The 5th AML Directive - are you compliant?

The 5th Anti-money Laundering Directive (5AMLD) came into effect in the UK on 10 January.

The directive is the latest measure in the worldwide fight against money laundering and terrorism financing, across all sectors. The Financial Action Task Force acknowledges that law firms are an attractive target for money launderers.

The 5AMLD amends and updates the 4th Anti-money Laundering Directive (4AMLD), which came into effect in June 2017, adding more stringent procedures and requirements. While the scale of the changes is significantly less than that introduced by the 4AMLD, there are concerns that the changes come at a time when many firms are already lagging behind on effective implementation of the 4AMLD.

What are the changes?

One of the aims of the 4AMLD was to discourage firms from ’blanket screening’ their clients by introducing a risk-based assessment approach. The 5AMLD strengthens these changes, including extending the scope to include all tax advisory services, art dealers, letting agents, virtual currency exchanges and custodian wallet providers, and introduces new measures, including the following.

Enhanced due diligence (EDD)

The 5AMLD introduces expanded EDD requirements for business relationships or transactions involving high-risk third countries. The mandatory package of EDD measures includes determining the nature of business relationships, the reasons for the transaction, and information on source of funds and wealth.

Beneficial ownership reporting

The 5AMLD takes further measures to improve the transparency of beneficial ownership, including a new obligation for law firms to report any discrepancies between information listed on public registers and information gathered through customer due diligence.

Beneficial ownership reporting requirements are also extended to any legal arrangement like a trust – member states are required to maintain a register of beneficial ownership that can be accessed to anyone who can show a “legitimate interest”.

National bank account registers

The 4AMLD required each member state to establish a financial intelligence unit (FIU), which in the UK operates as part of the National Crime Agency. Under the 5AMLD, the FIU will be able to access all bank account information held in the UK through a new national register (which member states are asked to established by 10 September 2020), and can request information even if a suspicious activity has not been submitted.

How are law firms keeping compliant?

For those firms that were already required to apply the 4AMLD, the new requirements should not be too onerous. However, in October 2019, research by the Solicitors’ Regulation Authority (SRA) suggested that a fifth of law firms in the UK did not have the required risk assessment mechanisms in place to meet the requirements of the 4AMLD.

The SRA found that 64% of firms were using templates for risk assessment, remarking that too many were taking a ‘copy and paste’ approach, without thinking through the specific risks and issues. The SRA has said it will increase checks on law firms as a result, and warned of “strong action” for those firms that continue to fall short.

Our own research reinforces these concerns. As recently as 2018, we found that 85% of law firms were using public websites for client screening. 86% say that they find establishing a client’s source of wealth a challenge, while 78% struggle with identifying beneficial ownership and the corporate structure of overseas customers – usually because the firms were not using a screening system and verified databases.

Being compliant

To effectively meet the requirements of the 5AMLD, there are three main areas that demand your attention.

The right processes and policies

If these are already in place to comply with the 4AMLD, some may need to be updated, for example to identify red flag transactions for EDD, or to assess the risk of business relationships or transactions involving high-risk third countries.

Appropriate documentation

You should document each process in order to meet requests for information from the FIU and others. The Law Society has published anti-money laundering guidance that includes details of which records need to be kept and for how long – including customer due diligence material, decisions made on risk assessment processes, and comprehensive records of suspicions and disclosures of suspicious activity.

Training

Developing an awareness of the 5AMLD in your staff is vital, to help embed a risk-based approach throughout the business.

What happens next?

This is by no means the end of changes to AML legislation. The 6th AML Directive – which focuses on punishment for money laundering and terrorism funding, including specific criminal offences and extending criminal liability to companies and other legal entities – has already been discussed by the European Parliament, and is due to be transposed into national law across member states on 3 December 2020.