Following the recently revised FATF Recommendations the European Commission published their report in April 2012 on the application of the 3rd Money Laundering directive. The UK authorities (HMT) have now commented comprehensively on this EC report.
HMT are clearly not keen on the suggestion of greater harmonisation across member states. Whilst international sharing of AML/CTF practices is supported, HMT are stressing that development of a separate national risk based approach methodology must be the way to go.
This reluctance on harmonisation ties in with recent comments from Chancellor George Osborne who expressed concern about any plans that could leave British taxpayers liable for re-capitalising Eurozone banks and would put UK banks under the supervision of an EU-wide banking regulator.
But why not harmonisation you might ask? - In my opinion jurisdictions definitely need flexibility to best meet individual national challenges. If you consider the different levels of implementation of AML /CTF obligations across member states, the varied approach offered by differing technology and documentation available and differences in types of crimes across jurisdictions, then an EU wide approach would appear to be challenging.
Perhaps understandably too, the UK authorities do not want to see any parts of the planned 4th Directive being made a regulation, again seeking to retain flexibility for each individual jurisdiction.
It is not harmonisation HMT seek but clarification on some of the directives key points particularly, when it comes to payments and e-money situations.
So what are HMT seeking in any updated directive?
- Better legal clarity of terms to remove uncertainty of some of the key provisions
- CDD requirements having sufficient scope for a risk-sensitive approach on a jurisdictional basis. A blanket approach is not appropriate
- No changes to the “all serious crimes” approach or to the obligation for firms not have to determine if suspicion of criminal activity results from an actual crime. Changing terminology to “criminalise” instead of “prohibit” is supported
- A registry of legal ownership (but one that is not onerous on firms)! This may be an interesting (and onerous?) development particularly if this extends to Trusts and other legal entities
- No change in the current standards for FIU’s to share information. HMT consider current standards sufficient
- Clarity on requirements where third parties are relied on to forward CDD information
HMT’s response supports:
- Bringing letting agents and estate agents into scope of the directive (the focus must be on who is the legal person but also should exclude informal rental agreements)
- A less prescriptive definition of Enhance Due Diligence, particularly for non face-to-face business, allowing a risk-based approach
- Clarity being provided on Simplified Due Diligence measures and the difference between SDD and full exemption from any CDD being required. This is not simply a list of acceptable times SDD can be applied but is the ability for each firm to decide when and how SDD is applied
- The inclusion of “domestic” PEP’s within the meaning of a PEP. (From experience, most firms already treat such domestic PEPs as High Risk (High Profile) clients in any event so not much change here)
- Greater legal certainty on identification of who an ultimate beneficial owner is, again on a risk based approach, with the threshold to remain at 25% (with this being indicative and not absolute)
- Clarification for Supervisors regulatory powers on cross-border situations (particularly relating to payment and e-money institutions)
- Adequate penalties being imposed to deter further or similar breeches happening, particularly relating to Sanctions
- Sanction countermeasures remaining a national risk based decision
- Clarity on the link between data protection and AML/CTF obligations
- Use of self-regulatory bodies as this is a valuable element of any AML regime
- Group-wide AML/CTF programmes but with the caveat to consider the impact of data protection when it comes to sharing CDD between group members
- An increase from the current €2,000 to €3,000 threshold triggering CDD requirements in casino’s (in line with FATF Recommendations)
Where HMT have concerns:
- Bringing financial agents directly within the regulations. HMT believe this is out of line given that the ultimate financial services firm is responsible for their agent’s actions. Clarification is also required on AML/CTF obligations to agents and e-money distributor’s particularly in a cross-border context
- The definition of a transaction as “those that physically handle cash”. HMT consider FATF’s definition to be wider than just handling money
- Removal of the current €1,000 threshold for wire transfers below which CDD is not verified
What is strongly opposed by HMT?
- An EU wide list of acceptable identification documents particularly due to changing technology and the variety of documentation across jurisdictions. Such a prescriptive list would preclude customers who, for a perfectly valid reason, could not produce standard documentation. FATF particularly are encouraging financial inclusion
- The narrowing of the definition of a PEP as well as the ability to “de-PEP” after a suitable period (The argument is that this would take away a firm’s risk-based approach)
- Inclusion of any more detailed data protection provisions as these are covered in other existing legislation
- The Third Country Equivalence List. This is felt to be ineffective and of little value. These lists often lead to an “excuse” to apply a shortcut or Simplified Due Diligence. This should be considered on an individual risk-sensitive basis
- “Black lists” as this should be handled via the FATF Public Statement process which is endorsed at EU level
- Any ability for third party introducers to avoid having to provide CDD information particularly where secrecy laws make this difficult
And of course HMT have “sat on the fence” or at least said that further exploration is required where:
- Pooled accounts and the conflict between identification and confidentiality exist. Watch this space. HMT acknowledge solicitors concerns over the conflict between identifying beneficial owners and issues of client confidentiality.
So probably no big shocks here for UK firms and, on the face of it, a balanced and reasoned response from HMT.
Their comments on the level and imposition of penalties for breeches is a clear indication that we can expect these to become stiffer in the UK, irrespective of any EU or FATF changes.
If I had to pick one issue likely to have the biggest impact for UK firms then I believe this will be the recommendation of a registry of legal ownership. My concern is how this will work operationally, even from a risk based perspective, and the requirements for a whole new set of additional processes and reporting to meet this.