Implementation of the European Union’s most recent Money Laundering Directive (MLD4) has been a long time coming. While the deadline for national implementation has only just passed, the new rules were finalised in mid-2015 and private equity firms have therefore had some time to adjust. The extent of the required adjustment depends, to some extent, on where in Europe a firm is based – but all private equity and venture capital fund managers operating in the EU will need to do some work to ensure they are compliant with a significantly more onerous regime.
EU Directives need to be written into national law, and that is a notoriously cumbersome affair: member states often miss deadlines, and frequently interpret the same rules in different ways. Added to that is the complication that domestic legal systems already had partially compliant rules, even if they needed fine-tuning. That is the case in the UK, for example, where private equity fund managers have had to navigate the complexity of a transparency register – known as the Register of Persons with Significant Control – since April last year. But it is curious that the UK decided to bring forward a new regime in 2016 that, in some respects, went further than the EU rules required (for example, the UK transparency register is a public document), but which, in other respects, did not fully conform to the EU’s model. As a result, the UK government has had to make more changes to its rules, creating further upheaval for private equity firms.
One such change affecting UK fund managers is a new requirement for Scottish limited partnerships (SLPs) – a popular European-based fund vehicle – to identify and publicly disclose details of individuals who have significant ownership rights, influence or control. (Unlike English limited partnerships, SLPs have separate legal personality and are therefore covered by MLD4.) The UK government hailed that change with a press release, no doubt because it has been under pressure to tighten the rules for SLPs since allegations came to light that their status as legal persons, combined with their light disclosure obligations, may be leading to their use for criminal activity. After helpful changes to partnership law recently, enabling English and Scottish limited partnerships to benefit from a much-improved (‘private fund limited partnership’) regime, it would be a retrograde step to restrict the availability of SLPs for legitimate business, and if some increased disclosure alleviates pressure on the government to do that, it will actually be a welcome development.
More substantially, MLD4 will require private equity and venture capital firms with a European presence to look again at their anti-money laundering and customer due diligence procedures and controls. Although for many firms the rules will only codify existing best practice, some evolution will inevitably be required. For example, the transparency register is new in many countries, and firms will have to adjust to that; the range of people that must be treated as “Politically Exposed Persons”, and therefore subject to enhanced due diligence, has increased; and the requirements for a written risk assessment – the detail of which is to be specified by regulators – will create an additional compliance burden. In some EU countries, smaller locally-based fund managers will have to appoint an anti-money laundering officer for the first time.
It is hard to argue with legislation that is designed to stem the flow of money to finance criminal activity and terrorism, and a more level playing field in Europe is clearly important. But the headache for compliance officers will continue until regulators’ rulebooks, guidance and secondary legislation are finalised in the coming months. And important differences in rules across Europe, which will certainly remain after MLD4 is fully implemented, will only make this task more challenging.