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| Financial Law Update | Back to article summary. |
| Time to start thinking about the third Money Laundering Directive | ||
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| With the third Money Laundering Directive due to come in to force in December Joe Beashel looks at the important changes caused by the directive and some of the challenges that need to be overcome to implement it effectively. | ||
Due to be implemented on 15 December next, the Third Money Laundering Directive (2005/60/EC) (the "Directive) will introduce a new anti-money laundering and counter-terrorist financing regime across the European Union. The Directive both consolidates the previous two Money laundering Directives and adds some new requirements. Key to the new regime will be the introduction of a risk based approach to customer identification. Designated bodies (firms which are subject to anti-money laundering laws and regulation) will need to review and enhance their customer due diligence framework to provide for both simplified and enhanced identification measures and to be able to deal with the new concept of a "Politically Exposed Person". Compliance manuals will need to be updated, systems enhanced and staff re-trained.
Customer Due Diligence ("CDD") The CDD identification process requires designated bodies, using a risk based approach, to obtain and verify the identity of their customers from documents, data or information obtained from reliable and independent sources. Where applicable, beneficial owners must also be identified. During the CDD process, institutions are expected to obtain information on the source of funds, purpose and intended nature of the business relationship and to conduct ongoing reviews of the customers and their transactions. Simplified and enhanced due diligence The Directive sets out a list of situations where normal CDD requirements are not necessary: The list includes: a)The customer is a listed company trading securities on a regulated market in the EEA or situated in a third country with disclosure requirements similar to community legislation. b)Where the customer is a beneficial owner of pooled accounts held by notaries and other legal professionals from Member States or from third countries with equivalent money laundering standards and the information on the beneficial owner is available, on request, to the institution that acts as a depository institution for pooled accounts. c)The customer is a domestic public authority d)Life assurance policies with an annual premium below €1,000 (Single Premium below €2,500). e)An insurance policy for pension schemes with no surrender value and no assignment value. f)Where the product is e-money and (1) if the device cannot be recharged then the maximum amount stored is €150, and (2) if the device can be recharged, then the maximum limit is €2,500 on the total transacted in a calendar year. To make an informed judgement, firms are required to obtain enough information on the relevant application form to assess whether the customer qualifies for any of the above exemptions and it is important to note that there is no exemption from the full Customer Due Diligence requirements where there is a suspicion of money laundering or terrorist financing. Enhanced Due Diligence The Directive requires an "enhanced" due diligence for customers or situations that are, by their nature, higher risk. The Directive gives three examples of such situations: Where customers are not physically present Article 13(2) confirms that for non face-to-face transactions, firms must take specific and adequate measures to compensate for the higher risk of the person not being present by applying one or more of the following measures: Third Parties For cross-border correspondent banking relationships, Article 13(3) of the Directive requires credit institutions to gather sufficient information about the respondent institution to understand fully the nature of their business and to determine from publicly available information the reputation of the institution and the quality of supervision. Politically Exposed Persons' ("PEPs") Institutions are required to conduct enhanced due diligence for non-domestic Politically Exposed Persons' ("PEPs"). In particular they must: Politically exposed persons are understood to be persons entrusted with prominent public functions, their immediate family members or person's known to be close associates of such persons. In order to provide for a coherent application of the concept of politically exposed person, when determining the groups of persons covered, it is essential to take into consideration the social, political and economic differences between countries concerned. Public functions exercised at levels lower than national should normally not be considered prominent. However, when their political exposure is comparable to that of similar positions at national level, institutions and persons covered by this Directive should consider, on a risk sensitive basis, whether persons exercising those public functions should be considered as politically exposed persons. Where the Directive requires the identification of close associates of natural persons who are entrusted with prominent public functions, this requirement applies to the extent that the relationship with the associate is publicly known or that the institution or person have reasons to believe that such relation exists. Hence, knowledge of this condition does not require pro-active research. On retirement of a person previously falling under the concept of PEPs, an institution should not consider them as a high-risk business relationship, subject to a reasonable prudential period. Challenges in implementation In Ireland, the implementation process is moving forward on three fronts. The Department of Finance has begun the processes of drafting new primary legislation. The Money Laundering Steering Committee ("MLSC") has started the process of reviewing its Guidance Notes for Industry while the Financial Regulator has met with industry bodies to discuss issues and concerns. The extent of the initial due diligence, the boundaries between low or high risk customers, and the ability of designated bodies to make judgement calls in particular situations will need to be teased out in the implementation process. The updating of the Money Laundering Steering Committee's Guidance Notes will be particularly helpful in helping designated bodies navigate these issues. We would encourage all designated bodies to look to influence the new Guidance Notes either by direct submission or via their industry representative body. Summary The Third Money Laundering Directive will introduce important new changes to the procedures of all designated bodies. These will require system enhancements, process and procedure updates, staff training and possibly customer education. While the precise nature of the changes are still evolving in the implementation process, in-house counsel and compliance offices ought to start planning now for the implementation of this important directive. |
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Joe Beashel is a partner in the Banking and Financial Services Department at Matheson Ormsby Prentice and is Head of the Regulatory Risk Management and Compliance Group. He can be contacted by phone: +353 1 619 9000 or by email: joe.beashel@mop.ie |
