Today’s the day …
In June 2019 we published an article summarising key points relating to the 5 MLD Transposition into UK law. At that time, we promised to provide an update when one was available. Unfortunately, as this article was being written we were still waiting! That was a problem because, according to the latest information on the FCA website, the new rules apply from 10 January 2020. That is TODAY!
As of 9am on 10 January there was no update from Her Majesty’s Treasury or from the FCA. Firms might assume that nothing has changed yet. However, we took the opposite view. The FCA’s latest pronouncement (23 December 2019) on 5MLD stated:
“On 10 January 2020 changes to the Government’s Money Laundering Regulations are coming into force.”
And now, literally as this article was being prepared, we have seen the first official Government confirmation that the changes do indeed take effect from today. See here.
Firms should therefore be aware that the changes do apply as from 10 January 2020 and adopt or amend processes as necessary.
This newsletter gives a brief reminder of the background and outlines the proposed changes in a bit more detail.
Summary of 5MLD
5 MLD replaces 4MLD, with the intention of improving transparency and the existing preventative framework to more effectively counter money laundering and terrorist financing across the EU. The consultation document detailed the steps that the government proposed to meet the UK’s obligation to transpose the directive (EU) 2018/843 (5MLD) into UK law by 10 January 2020.
Requirements as from 10 January 2020
- Trust Registration Service
5MLD expands the scope of the Trust Registration Service. This aspect of 5MLD is likely to affect many of our readers when advising clients on Trusts so we have done a separate article that can be read here.
- New obliged entities
5MLD expands the scope of entities to include letting agents, Crypoassets, Art intermediaries and widening the scope in relation to ‘tax advisers’;
- Customer Due Diligence (CDD)
Nothing in the existing UK regulations precluded the use of electronic means of identification. 5 MLD sets out the circumstances under which secure, remote or electronic identification processes may be taken into account in undertaking CDD.
5MLD introduces a change to regulation 28 (3). Firms are required to verify the identity of the senior managing official, when the customer is a body corporate and the beneficial owner cannot be identified. Previously, if the firm had exhausted all possible means of identifying the beneficial owner of the corporate body and hadn’t succeeded, then the firm had to keep written records of actions taken to identify the beneficial owner. 5MLD requires the firm to take further measures to verify the identity of the senior person in that corporate body and keep written records of these actions.
Regulation 28 (4) adds an explicit requirement stating that firms are ‘required to understand the nature of their customer’s business and its ownership and control structure’ as part of their CDD obligations.
Clarification of Regulation 31 is being considered so that it is clearer when firms are required to cease transactions and consider filing a Suspicious Activity Report (SAR) where they cannot apply CDD or EDD;
- Electronic Money
E-money is an electronic store of monetary value on a device (such as a prepaid card) that may be widely used for making payments and value transfers, which does not necessarily involve bank account transactions. 5MLD reduces the thresholds above which CDD must be applied;
- Obliged entities: beneficial ownership requirements
5MLD requires that when a firm enters into a new business relationship with a company or trust that is subject to beneficial ownership registration requirements, they must collect either:
Proof of registration; or
An excerpt of the register
This is only required before a new business relationship is established.
- Enhanced Due Diligence (EDD)
The requirements for applying EDD is changed from ‘natural persons or legal entities established in third countries’ to ‘business relationships or transactions involving high-risk third countries’ There is emphasis on the change from EDD applying for relationships ‘established in’ to ‘involving’.
Firms will also be required to obtain the approval of senior management for establishing or continuing a relationship involving a high-risk third country.
A new defined set of EDD measures will be introduced, requiring firms to obtain additional information on:
– the customer and beneficial owner(s);
– the intended nature of the business relationship;
– the source of funds and wealth of the customer and beneficial
– the reason for the intended or performed transactions.
Additional measures will require firms to apply at least one of the
– additional elements of enhanced due diligence;
– introducing an enhanced reporting mechanism or systematic
reporting for financial transactions;
– limiting business relationships or transactions with natural
persons or legal entities from the designated high-risk third
- Politically exposed persons: prominent public functions
5MLD adopts the FCA’s definition of a prominent public function.
- Mechanisms to report discrepancies in beneficial ownership information
The UK’s existing People with Significant Control (PSC) regime already met most of the 5 MLD requirements. The main new elements for the UK are that firms must report any discrepancies they find between the beneficial ownership information available in the central registers and the beneficial ownership information available to them. It is thought that a bespoke reporting mechanism for reporting these discrepancies will be established with Companies House;
- National Register of bank account ownership
5MLD extends the requirements relating to a national mechanism for retrieving ownership information on bank and payment accounts;
- Pooled Client Accounts (PCAs)
A PCA is a specific type of bank account in which a business holds money on behalf of its clients. The money in these accounts belongs to the clients. They are used by several different industries including legal and accountancy professionals and letting and estate agents;
5MLD defines how the CDD can be met in respect of the clients (beneficial owners) whose money is held in a PCA where the firm holding the PCA is not regulated under the MLRs e.g. letting agents.