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The MLD4 will amend and replace the Third Money Laundering Directive (MLD3) on 26 June 2017. This is the date by which all member states are required to bring into force the laws, regulations and administrative provisions necessary to comply with MLD4.
The government proposes that transposition of MLD4 will include the creation of the Money Laundering and Transfer of Funds (Information on the Payer) Regulations 2017, and that the current Money Laundering Regulations 2007 will be revoked. Appropriate transitional provisions will be given in relation to the implementation of the new Regulations.
This study takes a quick look at the customer due diligence and simplified due diligence requirements under the new MLD4. Enhanced due diligence requirements have also been amended but are outside the scope of this quick study.
We also take a look at the impact these new due diligence measures have on third parties which firms may seek to rely on.
Customer Due Diligence
MLD4 clarifies and reinforces the MLD3 Customer Due Diligence (CDD) requirements.
It requires under Article 13(1) that firms take the following CDD measures:
- Identifying the customer and verifying the customer’s identity on the basis of documents, data or information obtained from a reliable and independent source.
- Identifying the beneficial owner and taking reasonable measures to verify their identity so that he firm knows who the beneficial owner is.
- Verifying that any person purporting to act on behalf of the customer is authorized to do so and identifying and verifying the identity of that person.
- Assessing and, as appropriate, obtaining information on the purpose and intended nature of the business relationship.
- Conducting ongoing monitoring of the business relationship including scrutiny of transactions undertaken throughout the course of the relationship to ensure that the transactions are consistent with the firm’s knowledge of the customer, the business and risk profile (including where necessary the source of funds and ensuring that the documents, data or information held are kept up to date).
In order to determine the extent of the CDD measures firms must consider the transaction or relationship on a risk-sensitive basis. As a minimum firms will need to consider the factors in Annex 1 to MLD4 which are:
- the purpose of an account or relationship;
- the level of assets to be deposited by a customer or the size of transactions undertaken;
- the regularity or duration of the business relationship.
Simplified Due Diligence
The MLD4 also tightens the rules on Simplified Due Diligence (SDD). Decisions on when and how to carry out SDD will have to be justified on the basis of risk, in line with the risk-based approach.
The Directive states that where a firm identifies areas of lower money laundering and terrorist financing risk, its member state may allow them to apply SDD measures (Article 15(1), MLD4).
However, before applying SDD measures, the firm must determine that the business relationship or transaction presents a lower degree of risk (Article 15(2), MLD4).
Annex II to MLD4 sets out a non-exhaustive list of factors and types of evidence of potentially lower-risk situations that member states and firms must, as a minimum, take into account (Article 16, MLD4).
The factors covered in Annex II which should be considered by firms include:
Customer risk factors:
- public companies listed on a stock exchange and subject to disclosure requirements (either by stock exchange rules or through law or enforceable means), which impose requirements to ensure adequate transparency of beneficial ownership;
- public administrations or enterprises;
- customers that are resident in geographical areas of lower risk (as set out in the geographical risk factors bullets)
Product, service, transaction or delivery channel risk factors:
- life insurance policies for which the premium is low;
- insurance policies for pension schemes if there is no early surrender option and the policy cannot be used as collateral;
- a pension, superannuation or similar scheme that provides retirement benefits to employees, where contributions are made by way of deduction from wages, and the scheme rules do not permit the assignment of a member’s interest under the scheme;
- financial products or services that provide appropriately defined and limited services to certain types of customers, so as to increase access for financial inclusion purposes;
- products where the risks of money laundering and terrorist financing are managed by other factors such as purse limits or transparency of ownership (for example, certain types of electronic money).
Geographical risk factors:
- member states;
- third countries having effective AML and CTF systems;
- third countries identified by credible sources as having a low level of corruption or other criminal activity;
- third countries that, on the basis of credible sources (such as mutual evaluations, detailed assessment reports or published follow-up reports), have requirements to combat money laundering and terrorist financing consistent with the FATF standards and effectively implement those requirements.
Under Article 17 of MLD4, the European Supervisory Authorities (ESAs) are required to issue guidelines, addressed to National Crime Agencies (NCAs) and firms, on the risk factors to be taken into consideration, and the measures to be taken, in situations where SDD measures are appropriate. In producing the guidelines, the ESAs are to take specific account, among other things, of the nature and size of the business. The guidelines are to be issued by 26 June 2017.
Relying on Third Parties
MLD4 makes it clear that the ultimate responsibility for meeting the CDD requirements remains with the firm that relies on the third party and not with the third party itself. If therefore a firm wants to rely on a third party to carry out the CDD measures, they must ensure they obtain from the third party the necessary information required.
This includes taking adequate steps to ensure that on immediate request the third party provides relevant copies of identity and verification data, as well as other relevant documentation on the identity of the customer or beneficial owner.
The Fifth Money Laundering Directive (MLD5)
This is already being considered and is expected to follow shortly. This is expected to build on and re-affirm the measures set out in MLD4.
Timothy Anson, London, Paralegal also contributed to this article.