FM127 Legal Update - What the third EC money laundering directive means
Finance & Management, Issue 127, November 2005.
Published by the Faculty of Finance and Management
The third anti-money laundering directive includes an extension to the 'relevant categories' of businesses covered by the preceding two directives. Daren Allen and Laurence Lieberman explain.
On 26 May 2005 the European Parliament approved a third money laundering directive (3MLD), subject to a number of amendments, and on 7 June it was adopted by the European Council of Ministers. Member states are expected to implement 3MLD during 2006.
In 3MLD the key definition of 'criminal activity', from which the various money laundering offences flow, remains largely unchanged. It is defined as, "any kind of criminal involvement in the commission of a serious crime". Serious crimes are very broadly defined.
Also, although 3MLD sets out two new categories of offence - terrorist funding, and any offence punishable by imprisonment for a minimum of six months - this revised definition will have no practical impact in the UK . Under the Proceeds of Crime Act 2002 (POCA), all crimes can potentially form the basis of a money laundering offence and the Terrorism Act 2000 already contains specific offences of terrorist financing and laundering of terrorist property.
Extension of 'relevant business' categories
For UK businesses, however, one important aspect of 3MLD is its proposed extension of the categories of 'relevant business' in the UK 's Money Laundering Regulations 2003 (ML Regs). The ML Regs currently apply to "businesses dealing in goodsÉwhenever a transaction involves accepting a total cash payment of £15,000 or more".
But 3MLD aims to capture "persons trading in goods or providing services, whenever payment is made in cash and in an amount of £15,000 or more, whether the transaction is carried out in a single operation or in several operations which appear to be linked".
This change will affect many service organisations which are not currently subject to the ML Regs. Luxury holiday companies, building contractors, leisure industry businesses and universities could all, for example, be caught. The consequences for these types of business are that they would be required to:
- identify customers;
- put in place anti-money laundering procedures;
- conduct money laundering training;
- keep customer identification records; and
- report suspicious transactions to the authorities under POCA.
Failure to comply with these new obligations could result in criminal liability.
Identifying a 'beneficial owner'
For businesses in the regulated sector,* one of the provisions in 3MLD with particular impact will be the requirement to identify a 'beneficial owner' when conducting customer due diligence (CDD). A 'beneficial owner' is a person who owns or controls, directly or indirectly, 25% or more of the shares or voting rights of a company or otherwise exercises a comparable influence, or one who is the ultimate beneficiary, directly or indirectly, of 25% or more of the property of a foundation, a trust or similar legal arrangement. Regulated businesses may well need to dig deeper into their clients' ownership structures when carrying out 'know your client' (KYC) procedures. The wide definition, which includes indirect ownership, may, however, cause differences of interpretation in practice.**
3MLD contains generally enhanced CDD obligations. For financial sector businesses, there will be little change as they are likely to apply the Joint Money Laundering Steering Group guidance notes, which already contain most of 3MLD’s requirements. Other regulated businesses will need to comply with 3MLD by having in place “such other procedures of internal control and communication as may be appropriate for the purposes of forestalling and preventing money laundering,” as set out in the ML Regs.
By way of example, 3MLD requires ongoing CDD throughout a business relationship to ensure transactions are consistent with the regulated firm’s knowledge of the customer’s business, risk profile and source of funds. Accountants will, as a result, need to ensure that they keep their KYC information up-to-date. 3MLD will also require accountants to carry out CDD when there are doubts about the veracity or adequacy of previously obtained customer identification data (ID). Accountants will not simply be able to obtain customer ID and not renew it if later facts cast doubt on the previously obtained ID.
3MLD also contains a requirement for firms (including accountants) to establish, on a risk-sensitive basis, enhanced CDD for politically exposed persons (PEPs). PEPs are persons entrusted with prominent public functions and whose financial and business transactions may represent an enhanced money laundering risk. The provision is aimed at individuals from potentially corrupt regimes and is likely to have cost consequences for firms in establishing procedures to comply.
Overall, 3MLD stresses the importance of CDD but recognises the need to take a risk-based approach. Those UK businesses already within the regulated sector will be familiar with the requirements of the current legislation and the need to take a risk-based approach. However, service businesses within the extended scope of 3MLD (once implemented) now need to address the challenges it will pose.
Daren Allen is a partner in the litigation group at international law firm DLA Piper.
Laurence Lieberman is a solicitor in the litigation group at DLA Piper.
* The regulated sector is defined in part 1, schedule 9 of POCA and comprises Bureaux de Change, cheque encashment agencies, estate agents, casinos, insolvency practitioners, tax advisers, accountants, solicitors, businesses relating to the formation, operation and management of a company or trust, dealers in high value goods (eg auctioneers) and businesses regulated by the Financial Services Authority.
** The ICAEW will produce guidance on this issue.