European compliance departments – already busy with GDPR implementation and Brexit structuring projects – may have been heard to let out a small sigh when further changes to European anti-money laundering rules were confirmed by the European Parliament last week. Whilst everyone wants to avoid taking dirty money into their funds, it is less than a year since the 4th Anti-Money Laundering Directive became effective across the European Union, requiring fairly significant upgrades of policies and procedures. Surely further changes are not needed already?
The good news is that – although some tweaks to policies will be needed when the next set of changes become effective – the reforms are incremental and mostly affect the regulatory authorities. Private funds will not have to make dramatic changes. And, in any case, there is still plenty of time: the 5th Anti-Money Laundering Directive (AMLD5) was adopted by the European Parliament on 19 April 2018, following political agreement at the end of last year, but it now needs to be approved by the Council. That approval is expected in May or June, and member states will then have 18 months to pass implementing legislation. (Incidentally, the UK is very likely to implement these changes even as it prepares to leave the European Union, since the terms of the currently proposed transitional period require it to adopt any new rules that become effective before December 2020.)
But there are two proposed changes that are relevant to fund managers, and it would be useful to keep these in mind ahead of the expected implementation date at the end of 2019.
First, access to the register of ultimate beneficial owners of European entities – including, of course, portfolio companies – will be extended. Under the existing pan-EU rules, implemented in June last year, “beneficial owners” – individuals that own or control an entity, including by holding at least 25 percent of the entity’s shares (directly or indirectly) – have to be recorded on a register, but do not have to be publicly identified. Some countries, including Denmark and (to some extent) the Netherlands, have already gone further and made their registers public, and the UK (which had substantially implemented the EU requirement a year earlier, through its Register of Persons with Significant Control) had already done so. Other countries, including Germany, France and Luxembourg, currently limit access to their register to public authorities and others “able to demonstrate a legitimate interest”.
AMLD5 will change that. It will require some basic information – identity, month and year of birth, country of residence and nationality, as well as the nature and extent of the beneficial interest held – to be available to “any member of the general public” in all EU countries. Further, AMLD5 will enable beneficial ownership information in relation to trusts – the settlors, trustees and beneficiaries – to be accessed not only by public authorities, but also anyone “able to demonstrate a legitimate interest” and (in some cases) those who file a written request. It will also extend the obligations to trust-like structures (such as certain types of German Treuhand), which were apparently overlooked in the last round of reforms. Ultimately, the national registers will be connected to permit cooperation and exchange of information between member states.
Secondly, AMLD5 will upgrade the rules applying to firms dealing with parties from designated high-risk third countries, such as Ethiopia, Sri Lanka and Iran. Business relationships will be made subject to specific enhanced due diligence measures. These will be required whether a firm is dealing with an individual or a legal entity, and will require the firm to gather information on the customer’s source of wealth and source of funds (and that of its beneficial owner), obtain approval from senior management for establishing the relationship, and monitor the relationship more closely.
So, firms will have to keep money laundering rules on their own project list for the time being, but the rule changes envisaged by AMLD5 are mostly designed to help the authorities to detect and pursue money launderers, and are not radical. It seems like a small price to pay if AMLD5 achieves its goal: to enlarge and strengthen the EU’s ability to bear down on money laundering and terrorist financing.