Overview of the objectives and changes brought by 5th Anti-Money Laundering Directive (5MLD)
The EU adopted the first anti-money laundering Directive in 1990 in order to prevent the misuse of the financial system for the purpose of money laundering. 30 years later, on the 10th of January 2020, the most recent revision of underlying legislation countering money laundering and terrorist financing in the EU entered into force. The 5th Anti-Money Laundering Directive (5MLD) sets out to close down criminal finance without hindering the normal functioning of payment systems. Amending the 4th Anti-Money Laundering Directive (4MLD), it is part of an action plan launched after a spate of terrorist attacks in Paris and Brussels in 2016, and as a reaction to the Panama Papers during the same year.
Objectives of 5MLD
It is essential that gatekeepers (financial institutions and other obliged entities) apply measures to prevent money laundering and terrorist financing. Traceability of financial information has an important deterrent effect for this matter. In order to have a proper mitigating framework, there must be transparency and it is exactly what the European Union tries to achieve with the revisions of the framework countering the perpetration of financial crimes.
In order to successfully prevent money laundering and counter terrorist financing, all gatekeepers need to be aware of the most recent changes and successfully implement them within the internal processes. Furthermore, it is advantageous to know the underlying objectives of the amendments as they are helping to understand the underlying reasoning. This allows for the gatekeepers to be on the same page and achieve the purpose envisaged by the legislation. The objectives of the amendments brought by 5MLD can be summarised as follows:
- Enhance transparency by setting up publicly available registers for companies, trusts and other legal arrangements where beneficial owners will need to be revealed;
- Enhance the powers of EU Financial Intelligence Units, and provide them with access to broad information for the carrying out of their tasks;
- Limit the anonymity related to virtual currencies and wallet providers, but also for pre-paid cards;
- Broaden the criteria for the assessment of high-risk third countries and improve the safeguards for financial transactions to and from such countries;
- Set up central bank account registries or retrieval systems in all Member States;
- Improve the cooperation and enhance the sharing of information between anti-money laundering supervisors, prudential supervisors and the European Central Bank.
Changes brought by the directive
5MLD has brought substantial changes to reach the abovementioned objectives, the following measures were implemented:
- The registers in member states will be public and contain the information regarding ultimate beneficial owners, with the ultimate aim of making them interconnected and consolidated. The need to demonstrate a legitimate interest for access will be eliminated except for trusts and similar legal arrangements. Currently, there are already European business registers which collate information from a variety of national registers. With the 5MLD, obliged entities must consult the registers on ultimate beneficial owners whenever performing checks on any new business relationship.
- Each member state must issue a list of positions that clarify prominent public functions on the national level and including nationally registered international organizations. Thus, defining politically exposed persons more consistently. The EU will draft a corresponding list on the EU level consolidating the national lists from the member states. Persons who will be identified as holding prominent public functions according to this list will be considered high-risk and require EDD.
- With the entry of 5MLD e-money and prepaid instruments are subject to lower thresholds than previously. With 5MLD obliged entities are required to institute CDD whenever the value of pre-paid instrument is more than 150€. Member states will have the possibility to allow the anonymous use of electronic money products only in two situations: (i) when customers use their prepaid instrument directly in the shop for a maximum transaction amount of EUR 150; (ii) when customers carry out an online transaction with a prepaid card below EUR 50. Furthermore, the prepaid instruments issued outside of the EU are prohibited unless they are issued in a country that has legislation equivalent to 5MLD.
- The rules will now apply to entities which provide services that are in charge of holding, storing and transferring virtual currencies, to persons who provide similar kinds of services to those provided by auditors, external accountants and tax advisors which are already subject to the 4MLD and to persons trading in works of art. These new actors will have to identify their customers and report any suspicious activity to the Financial Intelligence Units.
- New criteria have been added under which to assess high-risk third countries, including transparency of beneficial ownership. With the entry of 5MLD each transaction involving high-risk third country should be subject to additional scrutiny and EDD measures. The high-risk third countries in this regard comprise those identified by the Commission and published on their website.
- The Commission has set up a joint working group to support closer cooperation and exchange of information between money laundering supervisors and financial supervisory authorities, including with the European Central Bank, given that risks of money laundering can also pose a risk to the financial stability.
- Anonymous bank accounts, savings accounts or safe deposit boxes are abolished with the 5MLD. Member States are required to set up centralised bank account registers or retrieval systems to identify holders of bank and payment accounts. The Financial Intelligence Units will have access to more information through centralised bank and payment account registers or data retrieval systems. Thanks to this, the Financial Intelligence Units from the different EU countries will also be able to cooperate more easily between themselves, as well as with other competent authorities.
All of these measures must be considered by the gatekeepers in detail and implemented in a timely manner. The absence of action can bring your institution into non-compliance with the 5MLD. Therefore, it is of due concern to follow up with the updates and keep an eye on the further developments and market practices that are aimed at countering money laundering and terrorist financing.
 REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the interconnection of national centralised automated mechanisms (central registries or central electronic data retrieval systems) of the Member States on bank accounts