AML – Directives

We are currently on the Fifth Anti-Money Laundering Directive which was introduced on 14 May 2018, and the timeline below details the Directives that were introduced before that and how they have evolved over the past 30 years. The Sixth Anti-Money Laundering Directive has been introduced but has not been implemented as yet.

1st Money Laundering Directive

Council Directive 91/308/EEC of 10 June 1991 on the prevention of the use of the financial system for the purpose of money laundering, defined money laundering as being four types of intentional conduct:

• The conversion or transfer of property knowingly derived from criminal activity, with a view to concealing its illicit origin or to assist another to avoid the legal consequences of his actions.
• The concealing of information relating to property which is known to be derived from criminal activity or the disguising of the true facts about the property.
• The acquiring, possessing or using property knowing that it was derived from criminal activity; or
• The aiding and abetting anyone to commit any of the actions mentioned above.

Criminal activity

Criminal activity is defined as a crime specified in article 3(1)(a) of the Vienna Convention, with the full title of United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, as well as any other criminal activity designated as such for the purpose of this directive by each member state.

The First Directive required member states to oblige credit and financial institutions to obtain evidence of identity from new customers and to report to the governing authority, with evidence which might be indicative of money laundering. The Directive was implemented into UK domestic legislation by the Criminal Justice Act 1993 by the amendment to the Criminal Justice Act 1988.

Money Laundering Regulations 1993 and 2001

This Act was supplemented by the Money Laundering Regulations 1993 and the Money Laundering Regulations 2001 which imposed obligations on persons engaged in relevant financial businesses. Institutions were obliged to establish specified procedures for the purpose of identifying money laundering and report any findings to the National Criminal Intelligence Service now named the NCA

2nd Money Laundering Directive

In December 2001, the European Parliament and the Council of the EU introduced the Second Money Laundering Directive and required member states to implement this into their domestic law by 15 June 2003. This required two main changes in the UK’s money laundering legislation:

• To extend the reporting requirement from suspicion of drug trafficking to suspicion of all serious offences.
• To expand the definition of the regulated sector to include, amongst others, auditors, external accountants and tax advisers.

Therefore, the Money Laundering Regulations 2003 came into force, replacing the Money Laundering Regulations 1993 and 2001.

3rd Money Laundering Directive

On 26 October 2005, the EU’s Third Money Laundering Directive was introduced, and Member states were required to give effect to the Directive by 15 December 2007.  At the same time, the Second Money Laundering Directive was adopted replacing the 2^nd Money Laundering Directive.  Consequently, the Money Laundering Regulations 2007 came into force and revoked the 2003 regulations, in particular:

• Applying customer due diligence measures on a risk-based approach.
• Allowing reliance on third parties due diligence work.
• Requiring those charged with operating due diligence measures to be the subject of monitoring by a supervisory authority.

In the UK’s Money Laundering Regulations of 2003, this was stated institutions require satisfactory evidence of identity, to be obtained from the customer themselves or from other identification procedures.

The Third Directive made it clear that the extent of the identification procedures now called customer due diligence, should be obtained by the institution in question and reviewed on a risk-based approach.

4th Money Laundering Directive

On 20 May 2015, the EU’s Fourth Money Laundering Directive 2015/849 was introduced, with the Third Money Laundering Directive (2005/60/EC) repealed from 26 June 2017. Member states were required to give effect to the Directive by this latter date and as a consequence, the Money Laundering, Terrorist Financing and Transfer of Funds Regulations came into force on that date. The Money Laundering Regulations 2007 and the Transfer of Funds (Information on the Payer) Regulations 2007 (SI 2007/3298) were revoked at the same time.

These regulations include more emphasis on risk assessment with regards to money laundering and terrorist financing.

5^th Money Laundering Directive

On 14 May 2018, the EU’s Fifth Money Laundering Directive 2018/843 was introduced, amending the Fourth Money Laundering Directive 2015/849 to strengthen the EU rules preventing money laundering and terrorist financing. The directive was put into force on 9 July 2018 and is the most current Directive.

The new rules introduced stricter transparency requirements, including full public access to the beneficial ownership registers for companies, greater transparency in the registries of beneficial ownership of trusts, and interconnection of these registers.

The key improvements also include: limiting the use of anonymous payments through pre-paid cards, including virtual currency exchange platforms under the scope of the anti-money laundering rules; widening customer verification requirements; requiring stronger checks on high-risk third countries as well as more powers for and closer co-operation between national Financial Intelligence Units.

The Fifth Anti-Money Laundering Directive also increases the co-operation and exchange of information between anti-money laundering and prudential supervisors, including with the European Central Bank.

Member states had to implement these new rules into their national legislation before 10 January 2020. The UK did this through the Money Laundering and Terrorist Financing Regulations 2019, which amend the Money Laundering Regulations 2017. The amended regulations do not include the implementation of the trust registration service.

The UK left the European Union on 31 January 2020. The October 2019 Withdrawal Agreement was approved, and so the UK will enter an implementation period from 31 January 2020 until 31 December 2020, during which EU law, including obligations under the fifth money laundering directive will continue to apply.

Once the Transition Period comes to an end it will no longer be appropriate for the UK to treat EEA states differently to other foreign countries simply by reason of EEA membership.

6th Money Laundering Directive

On 11 October 2018, the European Council introduced a new anti-money laundering directive introducing new criminal law provisions to disrupt and block access by criminals to financial resources.

The directive complements the Fifth Money Laundering Directive and new rules include:

• Establishing minimum rules on the definition of criminal offences and sanctions relating to money laundering. Money laundering activities will be punishable by a maximum term of imprisonment of 4 years, and judges may impose additional sanctions and measures. Aggravating circumstances will apply to cases linked to criminal organisations or for offences conducted in the exercise of certain professional activities.

• The possibility of holding legal entities liable for certain money laundering activities which can face a range of sanctions e.g. exclusion from public aid, placement under judicial supervision.

• Removing obstacles to cross-border judicial and police cooperation by setting common provisions to improve investigations.

The Sixth Anti-money Laundering Directive needs to be transposed into national law by 3 December 2020 and the regulation will apply to Member States from 3 June 2021 onwards.

The Sanctions and Anti-Money Laundering Act of 2018

On 23 May 2018, the Sanctions and Anti-Money Laundering Act 2018 received Royal Assent. The Act provides that once the UK has left the EU, and is therefore no longer subject to the EU’s law on sanctions and money laundering the UK will be able to:

• continue to implement the United Nations (UN) sanctions regimes and to use sanctions to meet national security and foreign policy objectives; and
• create anti-money laundering and counter-terrorist financing regulations.

SQA Consulting helps organisations ensure their financial crime frameworks are effective. If you would like to hear more about our work, then please contact us.