Things are changing, the 4th Money Laundering Directive came into force in the UK at the end of June 2017 with evermore onerous obligations being put on businesses. Are you now caught by these changes? Please see our article for further information.
The Fourth Money Laundering Directive (‘4MLD’) was introduced on 26 June 2015. It requires European member states to update their respective money laundering laws and “transpose” the new requirements into local law by 26 June 2017.
The two laws that require an update are the Money Laundering Regulations and the Proceeds of Crime Act.
First half of 2016 – Consultation document, 3 months to respond and open HMT events
15 March 2017 – Second consultation
15 March 2017 – Draft regulations (Money Laundering Regulations 2017)
May 2017 – Guidance should be finalised
June 2017 – Regulations come into effect
Reduced to €10,000 for single and linked transactions. More businesses will be caught by the regulations and the need to monitor cash receipts to identify potential linked transactions become more complex.
The need for differing levels of due diligence dictated by risk assessment is a key focus of the 4th Money Laundering Directive. Businesses are to apply Standard Due Diligence (SDD), Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) more effectively. While regulated businesses have vastly improved on their EDD controls, lower levels of due diligence are usually lacking. The further focus on risk based due diligence detailed below and above indicates HMRC will be testing due diligence controls in relation to all levels of risk and the effectiveness of these controls to mitigate the perceived level of risk.
Businesses may face issues with controls applied to lower levels of risk in terms of effectiveness and commercial viability. Businesses will also need to demonstrate how changing levels of risk are identified to apply ongoing due diligence at the appropriate time. Businesses will therefore need improved systems to demonstrate ongoing monitoring and application of risk assessment. This is reinforced in the 4th Money Laundering Directive as it states that if two triggers (triggers will be provided as a non-exhaustive list by regulating bodies) are met then renewed risk based due diligence checks must be applied.
Consultation focuses heavily on regulated entities needing to apply all controls on risk based approach and implementing higher level of risk assessment. This will require more sophisticated systems to identify risk and will lead to increased frequency of risk based due diligence to mitigate risk. Criticising businesses risk assessments has been a key tool for HMRC in undermining a business's compliance controls as these assessments can only be formed by the regulated entity. This will prove difficult for regulated parties who have no experience of forming risk assessments as these are very open to interpretation as to their effectiveness.
This means regulated entities are likely to need to:
All member states are required to maintain a register of all beneficial owners. This has been demonstrated by the introduction of Persons with Significant Control replacing Annual Returns which enables Companies House to more accurately capture details of all beneficial owners.
The identification and verification of beneficial owners currently poses a significant challenge to regulated businesses. While a central register will be held only banks, law firms and “any person or organisation that can demonstrate a legitimate interest” will be able to access this register. It is unlikely regulated businesses will meet this criteria.
Businesses will also face issues in identifying all beneficial owners as fraudulent beneficial owners are unlikely to register their details. This clearly indicates HMRC will more vigorously test controls around the identification and verification of beneficial owners and businesses will likely face difficulty in this area of their compliance controls.
The rules for politically-exposed persons (“PEPs”) are no longer limited to persons outside the UK. Local PEP’s will be subject of same level of scrutiny and risk assessment as overseas PEP’s. Businesses will need more effective methods and procedures to identify and risk assess PEPs.
Trust and Company Service Providers (TCSP) who are not already registered with HMRC or the FCA will be required to register with HMRC as their regulator. This will introduce the need for these types of businesses to apply more rigorous due diligence controls and checks, and require a higher level of compliance. Trust and Company Service Providers are deemed as being able to facilitate MTiC fraud; we therefore believe HMRC will apply more pressure on this sector to tackle this issue.
Agents of TCSP’s and Money Service Businesses (MSB) will now be subject of the fit and proper test. As demonstrated by the implementation of the AWRS, the criteria to satisfy the fit and proper test are very open to interpretation. This process has posed a significant challenge for many businesses subject of the test, and through our experience of dealing with this test we know it is crucial to 'put your best foot forward' in the first instance. HMRC officers will always critically review all historical issues relating to the business and key individuals when assessing a registration application. Whether it is a historical VAT loss claim or previous seizures of stock; it is therefore logical to preempt any possible issues and be able to put them into perspective, giving yourself the best possible chance in obtaining a registration.
Estate Agents were already regulated, however the 4th Money Laundering Directive makes particular comment on ensuring letting agents are included in the consideration of Estate Agents. The 4th Money Laundering Directive will therefore affect more businesses of this type and indicates an interest in more heavily regulating this sector.
The need for these types of businesses to apply due diligence controls and checks in to sources of fund is also reinforced.
Over the last two years we have seen a significant increase in HMRC applying penalties to regulated entities and more frequent use of their powers to pursue matters on a criminal basis. All of the above clearly demonstrates that a higher level of compliance with the regulations will be required and expected and it is sensible to conclude we are likely to see a further increase in the application of MLR penalties and criminal prosecution.
Do you require any assistance with your compliance? If you know what areas you require assistance with then please follow this link to request a quote.
Alternatively, if you would like to discuss your businesses requirements, see whether the changes with the 4th Money Laundering Directive will affect you or just for some free information, then please follow this link to request a FREE 15 minute consultation.