How to Navigate Rocky Regulatory Waters in the ID Verification Marketplace

As European countries are still undergoing implementation and compliance of the 4th EU Anti-Money Laundering Directive (AMLD 4), the EU Commission has published the 5th EU Anti-Money Laundering Directive (AMLD 5). The new directive, which will be coming into force by January 10, 2020, is meant to strengthen and enhance the integrity, stability, and confidence in the financial system as a whole by cracking down on rampant money laundering and financial crime. AMLD 5 aims to change the way of how businesses deal with money laundering by strengthening a risk management approach and enhanced due diligence. It introduces a series of amendments and additional provisions to the existing AMLD 4 focused on increased direct access and transparency around beneficial ownership information and trusts.

From 4 to 5: An Evolution of AMLD

Before diving into AMLD 5, it’s important to understand how its predecessor impacts organizations, and why the EU Commission introduced the fifth directive. AMLD 4, which was adopted on June 26, 2015, places emphasis on a risk-based approach for firms to develop risk-based policies and conduct Customer Due Diligence (CDD) more extensively. When dealing with individuals or legal entities established in countries recognized by the EU Commission as high-risk countries or Politically Exposed Persons (PEP), organizations are required to carry out CDD to ensure the highest level of safeguards and checks on financial transactions. The goal of having a central register of Ultimate Beneficial Ownership (UBO) is to allow the information of beneficial owners of organizations to be accessible by financial institutions to improve the transparency of real owners of organizations. However, the implementation of UBO is premature, as many countries, even in the EU, still lack the central registers and little verification with the integrity of UBO information. Organizations in compliance with AMLD 4 still face adversity as the transparency of UBO information and the KYC process is not as clearly guided in the directive.

The AMLD 5 extends the reach of AMLD 4 in areas such as CDD and Politically Exposed Persons (PEP) by proposing additional provisions such as obtaining additional information of the proposed transactions, funding of customers & CDD, and reporting of transaction details to senior management for approval and scrutiny. Companies dealing with high-risk countries will be required to carry out this enhanced due diligence and compile a functional PEP list for public release. The PEP list created by organizations complying with AMLD 5 will feature the positions but not the name of PEP, which changes from time to time. This process of featuring positions but not names in the PEP list is designed to make compliance easier as PEP is screened and monitored for ongoing changes to risk, which can sometimes require significant administrative resources.

The introduction of AMLD 5 also allows for the public accessibility of UBO lists, the observation of beneficial ownership by trusts, and the establishment of UBO national registers to be interconnected at the EU level to facilitate information exchange and cooperation between various authorities in a better way. This will result in a stronger and more formidable UBO verification mechanisms for the accuracy of information. The KYC process can be improved when dealing with the new business relationship by consulting the beneficial ownership register and notifying authorities when discrepancies are found. In this case, AMLD 5 can solve the difficulties faced in AMLD 4 when determining UBO and the subsequent running of KYC, which can be challenging as the UBO and KYC process addressed in AMLD 4 was not as comprehensive and updated. 

AMLD 5: How You Can Prepare

AMLD 5 also addresses anonymous virtual currencies and cryptocurrencies’ usage linked to terrorism, financing risks, prepaid card spending limit, increased reach to cover tax evasion, wealth hiding, and laundering. With the implementation date of January 2020 marching closer and closer, many organizations are facing administrative struggles to keep up with the deadlines to comply with AMLD 5. This has led to an increasing number of organizations to seek out external advisory services to deal with AMLD 5 compliance provided by third parties such as Trulioo.

Trulioo offers comprehensive coverage identity verification and AML solutions for the purposes of identifying business entities and their beneficial owners. By providing transparency to Business Entity information as well as associated Beneficial Owners; Trulioo's global KYB KYC and Anti-Money Laundering (AML) watchlist services help organizations comply with international AML, Counter-Terrorist Finance (CTF), and sanctions regulations enforcement by streamlining the administrative efforts and focus on high-risk areas to save the additional cost of compliance. Trulioo customers can cross-reference the business and beneficial owner information provided by their clients with the information provided by government registries, credit agencies, and other reliable sources to conduct identity verification as well as AML watchlist checks against potential high-risk individuals or PEPs in compliance with AML and KYC obligations. Trulioo services can help organizations to avoid heavy fines imposed due to inadequacies in PEP screening and ensure robust compliance and regulatory framework to meet global legislative requirements such as AMLD 5.

With the amendment of (1) point (3) of Article 2(1) Directive (EU) 2015/849 (AMLD 4), Virtual Currency providers can also leverage Trulioo's comprehensive identity verification and AML solutions to comply with the requirements set for in Article 13 for customer due diligence.

Enforcing AMLD 5, Looking Ahead to AMLD 6

The upcoming enforcement of AMLD 5 promises better regulation when it comes to eliminating money laundering and terrorist financing to establish the confidence and integrity of the financial system. Organizations, especially those located in the EU, need to prepare and adjust their internal compliance and risk management framework to suit the AMLD 5 before the deadline. With increasing compliance and exhausting administrative issues, many organizations are approaching companies like Trulioo to assist them in their compliance efforts. It would be interesting to see how the AMLD 5 is implemented as the next phase of the battle against money laundering and financial crime. 

It is also important to note that the work on a new AMLD 6 is already in process. Approximately six months after the adoption of AMLD 5, the European Parliament plans to further strengthen the fight against money laundering through the introduction of AMLD 6. The sixth iteration of the directive lists 22 specific predicate offenses that all EU members must criminalize. Some of the offenses include environmental crimes, cybercrime, and tax offenses. 

The introduction of such punitive measures may require businesses to reassess their control mechanisms and relevant risk factors. AMLD 6 also broadens the scope of money laundering to include aiding, abetting, and attempting to commit the money laundering act as a criminal offense. The extension of criminal liability to legal persons (companies, partnerships, legal representatives or persons having the authority to decision making and exercise control over a particular person) encourage businesses to revise their internal governance strategy, where money laundering is carried out when there is a lack of supervision and oversight. Additionally, AMLD 6 introduces investigative tools and rules to determine which EU member state would have jurisdiction when offenses fall within the jurisdiction of more than one member state. AMLD 6 introduces the requirement of dual criminality where an offense will be unlawful in both jurisdictions, the country where the offense takes place and the jurisdiction in which the offense of money laundering is committed. Tougher punishments, such as an increase in minimum prison sentence for money laundering offenses from 1 to 4 years and dissuasive criminal penalties such as temporary prohibition from public welfare benefits, are pushing businesses to re-evaluate their internal AML and CTF mitigation.

The fight against money laundering and crime financing is surely long-lasting and increasingly strenuous. As the global financial landscape changes rapidly, many methods of unlawful money laundering activities are being discovered, which need to be immediately eradicated with the cooperation between authorities and businesses. The introduction of AMLD 5 and in the future, AMLD 6, can absolutely tackle these concerns and risks that are plaguing the global financial system.