UK Government Consults on Implementation of the EU Fifth Money Laundering Directive
04/15/2019HM Treasury launched a consultation on its proposed options for transposing the Fifth Money Laundering Directive into U.K. law. 5MLD makes a number of changes to the European Anti-Money Laundering and Counter-Terrorist Financing regime set out in the Fourth Money Laundering Directive. EU Member States are required to transpose 5MLD into national laws, which must take effect by January 10, 2020. HM Treasury is consulting on how it proposes to effect the transposition, in particular where the U.K. has discretion as to how certain aspects are implemented and where gold plating provisions are proposed. Notably, the U.K. government intends to implement 5MLD irrespective of when the U.K. leaves the EU, and is committed to implementing the Financial Action Task Force's standards, focusing on those areas highlighted in the FATF's mutual evaluation report of the U.K.'s AML/CTF regime. Responses to the consultation were to be submitted by June 10, 2019.
Some of the main proposals put forward by HM Treasury are:
5MLD extends the scope of "obliged entities" to include providers of exchange services involving virtual and fiat currencies as well as custodian wallet providers for such instruments. These entities will need to register for AML purposes in their home Member State, fulfill customer due diligence obligations and assess the AML and CTF risks that they face. HM Treasury is considering two options in this area: transposing the 5MLD provisions only or adding U.K.-specific regulatory obligations. HM Treasury has indicated a preference for the latter option because of the wider scope of the FATF's standards and because there is evidence of increasing risks from the use of these assets (as presented in the U.K. Cryptoassets Taskforce report). In particular, it is proposed that the following would be brought within scope of the U.K.'s AML/CTF laws: crypto-to-crypto exchange service providers, peer-to-peer exchange service providers, crypto-asset ATMs, initial coin offerings and the publication of open-source software, which can include non-custodian wallet software.
The government is also seeking views on the cross-border risks posed by crypto assets and how regulatory action could address those risks. The report confirms that HM Treasury still intends to consult on the regulatory perimeter for security and utility tokens and whether exchange tokens might be regulated other than for AML and CTF purposes.
Certain e-money products are exempt from some customer due diligence (CDD) requirements. 5MLD reduces the thresholds for this exemption. In addition, EU banks and financial institutions can only accept payments through anonymous prepaid cards issued in a non-EU country where the country has requirements equivalent to 5MLD's requirements for e-money. Member States have a discretion as to whether to allow payments to be processed using anonymous prepaid cards.
HM Treasury considers that 5MLD may result in increased compliance costs for e-money firms, but does not think that the risks will be mitigated through the threshold change. As a result, the proposal is to implement 5MLD without further gold-plating.
Enhanced Due Diligence
5MLD makes several changes to the EDD requirements, including changing the requirement to conduct EDD from "natural persons or legal entities established in the third countries" to "business relationships or transactions involving high-risk third countries". The EU publishes and regularly reviews the list of high-risk third countries.
HM Treasury is proposing to provide some indication as to what the term "involving" in this context means. In particular, it does not propose that the EDD requirements should apply to U.K. citizens who are nationals of high-risk countries. After Brexit, it is expected that the U.K. will develop its own list of high-risk third countries.
Bank account ownership register
5MLD requires Member States to establish a centralized automated mechanism, such as a central registry, for the identification of natural persons and legal entities that hold or control bank accounts, payment accounts or safe deposits held by banks. National financial intelligence units and national regulators responsible for AML supervision would have direct access to this information. HM Treasury is proposing to require the minimum information to be submitted by U.K. banks and payment institutions and U.K. branches of non-U.K. banks to a central registry. In a U.K.-only expansion of the 5MLD scope, HM Treasury is also proposing to require similar information to be submitted to the central registry by U.K. banks and payment institutions that issue credit cards, e-money issuers issuing prepaid cards, and credit unions and building societies that issue accounts that are not identified by IBAN.
The consultation paper sets out the proposed approach to information to be included in the register and confirms that the requirements would only apply to accounts open on the day that 5MLD is transposed into U.K. law or accounts opened after that date.
Other proposals include amending certain sections of the U.K. Money Laundering Regulations to make some CDD obligations explicit requirements, as opposed to the current approach where firms are only required to take all reasonable steps, and requiring firms to collect proof of registration or an extract of the register from those entities with which it enters new business relationships.
HM Treasury is also seeking feedback on the framework under the Money Laundering Regulations for pooled client accounts (PCAs). Banks are required to conduct CDD on their customers, including when a business customer opens a PCA in order to hold money on behalf of its clients. The consultation paper requests feedback on issues stakeholders have encountered when implementing the PCA framework, the money laundering and terrorist financing risks that PCAs present and how they have been misused.
View the consultation paper.
View details of the Fifth Money Laundering Directive.
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