Treasury consults on UK implementation of EU anti-money laundering reforms

Since its coming into force the Commission has proposed amendments to it to counter terrorist financing. These would require EU member states to implement the directive by 1 January 2017, bringing its UK implementation forward by 6 months. 

Banks and other financial firms, as well as gambling service providers and accountancy firms are among the businesses within the scope of MLD4. The directive refers to such in-scope businesses as "obliged entities".

Customer due diligence measures (CDD) under MLD4 involve checking the identity and beneficial ownership of customers to understanding who owns and controls the customer; assessing the purpose and nature of the business relationship, and monitoring it. CDD must be carried out when obliged entities are establishing a business relationship or carrying out occasional transactions of specified amounts; when there is suspicion of money laundering or terrorist financing or money laundering, and where there are doubts about previously obtained customer information, amongst other situations.

Obliged entities must carry out each of the measures but can determine their extent taking a risk-based approach endorsed in the directive. Because the directive also requires obliged entities to apply CDD measures to existing customers at 'appropriate times', in particular when a customer's circumstances change, the Treasury is interested in responses to a range of questions, including when respondents think CDD measures should be applied to existing customers while using a "risk-based approach", as well as the changes in customer circumstances they think should need to arise for CDD obligations to apply to existing customers.

Member States may allow obliged entities to apply simplified customer due diligence (SDD) measures if the transaction or business relationship is lower risk, based on types of customers, geographic areas and the products and services involved.  Obliged entities are to take account at least of the factors for potentially lower risk situations in Annex II to the directive.  One change proposed by government is to remove the list of products that could be subject to SDD currently contained in the UK's existing Money Laundering Regulations 2007 (Regulations) and to use the non-exhaustive list in Annex II instead. Respondents are asked whether they agree with this proposal and, if not, which products should be listed.

Obliged entities are to use enhanced customer due diligence (EDD) measures in higher risk cases set out in the directive, including where they have business relationships or carry out transactions with politically exposed persons and when dealing with natural persons or legal entities in third countries identified by the Commission as high-risk. To assess the risks of money laundering and terrorist financing obliged entities shall at least take account of the factors for potentially higher-risk situations that are set out in Annex III of the directive.  The consultation asks respondents a number of questions around EDD, including whether other products, factors and types of evidence, in addition to those in Annex III, should be considered and whether respondents consider there to be high-risk products from sectors other than the Financial Services sector that should be included.

The directive requires EU countries to set up a "central register" to record information on the beneficial owners of companies and other legal entities incorporated in their territories.  This information must be "current". 

Since 6 April 2016, most UK companies and limited liability partnerships have been obliged to keep a register of 'people with significant control' (PSCs).  These are individuals or legal entities that control them for example by holding, directly or indirectly, more than 25% of the shares or voting rights in the company, by having the right, directly or indirectly, to appoint or remove a majority of the company's directors or having the right to exercise, or actually exercising, significant influence or control over the company. Companies have had to supply this information to Companies House since 30 June 2016 when they file the company's confirmation statement which replaced  the annual return. 

Because the directive is intended to apply to a wide range of organisations the government said it has not yet defined exactly 'which other legal entities' will be subject to the directive's beneficial ownership requirements or how they will register information on their beneficial ownership. It still has to work out how the data stored on the UK's central public register at Companies House remains "current", in line with the requirements of the directive, the Treasury said

The government has also outlined plans to establish a public register of company beneficial ownership for foreign companies that already own or buy property in the UK, or that bid on UK central government contracts.

The directive expands the existing regime to include all gambling providers rather than just casino operators, as is currently the case. Providers of gambling physical and remote gambling services may be exempted from some or all of the directive if their activities are low risk. The Treasury has asked respondents to give their views on the money laundering and terrorist financing risks in certain sectors of the gambling industry and in the different gambling services providers offer.

"Following assessment of the evidence provided to us through this consultation, the government will exempt only gambling providers which are proven low risk," the Treasury said. If, for example, the UK makes no changes to the Regulations in relation to gambling and so it continues only to regulate casinos, such a "decision would need a very strong evidence base since the directive requires member states to explain their conclusions to the [European] Commission who will share this with other member states. An exemption and explanation is also susceptible to the scrutiny of the courts."

Casinos cannot be exempted from the AML rules under the terms of the EU directive. Providers of gambling services that are not exempt will need to comply with the CDD measures when establishing a business relationship; on the collection of winnings or placing of a stake or both and when any transaction amounts to €2,000 (£1,672) or more, whether the transaction is in a single operation or several that appear linked. Gambling service providers must also apply CDD where there is a suspicion of money laundering or terrorist financing despite there being any derogation, exemption or threshold and when there are doubts about the accuracy or adequacy of customer identification information.

The appointment of staff into some non-managerial roles but holding a management function in currency exchanges, cheque cashing businesses, trust or company service providers and gambling service providers could be subject to the approval of supervisors under the proposed new UK AML rules.

Under MLD4, supervisors of such businesses must ensure that people performing a "management function" at those businesses or who are the beneficial owners of such entities are fit and proper persons. The directive does not define "management function". The Treasury said that it believes the term 'management function' does not only apply to staff in management roles but to others at a  less senior level based on what such an individual does. It said it could apply to compliance officers, for example. It has set out proposed criteria for determining which other staff at those organisations might also be subject to the fit and proper persons test under the new UK framework.

The Treasury confirmed that it interprets the fit and proper persons test, contained within MLD4, as potentially applying to staff operating outside of management positions in the relevant businesses. 

"The government view is that, in addition to certain management positions within an entity, there are others who may hold a management function because they play substantial roles in, or have the ability to play substantial roles in: the making of decisions about how a significant part of the entity’s activities are to be managed or organised [; or] the actual managing or organising of a significant part of those activities" the Treasury said. "It would be individuals that meet the above criteria that are subject to the fit and proper test." The consultation asks for respondents' views on this approach and whether it would encompass all individuals that should be subject to a fit and proper test.

The Treasury's consultation provides an opportunity for all obliged entities that will be subject to the new regime under MLD4 in the UK, to shape the requirements they will need to follow under the legislation. The closing date for comments on the consultation is 10 November, 2016.