Are you prepared for the 5th Anti-Money Laundering Directive?

The UK has some of the most developed anti-money laundering (AML) laws in the world, yet government statistics suggest fraud still costs the country £6.8 billion a year. This is the equivalent of approximately £255 per household. Money laundering is also an enabler of other serious and organised crimes, which drain £37 billion from the annual economy.

The first European Union (EU) anti-money laundering directive was adopted in 1990 in an effort to prevent the misuse of the financial system for criminal means. On January 10th 2020, the latest iteration of the legislation will be enforced, meaning the UK is due to transpose the 5th Anti-Money Laundering Directive (AMLD) into law in less than eight months.

However, surveys conducted as part of our latest market report found that over one-third (36%) of compliance teams feel unprepared for the 5th AMLD. This figure rises to 44% within the investment sector, while half of insurers said they were not ready.

What changes are coming?

AML laws must be constantly updated to ensure they keep pace with increasingly savvy criminals who are exploiting the latest technological advances. The 4th AMLD came into force on June 26th 2017, yet the 5th AMLD – or 5AMLD – had already been published in the Official Journal of the EU just a year later.

The good news for compliance teams is that the fifth directive isn’t quite as comprehensive as its predecessor, which led to wholesale changes of how businesses approached money-laundering prevention. The 4th AMLD introduced a new risk-based approach and removed key exemptions from due diligence tasks.

Instead, the next iteration is largely focused on amending shortcomings in the previous directive, albeit with a few key highlights that could have a significant impact on certain financial services firms. The main changes are:

• Cryptocurrencies: Bitcoin and other virtual currencies will face stronger regulations, with entities facing legal requirements to report suspicious transactions and conduct due diligence, among other compliance obligations.
• Prepaid cards: Money launderers are able to load up cash from illicit activities on prepaid cards, allowing them to transport the money across borders. 5AMLD will lower customer verification requirements from €250 to €150 on most transactions, with €50 the maximum on some remote transactions. Cards issued outside the EU will also face tighter restrictions.
• Registers of beneficial ownership: These were introduced under the 4th AMLD, but the public will be able to gain access to these registers under the fifth iteration’s proposals. Trusts must also comply with greater transparency requirements.
• Due diligence strengthened: Transactions from countries deemed ‘high risk’ will be scrutinised more closely, with the EU compiling a blacklist of nations with a history of money-laundering activities. Organisations must also identify sources of wealth and funds, as well as information on beneficial ownerships, when handling transactions from these countries.
• Expanded reach: The fifth directive will cover a broader range of individuals and organisations, including all tax advisory services, letting agents and even art dealers. Money-laundering whistleblowers will also receive greater protection and anonymity.

These are just the broad strokes, but there are many other changes that will occur under the 5AMLD.

Preparing for 5AMLD

In April, the UK government published its consultation paper on the implementation of 5MLD, which charts the expected journey for the directive to be transposed into the country’s legislation.

While the document outlines numerous options, it provides little guidance on how compliance teams should prepare. Comments on the consultation close on June 10th 2019, with a final paper presumably released later this year that confirms the details.

But what can organisations do in the meantime to ensure they are prepared for the January 10th transposition deadline? Here are some possible options:

• Examine other member states: All EU member states have the same implementation date, although some are further along than others. This article from Allen & Overy provides a relatively up-to-date summary of other countries’ progress.
• Analyse current compliance levels: A comprehensive assessment of a company’s existing compliance with AML regulations can help identify strengths and weaknesses to address ahead of 5AMLD.
• Review business lines: Compliance teams may want to explore which areas of the organisation will be affected by 5AMLD, as well as how much of an impact the directive is likely to have on these functions.
• KYC program assessment: AML laws require strong KYC frameworks, and 5AMLD is no exception. Businesses may need to examine how robust their existing programme is and mitigate any risks, particularly regarding high-risk country transactions and beneficial ownership data.

Implementing these processes and controls is a sizeable undertaking, but putting in place the right people, technology and frameworks now can help future-proof the organisation.

The road ahead

Overcoming the challenges that 5AMLD poses will be an ongoing effort. After all, the European Parliament has already published further rules to boost AML efforts, and the 6th AMLD must be transposed into law by December 2020.

That means firms within member states must implement the relevant regulations by June 3rd 2021. As things stand, the UK is due to leave the EU this October, but this is by no means a certainty given the way Brexit negotiations have gone thus far.

Even if the country has left the union by next year, the government will no doubt wish to maintain the nation’s reputation as having one of the strongest AML frameworks in the world. The UK is therefore likely to enforce similarly stringent rules to the 6th AMLD – if not stronger – regardless of its EU status.

As money launderers become increasingly sophisticated in their use of technology and loopholes, compliance teams must adapt to this ever-evolving landscape. Our research shows over a third of employers found hiring the right compliance professionals more difficult than expected last year, with 59% citing a lack of technical skills as the biggest hurdle.

If you are looking to strengthen your AML processes, sourcing the best talent is a must. To discuss your requirements, please contact me on 020 7936 2601 or via email at gr@barclaysimpson.com.

Our 2019 Market Report combines our review of the prevailing conditions in the compliance recruitment market with the results of our latest employer and candidate surveys.