In May, the European Parliament and the Council of the European Union adopted the 5th AML / CFT directive, amending the earlier EU Directive 2015/849, published in September 2015, which we analyzed in one of the first issues of Progreso.

Although the 4th Directive was considered “the main legal instrument for preventing the Union’s financial system being used to launder money and finance terrorism”, the European bodies saw a need to bolster up its provisions to enhance the prevailing preventive framework and promote more efficient measures for fighting against the financing of terrorism.

The 5th Directive solves issues of transparency throughout the EU financial and business environment, and ensure its integrity in order to prevent, detect and investigate money laundering, in the conviction that greater transparency can be a powerful tool of dissuasion.

Below, we highlight the key changes brought in by the new Directive:

Scope of application

It increases the scope of the Directive to the following parties:

• Apart from external accountants, auditors and tax advisors, it also covers all persons providing assistance or advisory services on tax matters as their main business or professional activity, whether directly, or through third parties
• Real-estate agents acting as intermediaries in the leasing of real estate, with respect to transactions for which the monthly rental is equal to or greater than EUR 10,000
• Persons who trade in art works or act as intermediaries in this sector, whether they are running art galleries or auction rooms or free-trade zones, whenever the transaction (or set of transactions) are worth EUR 10,000 or more
• Providers of custodial services for electronic wallets
• Providers of services for exchanging virtual currencies for fiduciary currencies

With respect to virtual currencies (such as bitcoins), it declares that competent authorities should be empowered to oversee the use of virtual currencies, to ensure a balanced, proportional focus, recognizing the latest developments in technology and the high degree of transparency in crowd funding and social entrepreneurship.

Given that virtual currencies provide anonymity which can easily be abused, it concludes that the Financial Intelligence Units in each nation should be able to obtain all information required for them to associate the addresses of the virtual currencies to the identity of their owners.

Actual title

The Directive states that member States must oversee companies and legal entities to ensure they obtain and maintain accurate, current information on actual title, to know who really owns the currency. It also argues that this information should be made publicly available to maintain confidence in the integrity of business transactions and the financial system.

To such end, it establishes that member States should permit access to the information in a sufficiently coherent, coordinated manner, with clear rules of access to allow third parties to know who has actual title to the companies and legal entities, and the trusts and analogous legal instruments. Access must be given to all parties proving legitimate interest.

There may also be exemptions to such dissemination under exceptional circumstances, when the information may expose the actual owner to a disproportionate risk of fraud, kidnapping, blackmail, extorsion, harassment, violence or intimidation. It also allows online inscription to be required in order to identify those applying for registration information, and the payment of a fee to access the information recorded.

Member States must also guarantee that the trustees or persons with equivalent positions in analogous legal instruments, report this condition and submit precise information to the entities under disclosure obligations, when they enter into a business relationship or carry out a one-off transaction above the threshold determined in the article 11, letters b), c), and d) of the Directive. Likewise, with respect to the information on the actual title of trusts and analogous legal instruments, it requires a central registry of beneficial ownership be kept by the member State in which the trustee or equivalent resides or has headquarters. It will be presumed that this information is adequate, exact and up to date, so the member States must put in place mechanisms to ensure that this is the case.

Due diligence

Member States must apply due diligence measures regarding clients, including the identification of clients and their identity, on the basis of documents, information and data obtained from reliable independent sources. The new Directive broadens the range of manners in which such information can be verified online, through trusted services or any other process for remote or electronic identification that has been recognized or accepted by the competent national authorities.

It also includes that when the beneficial owners are identified as persons performing senior-management positions, the identified entities must take reasonable measures to verify their identity, filing the measures taken in the registries and any difficulties encountered in the verification process.

It establishes that member States must protect and enforce the right to anonymity of all persons revealing information on matters related to money laundering.

• Exceptions

One exception is incorporated to the aforementioned obligation to apply due diligence. Such measure will not be required in the case of electronic money, provided certain attenuating conditions are met. These include: i) that the payment instrument is not reloadable or have a monthly transaction cap at EUR 150 and ii) the maximum amount stored electronically is no more than EUR 150.

• High-risk non-member countries

It establishes that business or transactions with high-risk non-member countries must be limited if significant shortcomings are detected in their AML and CFT measures.

Thus, when facing a high-risk situation, member States must demand strengthened due-diligence measures with respect to the customers (additional information on each one, the purpose of their business, the source of their funds, etc) in order to be able to manage and attenuate the risks. Additional attenuating measures (reinforced notification, caps on transactions, etc) to supplement the usual ones, focusing on the risk and considering the specific features of the business or transaction in question.

Risk assessment

It includes that the European Commission report assessing AML and CFT risks must also cover:

• The estimated value of the monies being laundered according to Eurostat for each of the sectors analyzed
• The means used for transactions between member and non-member States, whether or not they are considered to be high risk

This reform should be published at the most 6 months after being made available to member States, except for the parts of the document containing classified information.

Furthermore, it adds that each member State must: i) notify the institutional structure and general procedures of its system to fight against money laundering and the financing of terrorism, including the FIUs, the tax authorities and the human and financial resources allocated to this system; and ii) report on the human capital and budget used.

The member States must inform the Commission of the results of their risk analyses and their latest conclusions, and will publish a summary of the outcomes for the general public.

Financial Information Units

The Directive attributes a key role to the national FIUs in detecting terrorist crimes and terrorist organizations’ networks and systems. It thus argues that their efficacy and efficiency should be enhanced, specifying their competences and the means of cooperation between each organization of each member State, in order to carry out more efficient investigations into terrorism and, especially, improper use of virtual currencies.

To such end, it establishes that they should gather all the necessary information relating to their remit. They will also be obliged to rapidly, constructively and efficiently, guarantee the broadest-ranging international cooperation possible with FIUs of other countries with respect to money laundering, underlying crimes and the financing of terrorism, always in line with the FATF Recommendations.

Enforcement

The member States will have 18 months to transpose the provisions contained in the Directive.