Amended Draft Act on counteracting money laundering and terrorism financing – what changes do financial institutions need to get ready for?

On July 12, 2017 the Ministry of Development and Finance published a draft updating the Act on counteracting money laundering and terrorism financing.  The amendments are introduced with a view to implement Directive No. 2015/849 of the European Parliament and of the Council of 20 May 2015, also known as 4th AMLD, and to align the regulations binding in Poland with international standards. Legislators have suggested a number of amendments forcing financial institutions to change their approach to money laundering, the most important of which include:

  • Increased significance of risk evaluation at the level of the member state and obliged institutions;
  • Establishment of the Central Register of Beneficial Owners;
  • Changes in the requirements concerning the use of financial security measures;
  • Changes in the definition of a politically exposed person (PEP) and beneficial owner;
  • The duty to introduce AML procedures at the group level;
  • Stricter penalties for non-compliance.

Risk evaluation at the national level

In line with the 4th AMLD, the EU Commission will prepare a report assessing the risks of money laundering and terrorist financing at the supranational level.  Taking account of the Commission’s report, the General Inspector of Financial Information (GIFI) in consultation with the obliged institutions – within 12 months of the effective date of the Act – will prepare a report indicating the risk assessment at the national level.  The draft Act provides that when evaluating the risks involved, the obliged institutions will be able to consider both the report prepared by the EU Commission and the risks assessed at the national level.

Evaluation of risks by obliged institutions

The underlying objective of the draft Act that implements the 4th AML/CTF Directive is adjustment of the policies and procedures to the risks run by individual institutions.  Institutions covered by the Act will need to prove that they have undertaken effective actions aimed to identify, assess, understand and properly manage their money laundering and terrorism financing risks. Obliged institutions will be required to review their risk evaluation models to align them with the new criteria. In addition, the risk evaluation will need to be properly documented and periodically updated.  Obliged institutions should be aware that competent authorities will be entitled to demand of them to produce the documentation of their internal assessment of risks.

Central Register of Beneficial Owners

The draft Act prescribes establishment of a Central Register of Beneficial Owners containing up-to-date information about the beneficial owners of legal entities.  This solution is introduced to ensure transparency of legal persons and help obliged institutions with identification of the relevant beneficial owners. The Register is to be set up with the enactment of the new law, and obliged institutions (registered partnerships, limited partnerships, limited joint-stock partnerships, limited liability companies, except for public companies, foundations and associations) will be required to report beneficial owners to the register on pain of pecuniary penalty.

Furthermore, the draft act modifies the methods of establishing the beneficial owner status. If, having exhausted all means available, the beneficial owner of the client still cannot be determined, the obliged institution can treat the individual occupying the highest executive position within the hierarchy as the beneficial owner.  According to the Draft Act, the obliged institution can make that assumption if the given potential client is not suspected of the offence of money laundering and terrorism financing.  The amendments indicated above can make it easier to identify the ownership structure and by implication, streamline the client approval process within the institutions covered by the new Act.

Financial security measures

In line with the 4th AMLD, the threshold upon exceeding of which financial security measures have to be applied is lowered from EUR 15,000 to EUR 10,000 in respect of clients that carry out transactions in cash.

In addition, the lists of situations when obliged institutions can apply simplified financial security measures on the one hand and those in which stricter measures need to be adopted on the other have been extended.  It also needs to be kept in mind that a decision to apply simplified security measures in respect of a specific client should be preceded by a documented and individualized risk analysis, which means in practical terms that automatic adoption of simplified measures based on a certain criterion will not be allowed. The Draft Act does not include the category of ‘equivalent states’ concerning which obliged institutions have the option of refraining from application of financial security measures.  As a consequence, upon enactment of the new law the obliged institutions will need to adjust their internal procedures and transaction monitoring systems to accommodate the new requirements.

Politically exposed persons (PEP)

The new Act introduces considerable changes to the definition of politically exposed persons  (PEP). According to the draft, the definition of PEP will also embrace politically exposed persons with place of residence in Poland (under the old version of the Act PEP is a person residing “outside the territory of the Republic of Poland”). From the perspective of the obliged institution this may necessitate verification of the current client database to identify relations with clients occupying prominent political positions and application of extended financial security measures.  It is also worthwhile to note that under the current wording of the draft act, the economic relation with the client that is a PEP  can be continued or initiated upon upper-tier management approval and not, as now, the approval granted by a management board member or a management board appointee.

Reporting suspicious transactions and suspension of transactions

In line with the currently binding regulations, after notifying the authorities of a suspicious transaction the obliged institution cannot perform that transaction within 24 hours form acknowledgement of receipt of notification. According to the Draft Act the duration of the stay of the transaction is extended to 48 hours. In addition, the draft extends the period for which the General Inspector can suspend the transaction from 72 to 96 hours.   Furthermore, the period for which the transaction can be stayed by the decision of the public prosecutor has been extended from 3 to 6 months.  The same rules will apply to bank account blocking which may be made at the request of the public prosecutor if any link with money laundering, terrorism financing of fiscal fraud is suspected.

Group-related procedure

The Draft Act introduces an obligation to implement a procedure in respect of counteracting money laundering and terrorism financing at the capital group level.  The group members will be obliged to implement the general rules and procedures, including intragroup data protection and information exchange policies, their effective implementation at the level of branches and subsidiaries with majority shareholding in member states and third countries.

Pecuniary penalties

The Draft Act introduces stricter penalties for non-compliance with the duties imposed by the Act. The maximum penalty that may be imposed on the obliged institution will increase from PLN 750 000 to EUR 5 000 000 or 10% of the annual income.  Additionally, in the event of any deficiencies, the individuals responsible for fulfilment and supervision of the duties under the Act will be subject to a fine or imprisonment of up to three years.

The amendments proposed in the Draft Act are sure to force the obliged institutions to undertake steps aimed at verifying compliance with the new criteria and implement the necessary modifications.  Considering the current wording of the draft, one should expect challenges in the following areas:

  • carrying out and updates of the assessment of the individual AML risks run by the obliged institution, in terms of the specifics of its business activity, size, geographic scope, client base, products offered, distribution channels, etc.
  • review of the client base against changes in the definition of the beneficial owner and PEP and evaluation of the risks connected with the client base;

One also should not neglect the need to update the AML policies and procedures and deliver the relevant employee training.

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