European Union Expands Anti-Money Laundering Requirements and Increases Beneficial Ownership Transparency
Recently, a number of European countries, including the U.K. and Germany, have enacted revised anti-money laundering laws implementing the European Union’s (“EU”)
5th Anti-Money Laundering Directive (“the Directive”), in some instances giving companies only weeks to comply with their new anti-money laundering obligations. European authorities have not shied away for handing down large fines against corporations in the past, and it is imperative that companies operating in the EU reassess their current anti-money laundering compliance programs to ensure they are complying with the current state of the law.
In response to terrorist attacks across Europe and the Panama Papers revelations,1 the EU adopted the Directive to counter money laundering and terrorist financing routed through the European financial system. While initially enacted in 2018 to amend the
4th Anti-Money Laundering Directive (“the fourth directive”), EU Member States were given until January 10, 2020 to adopt legislation to implement the Directive.
The EU’s anti-money laundering regime applies to “obliged entities,” which are defined as credit institutions, financial institutions, and other enumerated categories of professionals and entities (including, among others, tax advisors, outside accountants, legal professionals who provide advice on certain subject matters, and merchants making or receiving cash payments of €10,000 or more in a single transaction or group of related transactions). The Directive expands the definition of obliged entities to also include certain cryptocurrency service providers, anyone undertaking to provide professional tax advice or assistance, and certain art dealers involved in transactions (or related series of transactions) valued at €10,000 and above.2
The Directive and the EU Member State’s new laws compliment recent EU efforts
to combat money laundering through criminal law reforms by imposing new obligations on obliged entities, including:
- Enhanced customer due diligence requirements for business dealings with customers from “high-risk” countries;
- Increased transparency for the beneficial ownership information of trusts and legal entities; and
- The expansion of anti-money laundering obligations to cryptocurrency service providers, those who provide services similar to tax advisors and external accountants, and certain art dealers.
These European efforts may be a harbinger of new legislation to come in the United States. The U.S. Congress is currently considering multiple bills aimed at enhancing corporate transparency including at least one proposed law that would require corporations and limited liability companies formed in the U.S. to disclose beneficial ownership information to be included in a registry maintained by the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).3 As it stands now, the bill only permits disclosure of the beneficial ownership information to law enforcement and financial institutions conducting customer due diligence with the customer’s consent.4
The proposed U.S. law is similar to the EU’s fourth directive, which has already been implemented by EU Member States. That directive required all EU Member States to maintain centralized registers listing the beneficial ownership information of legal entities formed within their jurisdictions.5 Information on the registers under the fourth directive could only be disclosed to enforcement authorities, obliged entities in connection with due diligence, or persons able to show a “legitimate interest.”6 The Directive takes beneficial owner transparency a step further by requiring Member States to make the registers available to “any member of the general public.”7
The Directive also requires Member States to maintain registers containing the beneficial ownership information for express trusts.8 Unlike the registers for legal entities, the registers of beneficial ownership information for trusts are only accessible to members of the public who can “demonstrate a legitimate interest” in obtaining the information.9
High-Risk Countries and Due Diligence
Perhaps the most impactful change in the Directive is to how European financial service providers and others conduct business with customers in non-EU countries that are designated as “high-risk.” The Directive empowers the European Commission (“the Commission”) to evaluate non-EU countries for money laundering and terrorist financing risk.10 Currently, 16 countries have received the “high-risk” designation from the Commission, including Afghanistan, Bosnia and Herzegovina, Guyana, Iraq, Lao PDR, Syria, Uganda, Vanuatu, Yemen, Iran, the Democratic People’s Republic of Korea, Ethiopia, Sri Lanka, Trinidad and Tobago, Tunisia, and Pakistan.11
Under the Directive, obliged entities must employ “enhanced customer due diligence measures” for business transactions involving high-risk countries.12 To proceed with a transaction involving a high-risk country, obliged entities must obtain certain information from the prospective customer, including background information about the customer, the identity of the customer’s beneficial owner(s), the source of the customer and beneficial owners’ wealth, the intended nature of the transaction or relationship, and the reasons for the transaction.13 Obliged entities also have to obtain approval from senior management before entering business relationships with companies from high-risk countries and conduct enhanced monitoring of all activities throughout the commercial relationship.14
Further, Member States must apply “additional mitigating measures” to any person or legal entity engaged in a transaction involving a high-risk country.15 The Directive grants Member States the discretion to require enhanced due diligence, implement enhanced financial reporting processes, limit any business relationship or transaction with people or entities in high-risk jurisdictions, or impose a combination of these options on companies doing business with customers in high-risk countries.16
What This Means for You
The Directive increases companies’ and financial service providers’ obligations when conducting business involving certain countries while expanding the types of entities subject to anti-money laundering obligations. At the same time, by increasing transparency for beneficial ownership information, the Directive invites intense public scrutiny of both legitimate companies and wrongdoers alike. Companies, especially financial institutions and other financial services providers, that conduct international business in or through Europe should take note of their expanded anti-money laundering obligations and ensure that their internal controls processes are updated accordingly.
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1 See Statement By First Vice-President Timmermans, Vice-President Dombrovskis and Commissioner Jourovà on the adoption by the European Parliament of the 5th Anti-Money Laundering Directive, EUROPEAN COMMISSION (April 18, 2018), https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_18_3429.
2 Directive 2018/849, art. 1(1)(c), 2018 O.J. (L 156) 43 (EU).
3 Corporate Transparency Act of 2019, H.R. 2513, 116th Cong. § 3 (2019).
4 Id. This proposed law passed the House of Representatives in October 2019 and has been referred to the Senate Committee on Banking, Housing, and Urban Affairs. See generally H.R.2513 - Corporate Transparency Act of 2019, CONGRESS.GOV (last visited Jan 14, 2020), available at https://www.congress.gov/bill/116th-congress/house-bill/2513.
5 Directive 2015/849, art. 30, 2015 O.J. (L 141) 73 (EU).
6 Id. at art. 30(5).
7 Directive 2018/849, art. 1(15)(c), 2018 O.J. (L 156) 43 (EU) (emphasis added).
8 Id. at art. 1(16).
9 Id. at art. 1(16)(c)–(d).
10 Directive 2018/849, art. 1(5)(a), 2018 O.J. (L 156) 43 (EU).
11 Commission Regulation 2016/1675, 2016 O.J. (L 254) 1 (EU); Commission Regulation 2018/105, 2018 O.J. (L 19) 1 (EU); Commission Regulation 2018/212, 2018 O.J. (L 41) 4 (EU); Commission Regulation 2018/1467, 2018 O.J. (L 246) 1 (EU).
12 Directive 2018/849, art. 1(11), 2018 O.J. (L 156) 43 (EU).