescient that EU legislators addressed risks associated with such freedoms - fraud, corruption, and money laundering.
Back in 1992 the United Kingdom had just seen the Conservative party hold on to power for a post-war-record fourth term with John Major maintaining his prime ministerial position (Margaret Thatcher had resigned the year before); but the party won by the slimmest of parliamentary majorities amid huge internal rifts between the Europhiles and Eurosceptics post-Maastricht that nearly tore the party apart. To give the global political context at the time, the world was barely a year into the post-Soviet era, with the Cold War only just thawed; the West was patting itself on the back for the success of the first Gulf War, which had seen Kuwait liberated and a balance of power maintained among Middle Eastern countries; Saddam Hussein was still in power. On 1 July 1992, the United Kingdom assumed the revolving presidency of the Council of European Communities.
Fast forward 24 years and the European Union has nearly doubled in size to 28 states – but where is the seismic change one might expect? The EU is once again riven with division among member states. In the United Kingdom, the Conservative party is back in power, albeit with a larger majority than 1992, but the deep divisions regarding Europe have now resulted in a referendum in June as to whether the UK will remain an EU member. Free movement of services and capital have, however, accelerated over the past 24 years, so it is fitting that, in this Olympic year, the evolution of EU regulations to deal with issues around financial crime and corruption should continue with the fourth incarnation of the MLD, or “4MLD”.  The changes in 4MLD should be seen, like the political context within which it sits, as evolution rather than revolution.
The latest update follows the Financial Action Task Force’s (FATF) overhaul of its Recommendations. Two the key themes running through 4MLD is a desire to bring a more risk sensitive, assessment-based approach to the prevention of money laundering and a renewed emphasis on preventing terrorist financing.
In addressing these themes, firms affected by 4MLD will be looking to adjust both their “front office” deal making and their compliance assessments and procedures. Institutions are also faced with the European Commission’s call for quicker implementation of these requirements. This may entail institutions again updating both systems and procedures to reflect the new provisions and an acceleration of any cultural retraining so that documented financial crime risk assessments are thoughtfully woven into each and every commercial proposition.
The battle today to deal with terrorist financing is, on the face of it, nothing new. In 1992, the EU and the rest of the world had to deal with funding of activities undertaken by the IRA and anti-western developing regimes such as Libya, Euskadi Ta Askatasuna (ETA), and numerous anti-American guerrilla factions in South America, and the Iran/Syria backed terrorist organisations across the Middle East. The renewed emphasis on terrorist financing today, however, should be seen within the context of a far more fractured political world for terrorist groups, which, with the rise of ISIS, to name just one, operate above and beyond the confines of nation state borders and depend less upon so-called rogue states for funding. Th e more open borders for financial and economic trade within a much larger EU today, compared to 24 years ago, also allow for both a greater variety and greater number of money laundering transactions to support the brave new world of terrorist cell networks that both infiltrate EU member states and launder monies across the full range of financial services institutions that operate within the EU. Once again, 4MLD is part of an evolution in tackling money laundering but will need to be enacted within a world where both the structure of terrorism networks and the way they are funded is evolving at an almost revolutionary pace.
4MLD enlarges the politically exposed persons (PEPs) regime. Taking account of the FATF recommendation adopted in 2012 and following the aim of enhancing due diligence, 4MLD extends the requirements provided for foreign politically exposed persons to domestic PEPs and PEPs of international organisations. These changes have been welcomed overall by the industry and in this respect seem more evolutionary than revolutionary.
Beneficial ownership and transparency
One of the more controversial issues posed by the new directive relates to rules requiring greater disclosure of beneficial ownership behind registered companies. This, in turn, focuses on the issues around so-called shadow companies.
The proposed changes seek to enhance corporate transparency and perhaps the greatest innovation has been in establishing rights of access to central registers relating to corporates and their ownership. When 4MLD was originally drafted by the European Parliament in 2014, it was envisaged that it would create an almost automatic right of access for any member of the public - comprising ordinary citizens, financial regulators and police authorities. That right of access has now shifted so that those willing to access central registers must demonstrate a “legitimate interest” in the information. The collection of ownership information remains, however, a significant step forward within an overall climate towards greater transparency (just consider the Panama Papers leak), while balancing legitimate rights to individual privacy with the increasing emphasis on the prevention of fraud and corruption. 4MLD does not prevent member states from going beyond its requirements and opening their registries to full public access – as UK and Denmark have already said they will do.
Practical changes to implement 4MLD
Requiring risk assessments to determine appropriate levels of customer due diligence (CDD) will come as less of shock for those institutions that have had to adapt to the UK fi nancial regulatory landscape, with the Financial Conduct Authority (FCA) and its predecessor for a long time embedding this rubric into its systems of regulation. 4MLD gives firms greater freedom to apply the level of CDD they deem appropriate for the relationship (whether simplified at one end, or enhanced at the other) but requires that the firms’ documented risk assessments support that determination. Those organisations that have already implemented the February 2012 recommendations set out in the FATF international standards on combating money laundering will most likely only need to make minor adjustments to adequately implement the changes required by 4MLD.
The most significant of these, perhaps, will be operating in an environment in which regulators and their supervisory authorities are required to develop risk assessments of their own. Under 4MLD, risk assessment measures are undertaken at different levels, including by member states, institutions and supervisory authorities. It follows that the supervisory authorities will be expected to be more familiar with and willing to challenge fi rms on their arrangements. Similarly, the focus on assessing the effectiveness of systems and controls and the corresponding emphasis on evidence-based measures is likely to translate to a closer scrutiny of both the method by which risk assessments have been performed and the intelligence and analysis on which an assessment has been based.
New law not new for long
The challenges firms will face is reinforced by the European Commission’s Action Plan , released earlier this year, which includes five amendments to 4MLD and calls on all member states to adopt the directive into national law by December 2016. It is interesting that proposals to amend 4MLD – being described by some as the Fifth Money Laundering Directive – are already on the table, given that the official deadline for implementation is 26 June 2017. Firms will inevitably want to start to adapt their procedures in good time before the official enactment of 4MLD and, of course, changes take time to plan, implement and enforce.
More to come: battling terrorist financing
It is also worth mentioning the new European Agenda on Security 2015-2020, adopted by the European Commission to support better cooperation between member states in the fight against terrorism, organised crime and cybercrime. Despite the short term brouhaha around the UK’s referendum debate, the political climate to support further cooperation to battle terrorist financing remains strong, not least due to the recent attacks in France and Brussels. Within that European Agenda there is an AML and a counter-terrorism dimension, meaning further measures to tackle terrorist financing may be in the offing. The Agenda specifically mentions preventative measures regarding freezing assets of EU internal terrorists (Article 75 of the treaty), but also anticipates further action at the international level, highlighting the mandate of FATF to carry out a revision of terrorist financing initiatives to check the effective application of existing rules and propose new controls. FATF is expected to present a report in October this year.
The European Commission is serious about combating money laundering and terrorist financing, areas that are constantly evolving. The very fact that we are now approaching the enactment of the fourth incarnation of the MLD within 24 years should mean this urgency is not a surprise to any financial institutions doing business in the EU. But, just as athletes and country teams can never stand still to ensure they compete at the very highest level every four years at a new Olympics, so do institutions need to constantly evaluate their level of preparation and training to ensure they can compete to the very best of their abilities within a culture that demands the highest standards to preventing money laundering. A Fifth MLD may come sooner than many expect.
1. http://eur-lex.europa.eu/legal-content/EN/ TXT/?uri=celex%3A32015L0849
2. http://ec.europa.eu/justice/newsroom/criminal/ news/160202_en.htm .
Lisa Kate Osofsky (firstname.lastname@example.org ) is EMEA Regional Chair of Exiger and EMEA Head of Investigations.
© Informa UK Ltd 2016