The fourth AML Directive, whose final version came into force on 25 June 2015, has introduced amendments to European anti-money laundering (AML) and counter financing of terrorism (CFT) regulations binding on the so-called obliged entities.
The purpose of developing the 4th AML Directive was to clarify the existing regulations and to improve compatibility of regulations on preventing money laundering and financing of terrorism binding on EU Member States. The Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with the 4th AML Directive by mid-2017.
Key amendments arising from the provisions of the 4th AML Directive regard the comprehensive approach to risk analysis, identification of beneficial owners, extending the definition of politically exposed persons and transaction registration limits.
The 4th AML Directive stresses the importance of comprehensive risk analysis in effective prevention of money laundering and financing of terrorism on three levels: supranational, national and institutional. On the supranational level, European supervising bodies shall issue opinions regarding risk that affects the EU financial sector, while the European Commission is responsible for coordination of risk assessment related to cross-border operations; this includes review of cross-border threats that may affect the internal market of the Union and that cannot be effectively identified or prevented by individual Member States. Member States are responsible for adjusting their domestic regulations and enforcing compliance of obliged entities with relevant requirements. The obliged entities should apply appropriate customer diligence measures, depending on circumstances.
Provisions of the 4th AML Directive clarify the current principles of beneficial owner identification. According to the current definition, ‘beneficial owner’ means among others any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted, and the natural person(s) who ultimately owns or controls a legal entity through a sufficient percentage of the shares or voting rights at the shareholders’ meeting in excess of 25%. The above definition gives rise to a number of interpretation doubts. In practice, the identification frequently stops on the first level of the customer’s shareholding structure, often having reached legal persons who are the customer’s shareholders. New provisions clarify that in relevant cases, identification of a beneficial owner should include legal entities being owners of other legal entities (indirect ownership). If there are no natural persons who meet the beneficial owner criteria, or if possibilities of identifying such individuals have been exhausted and there are no reasons for suspicions, obliged entities can indicate natural persons holding top managerial positions, e.g. management board members, as their beneficial owners.
Politically exposed persons (PEP)
The 4th AML Directive extends the definition of politically exposed persons (PEP) to domestic natural persons (formerly, the PEP status was limited to individuals with the place of residence outside the territory of the Republic of Poland). The amendment seems reasonable from the perspective of evaluating the actual money laundering risk. Equal treatment of domestic and foreign PEP by obliged entities may contribute to actual reduction of the threat related to the laundering of illicit money. Additionally, according to the 4th AML Directive, an approval for establishing or continuing business relationships with PEP may be issued by an individual having sufficient knowledge of a given obliged entity’s exposure to the risk of money laundering and financing of terrorism and holding a sufficiently high position to make decisions that affect the entity’s risk exposure; in other words, in certain cases such a decision does not have to be taken by a management board.
Transaction value threshold
Under the 4th AML Directive, persons trading in goods should be obliged to register cash payments made or received of EUR 10 000 or more, regardless of the fact whether the amount refers to a single transaction or a series of interrelated ones. The reduction of the threshold to EUR 10 000 (previously EUR 15 000) results from a very high risk of money laundering and financing of terrorism posed by cash payments.
The proposed changes mark another step towards tightening of the EU financial system and mitigating the risk of money laundering and financing of terrorism. From the viewpoint of businesses covered by AML regulations, compliance with the new requirements may mean the necessity to adjust processes and increase expenditure related to the fulfilment of new obligations. In this context, interpretation of the new guidance and its effective implementation seem crucial.
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The full text of the 4th AML Directive is available here: