The 4MLD approach

In an increasingly complex regulatory environment, keeping abreast with regulatory changes and rules are crucial. It directly impacts your business operations and in some cases, even business performance. It is understandable that your business may face challenges in implementing new regulatory changes, however the repercussions of non-compliance are burdensome.

The Third Money Laundering Directive was transposed into domestic law about 10 years ago. Financial crime has evolved since then as criminals find new ways to produce and keep illicit wealth, and as such, regulation must also evolve to tackle these criminal challenges. As the implementation of the Fourth Money Laundering Directive (4MLD) draws closer, how prepared is your organisation to implement the new changes to ensure strict compliance? We outline the key changes that will affect any business in the financial services sphere.

Increased Transparency

Considering the recent leaks of the ‘Panama Papers’, transparency was a key component the public and regulators noticed we lacked. The aim of the Directive is to prevent the use of the financial system for the purpose of money laundering and terrorist financing. In a bid to eradicate corporate anonymity, the 4MLD now requires all financial institutions to obtain all beneficial ownership information about companies they do business with and the assets within its control.

To enable your organisation to gain access to this information, the Directive binds its Member States to create a central register, containing beneficial ownership information of corporate entities that are incorporated in their countries. As of April 2016, the UK has had an active central register, also known as the Persons with Significant Control Register. This will be a useful tool to aid your client on-boarding and KYC process.

Greater Discretion in Applying Simplified Due Diligence

On this front, the 4MLD grants financial institutions and obliged entities the discretion to apply simplified due diligence (SDD) where they deem fit. In doing so, however, they must assess the level of risk a business relationship could potentially expose them to. The rationale behind the use of SDD must be justified and recorded. What this also means is that, you should keep records for each justification in case they are called for review by regulators.

Third Country Equivalence Regime

As per the changes to the Directive, enhanced due diligence (EDD) will be required for all customers who are established or resident in high risk non-EU countries. The list of high risk jurisdictions will be compiled according to the level of money laundering and terrorist financing deficiencies identified.

Changes to how the ‘PEP’ classification can be applied

The scope of the Third Money Laundering Directive did not cover domestic Politically Exposed Persons (PEPs). The Fourth Money Laundering Directive widens the definition of PEPs to include citizens holding positions of power and influence in their home countries. Those who should be categorised as PEPs now include UK politicians, senior officials in the UK army as well as officials of the English judiciary.

As part of the new amendments, financial institutions must carry out EDD, seek senior management approval and carry out on-going monitoring for domestic PEPs and their ‘associated persons’. PEPs are also to remain classified as such for at least 12 months after leaving public office. The classification can only be removed only after a risk assessment has been carried out. ‘Associated persons’ are immediate family and known associates of the PEP in question. Where, through your standard due diligence processes you identify an associate of a PEP, enhanced due diligence must now also be carried out on them.

Correspondent Banking

Due to concerns about money laundering, the definition of correspondent banking relationship has been extended beyond the traditional FATF definition. It now includes relationships between credit institutions and financial institutions.

As the fight against financial crime intensifies, regulators will continue to scrutinise client onboarding processes and other key risky lines of business to meet legal and regulatory requirements. Ultimately, the Fourth Money Laundering Directive seeks to resonate the following key messages to the financial industry:

• Aim to assess risks and mitigate those risks,

• Scrutinise client identification and on-boarding processes, and

• Regularly monitor clients who pose a greater risk of money laundering and terrorist financing.