How the EU’s 5th Anti-Money Laundering (5AMLD) Directive will help tackle financial crime threats
The EU’s Fifth Anti-Money Laundering Directive (5AMLD) came into effect on 10th January 2020, introducing a number of new requirements including specific provisions aimed at preventing cross-border financial crime. So, what do these reforms mean and how will they help effectively identify suspicious criminal activity?
Following a string of high-profile money laundering cases and devastating terror attacks across Europe, serious questions were raised about the European Commission’s approach to tackling money laundering and terrorism financing across the European Union. The reality is – those who truly suffer from financial crime are often the most vulnerable people in society, exploited by criminal gangs in whatever way will further their operation. As a result, the EU brought 5AMLD into action with a primary focus on implementing initiatives that help strip away the various mechanisms that allow criminals to hide behind complex business and financial structures. These amendments included provisions to allow for greater information sharing and for the establishment of centralized and public company registers in each EU country, including the requirement to capture and maintain details of ultimate beneficial owners.
The aim of the reforms introduced this year are designed to reinforce controls of financial institutions, tackle new threats from increased digitalization – specifically virtual currencies – and strengthen transparency rules to guard against the large-scale concealment of funds.
Improving transparency in the ownership of companies and trusts
Money laundering in any form is extremely complex, varying across different countries, products and companies. One of the most common methods of money laundering involves the creation of an illegitimate shell company which then transforms the proceeds of crimes into seemingly legitimate assets. By acting in the same way as a legitimate company, criminals are able to hide their illicit operations in plain sight. Whilst traditional anti-money laundering legislation has improved overall levels of controls and risk assessments, the continued focus on professional services like banking, law and property means that criminals continue to find innovative ways to launder money in unregulated sectors.
One of the largest and most targeted unregulated businesses is the world of art and antiques. The unique features of this market, such as easy storage and transportation processes, as well as the instant conversion of cash to tangible assets make it a money laundering haven for criminals. Also, many of the transactions, even those with legitimate intentions are conducted with middlemen, surrogates and the ultimate buyer/seller is usually unknown. Whilst there are claims that anonymity has been necessary to protect the buyers of high end art and antiquity to avoid them becoming a target for criminality, this can still be exploited. Whilst there are claims that anonymity has been necessary to protect the buyers of high end art and antiquity and to avoid them becoming a target for criminality, this can be exploited. There are well documented examples where art and antiquity purchasing have been linked to terrorism financing, notably ISIS, as well as being found in the possession of drug traffickers and used in asset recovery. 5AMLD is set to significantly improve the level of control in this sector, with greater transparency being introduced to sources of wealth, business activities and its owners.
As well as art traders, other obliged entities who have been brought into the scope of the new directive include estate agents, virtual currency providers, external accountants, tax advisors and those who provide similar services to auditors. Under 5AMLD, beneficial ownership information for corporate and other legal entities is now public, aiming to reduce the use of shell companies to launder funds. Access is no longer limited to those who have legitimate interests in the entities. This wider access to beneficial ownership information will enhance public scrutiny and contribute to preventing the misuse of legal entities for money laundering and terrorist financing purposes. This will be a big step forward to ensure comprehensive mechanisms are in place to prevent the manipulation of companies information on a public register.
There will also be increased scrutiny on transactions or ownerships linked to or from countries categorized as high risk. As a result, organizations must update their due diligence processes to ensure that they are able to identify beneficial ownerships, sources of wealth and funds associated with the list of nations that have a history of money laundering activities.
Leveraging technology, banks need to adopt a contextual approach to anti-money laundering to effectively understand their customers, their connections and relationships. These connections and relationships are constantly changing, whether a new company is acquired or new directors join. Entity resolution is key to uncovering the complexity of data being shared, taking into account a variety of internal and commercial data, the individual or company as well as errors, inconsistencies and incomplete records. A static approach to monitoring means potential risks may not be identified. Moving towards intelligence-led monitoring, banks can leverage internal data sources and enrich them with external data. Using all these data points, contextual networks are created to understand trade relationships and enables faster and more accurate compliance decisions.
Virtual Currencies and prepaid cards
With its traditional emphasis on anonymity, virtual currencies are seen as prime vehicles for criminal organizations to add layers of obscurity and to circumvent the traditional financial system to conceal financial transactions and/or fund terrorist activity. Becoming a crucial component in the fight against financial crime, the new Directive is the first of For example, the 5AMLD limit means that firms will be required to carry out identity checks on customers using prepaid cards funded with more than EUR 150. Similarly, anonymous remote or online transaction limits are reduced to EUR 50. Also, in the Netherlands, the Dutch Central Bank (DNB) announced that data and the use of digital technologies would be a supervisory focus for 2020. The DNB has also published its annual Supervision Outlook for 2020, which explains in detail their priorities. A key highlight, from the 2020 report, for the blockchain sector, is that the DNB will start using AMLD5 to monitor crypto enterprises.
Thousands of complex operational decisions are being made manually by organizations every week, often underpinned by inefficient processes. With these additional changes under 5AMLD, using human analysts to try and deal with them could be problematic and expensive. Instead, businesses could improve compliance systems and enhance operational processes by leveraging technology. Data driven approaches, underpinned by context can help organizations gain a better understanding of their networks in real time to help mitigate risks.
Every day we see new threats arise from rapid digitalization and procedures which are not ‘fit for purpose’ in this technological age. 5AMLD is a significant milestone in tackling the use of the financial system to fund terrorist financing, criminal activities and the large-scale concealment of funds. Banks and other regulated financial institutions will need to consider how monitoring systems may need to be adjusted and adopt intelligence-led approaches to reflect the directives new changes. By leveraging technology to overcome data challenges and creating context around those involved in transactions, banks will be better equipped to uncover key relationships, underlying risk and potentially suspicious cross-border activities.