New rules on Anti-Money Laundering are about to come into force on 10 January 2020. But what does it all mean?
Here, AAT looks at what the 5th Money Laundering Directive means for accountants.
Why the UK Government intends to adopt 5MLD despite Brexit
The UK is a major contributor in the fight against money laundering and terrorist financing, and despite Brexit, the UK has promised to abide by all existing and new European Union (EU) legislation. More than £90billion is estimated to be laundered illegally through the UK financial system each year, much of it using shell companies registered at Companies House. In response, anti‐money laundering law must constantly evolve, and legislative updates reflect the EU’s determination to keep pace.
5MLD is seen as a crucial tool in fighting tax evasion, money laundering and terrorist financing by increasing the overall transparency of economic and financial environments. By implementing 5MLD the UK will be making the other global financial centres aware of its intention to strengthen its integrity as a leading international financial centre and seeking continuous access to the EU markets.
How can members/organisations adapt 5MLD ahead of its transposition?
Accountants in practice are now well aware of the imminent extension to anti‐money laundering rules as set out in the Fifth Money Laundering Directive (5MLD)
But what are they and what steps should accountants now be taking to ensure that their game is sufficiently ‘upped’ in anticipation of what are sure to be much more robust procedures. However, before we explore what accountants should do in light of the imminent changes it is important to set the scene and explore why 5MLDs transposition is happening.
Without a doubt, the first simple step to take is to make sure that a suitable client risk assessment is in place and that staff are fully trained and knowledgeable of it. But what are the other changes in the pipeline aimed at tackling the growing issue of money laundering ‐ be that high end, with criminal gangs, posing a national security threat or at a lower level.
What are the proposed changes and the impact on the accountancy sector?
Here we take a look at some of the changes to expect and what they will mean, day‐to‐day, for accountants and how they can future‐proof their practices.
The first step is to understand the elements covered by the extension. It then follows that adequate client risk assessments are put in place, or procedures are tightened. Getting the right software in place to aid checks and ensure you are compliant is also a must.
It is not anticipated that the implementation of 5MLD will require major changes to organisations’ policies and procedures, much of the work should have been carried out in the lead to the enforcement of MLR 2017 on 26 June 2017.
However, in preparation for the enhanced measures being imposed by 5MLD when it becomes national law on 10 January 2020, it is recommended that organisations should be checking the efficacy of their current policies and procedures and looking at what actions need to be taken.
The key changes that need to be considered are as follows:
Extension of obliged entities
Firms providing both direct and indirect tax advice are now captured by the rules (e.g., repayment agents who act in the course of business as tax advisers, often referred to as High Volume Repayment Agents). With these sectors now formally classified as higher risk, firms currently operating within the regulated sector may need to consider how their risk appetite for working with entities within this new regulated sector may be affected.
Firms may need to consider the additional knowledge and/or controls to understand whether they are transacting in these areas and ensure they can conduct appropriate Customer Due Diligence checks because of this change. Firms should look at their control framework to ensure they give themselves enough time to implement any new changes.
Another significant update within 5MLD relates to the need for additional transparency related to identifying beneficial owners of corporations. 5MLD extends beneficial ownership reporting requirements to any legal arrangement like a trust, and tax neutral trusts. Under 5MLD, member states will be required to identify beneficial owners and to maintain public registers of these. 5LMD also widens access to the central register of beneficial ownership to any person who can show a ‘legitimate interest’.
The UK has already adopted this measure, creating the register of Persons of Significant Control. Obliged entities will need to review their policies and procedures for collecting UBO data, and ensure they are effective. It is likely that obliged entities will be required to report any discrepancies identified when comparing their own checks against the public register.
Trust registration service
5MLD expands the scope of the Trust Registration Service (TRS), requiring trustees or accountants to register those trusts with the TRS, this includes Discretionary, Interest in Possession, Charitable, Employee Ownership and Bare Trusts. The new Directive will bring into its scope all UK express trusts, not just those with UK tax implications.
It will also apply to non-EU resident trusts which own UK land or property, or which have a “business relationship” with an entity in the UK such as solicitors, accountants or banks. There are no carve-outs, exemptions or minimum threshold requirements. This means that a much broader pool of charities will be caught by the registration requirement.
Enhanced due diligence
There is a new provision designed to create a common interpretation of what enhanced due diligence measures are, when conducting anti-money laundering checks on an entity from a high risk country. Accountants are advised to ensure when risk based approach indicates a higher level of money laundering risk, the appropriate checks are defined, implemented and in line with 5MLD.
Such checks will need to be in depth and explore the wider risk that can be encountered through associated entities or individuals, such as with PEPs. This focuses on high-risk countries, the list of which will be expanded to cover those with an increased risk of money laundering. Additional checks are required to assess sources of wealth, overseas transactions and businesses owned abroad.
5MLD extends CDD requirements for situations where the beneficial owner of a corporate customer cannot be identified. It recognises the growing trend for the use of digital identity and electronic verification in the customer onboarding process and mandates that electronic verification should be used wherever possible.
Whilst nothing in UK legislation currently precludes using electronic identification, its explicit addition to 5MLD should provide firms with greater clarity and comfort as to the acceptability of electronic identification tools but should also inevitably facilitate client onboarding as more firms incorporate such processes. Firms should consider whether they have the necessary technological infrastructure to support electronic identification and verification.
When you take on a client, you must check that the client has filed details of the Persons with Significant Control with the registrar (i.e., Companies House) and report any discrepancies you identify. In response to evidence that Britain is being used by criminals across the globe to launder money, the Government recently unveiled plans for the biggest overhaul of Companies House ‐ the UK’s official register of companies and corporations ‐ in 170 years.
Law enforcement bodies believe that the system is being exploited to launder billions of pounds of cash each year. Under proposed 5MLD changes, Companies House will gain new powers to check the identities of individuals registering and controlling companies.
Law Enforcement Improvements
5MLD will bring with it the introduction of new national bank account registers. The aim of this is to enable the financial intelligence unit (FIU) to access all bank account information held in the UK. The FIU will be able to request this information even of a suspicious activity report has not been submitted.
The challenge for organisations will need to consider they have the right controls and process in place to deal with such requests from the FIU and who will be responsible for dealing with requests on a timely basis and on demand.
CCAB is working on updating the AML Guidance for the Accountancy Sector and members will be notified when it is published.
While firms will be required to be compliant with the new requirements from January 2020, AAT will take into account the shorth lead-in time firms have been given to implement all the new requirements in assessing the response to non-compliance identified. Each case will be assessed on its own merits.
Further reading on AML:
- Accounting dilemmas: 5 AML obligations
- The accountant’s guide to anti-money laundering
- How to submit a Suspicious Activity Report (SAR)
Jackson Quaker is AAT's Professional Standards Policy Development Manager.