UNDER the latest draft of the Fourth Anti-Money Laundering Directive, endorsed by the Economic and Monetary Affairs and Civil Liberties committees of the EU in December, the ultimate beneficial ownership of companies, other legal entities and trusts will need to be listed in central registers in EU member states, as part of efforts to combat money laundering. The Fourth Anti-Money Laundering Directive also requires banks, auditors, lawyers, real estate agents and casinos, among others, to be more vigilant about suspicious transactions made by their clients.
According to Civil Liberties Committee rapporteur Judith Sargentini, the new rules “will provide much greater transparency of the shadowy business structures that are at the heart of money laundering schemes, as well as schemes used by businesses to avoid their tax responsibility”.
The directive still needs to be endorsed by the full European Parliament and by the EU Council of Ministers. Member states will then have two years to transpose the directive into their national laws. That said, the rules are unlikely to change materially and professionals as well as companies, trusts and “obliged entities” should start familiarising themselves with the new rules soon.
It is proposed that the information on ultimate beneficial owners will be made available to competent authorities, member states’ financial intelligence units, entities that undertake customer due diligence (such as banks) and, in the case of companies, any persons or organisations (such as investigative journalists) who can demonstrate a legitimate interest in suspected money laundering, terrorist financing and “predicate” offences that may help to finance them.
Critics of the directive, however, have claimed that it falls short, leaving it up to the EU member state to determine whether to make the registers public or not. In particular, no access is foreseen for trusts other than competent authorities and financial intelligence units. There is also an exemption for provision of information if companies can show that such information would expose the beneficial owner to the risk of fraud, kidnapping, blackmail, violence or intimidation. In circumstances where the purpose of the register is to obtain information about “shadowy business structures” – some of whose controllers, one imagines, are not adverse to using methods such as blackmail, violence or intimidation – member states will need to ensure that such an exemption is not taken advantage of.
It is not yet clear how the United Kingdom will implement the new directive. The UK has committed itself to creating a public registry of the ultimate beneficial ownership of all companies registered in the UK. The government says that such a move “will help individuals and companies identify who really owns the companies they are doing business with, promote sound corporate behaviour and help prevent the misuse of companies for tax evasion, money laundering and other crimes”.
But it is not clear how far the disclosure obligation will extend. For example, will UK nationals have to give disclosure of overseas companies of which they are a beneficial owner? Will companies registered in the UK have to give disclosure of all of their subsidiary companies?
The UK has also not committed to a public registry of the beneficial owners of trusts, and it is unlikely to do so. Many interests groups within the UK, for example the Law Society, have raised concerns that requiring all trusts to be registered would have unfortunate unintended consequences for citizens’ privacy.
The problem is also particularly pertinent in the UK where there are more than 1.5 million trusts, and trusts are often used for family succession and tax planning purposes. The inclusion of such trusts, most of which are valid and of low risk, is going to be cumbersome, expensive and an administrative burden – and that’s before public access is given to the register.
In addition, the due diligence process for “obliged entities” (including credit and financial institutions and those persons acting in exercise of professional activities) is being altered.
While there were previously entities that automatically qualified for simplified customer due diligence (for example public authorities and regulated credit or financial institutions), the obliged entity must now first ascertain that the customer relationship or transaction is, in fact, of low risk. If the obliged entity identifies areas of low risk, it will be entitled to apply simplified due diligence. Factors that may influence such a decision include geographical risk factors, whether a company is listed on a stock exchange and customer risk factors.
Likewise, obliged entities will need to undertake enhanced customer due diligence where they determine there is a high risk. This will involve, particularly in cross-border relationships, understanding fully the nature of the respondent’s business and assessing its anti-money laundering and terrorist financing controls. Enhanced due diligence is also required for politically exposed persons, their families and close associates.
Finally, the directive provides member states with a number of administrative sanctions to penalise obliged entities. This includes making public statements that identify the obliged entity, making orders that require the entity to cease the conduct, suspension of authorisation and pecuniary sanctions of at least twice the amount of the benefit derived from the breach.
The purpose behind exposing ultimate beneficial owners of companies and trusts is to assist member states both in their own countries and internationally in the fight against money laundering. The cause is no doubt worthy. Money laundering apparently amounts to between 2% and 5% of global GDP. And, of course, if you’ve got nothing to hide then there should be no problem providing such information.
But given the number of trusts used legitimately in the UK, it may be that the ends do not justify the means. Certainly, the Law Society is concerned that they might not. That said, greater transparency is coming, and companies and trusts should stay vigilant to ensure that, as and when the new laws are introduced, both for ultimate beneficial owners and the changes in customer due diligence, they do not fall foul of them. ?
• How much of this process is automated through technology? And can it evaluate high-risk customers at the on-boarding stage?
• Do you have a knowledgeable and reliable AML compliance team or individual in place? Are these individuals well trained?
• Are the board and/or senior management involved in the oversight and management of compliance risks?
• Do you monitor the achievement of your compliance goals?
• Do you have robust policies and procedures in place in your company to detect and deter money laundering? Is there an escalation process for reporting potential non-compliance?
• Are systems integrated across all your offices?
David de Ferrars is head of fraud and Alexa Segal is associate in the disputes and investigations team at Taylor Wessing