The 5th EU Anti-Money Laundering Directive (5AMLD) was introduced by the European Parliament on April 19, 2018, in response to incidents such as human trafficking, terrorism, and the Middle East migration crisis. These events highlighted the need for new measures to tackle money laundering and terrorist financing, as the previous 4th EU Anti-Money Laundering Directive was insufficient. 5AMLD aims to detect and prevent money laundering by introducing stricter rules and expanding the number of organizations required to comply with Anti-Money Laundering (AML) regulations. In addition, 5AMLD takes into account the development of technology and trends in the financial sector and provides a clear definition of cryptocurrency and obligations for virtual currency exchanges and wallets. The directive also focuses on the regulation of anonymous prepaid cards and the improvement of public access to property information. Ultimately, 5AMLD seeks to improve financial integrity and confidence by combating money laundering and terrorist financing.
Understanding the 5th EU Anti-Money Laundering Directive
Since complying with the EU 4th Anti-Money Laundering Directive, incidents such as human trafficking, terrorism, and the Middle East migration crisis have revealed the need for new measures to combat money laundering and terrorist financing. In line with new regulations, developing technology, and trends, legal regulations for financial activities, corporate, and other legal entities had to be clear and more understandable. This explicitly would make it easier to improve the current preventive framework and combat terrorist financing.
5AMLD aimed to detect money laundering and prevent it. In this context, stricter rules have been introduced to fight money laundering and terrorist financing effectively. Besides, the number of organizations also obliged to comply with AML Regulations has increased.
What Are The 5AMLD Regulations?
With technology development, virtual money took its place in the economic cycle. Although the 5th AMLD was designed to improve the 4th AMLD, some additions needed to be made. The main measures taken against crypto assets under 5AMLD are as follows:
- 5AMLD creates a legal definition for cryptocurrency.
- Cryptocurrencies are obliged to comply with the AML Regulations applied to financial institutions accepted as 'compulsory institutions' under 4AMLD. Because cryptocurrencies and crypto exchanges are also considered 'mandatory organizations.'
- Institutions that operate crypto money are also obliged to practice Customer Due Diligence (CDD) and send Suspicious Activity Reports (SARs) like other organizations.
- Under 5AMLD, Financial Intelligence Units (FIU) have the authority to obtain the owners of the virtual currency's addresses and identities.
- Cryptocurrency exchanges and wallets are obliged to be registered with the competent authorities in their local location. An example of these authorities, The UK's Financial Conduct Authority.
Prepaid cards have been identified as a potential avenue for money laundering and financing terrorism due to their anonymous nature. These cards allow individuals to access large sums of money without leaving a traceable financial trail. To address this issue, 5AMLD mandates the implementation of customer due diligence measures for prepaid card issuers. This includes verifying the identity of cardholders and monitoring transactions for suspicious activity. Additionally, 5AMLD imposes monthly spending limits on anonymous prepaid cards to further mitigate the risk of money laundering and terrorist financing. By taking these measures, 5AMLD aims to enhance financial transparency and increase the security of the financial system.
UBOs and PEPs
Industries should be aware of the requirements for both Ultimate Beneficial Owners (UBOs) and Politically Exposed Persons (PEPs).
UBOs: Companies are required to identify and verify the identity of the UBOs of their clients and customers. The UBO is defined as an individual who ultimately owns or controls a legal entity, such as a corporation or trust. This information should be obtained and kept up-to-date, and the authorities should be able to access it if necessary.
PEPs: A PEP is defined as an individual who holds a prominent public function, either domestically or internationally, or who is closely related to such a person. Industries are expected to conduct a risk assessment of their clients and customers, taking into account the PEP status when evaluating the risk of money laundering or terrorist financing. In cases where a customer or client is deemed to be a PEP, industries are required to apply enhanced due diligence measures, which may include additional identity verification procedures, ongoing monitoring, and risk-based procedures for managing the relationship. Industries are also required to notify the competent authorities if they suspect that a transaction is related to money laundering or terrorist financing and that the funds involved come from or are destined for a PEP.
High-value goods, such as fine art, precious stones and metals, and high-end real estate, are often used to launder money or hide assets. As such, the regulations surrounding high-value goods aim to increase transparency and reduce the risk of money laundering or terrorist financing in these markets.
Under 5AMLD, industries involved in luxury goods transactions, such as dealers, brokers, and auction houses, are subject to the same anti-money laundering (AML) requirements as other financial institutions. This includes customer due diligence, suspicious activity reporting, and record-keeping.
Additionally, industries must implement measures to mitigate the risks of money laundering and terrorist financing, including verifying the identity of their customers, conducting enhanced due diligence for higher-risk transactions, and ensuring that adequate records are kept.
High-Risk Third Countries
5AMLD addresses the issue of high-risk third countries, which are defined as countries that pose a higher risk of money laundering and terrorist financing. Accordingly, the European Union (EU) must establish a list of high-risk third countries and apply enhanced due diligence measures to financial flows from these countries. This includes measures such as increased customer due diligence, risk assessments, and the implementation of additional internal controls. The purpose of these measures is to mitigate the risks associated with financial flows from high-risk third countries, including the risk of money laundering and terrorist financing.
In addition to establishing a list of high-risk third countries, 5AMLD also requires EU Member States to regularly assess and update their national lists of high-risk third countries, taking into account a variety of factors, including the level of corruption, the effectiveness of AML measures, and the level of cooperation with EU AML authorities.
With 5AMLD, obligations for financial crimes and tax evasion become clearer than previous legislation. Also, legislation reviews of the member states were expanded. Other decisions taken to broaden the scope of legislation are:
To ensure public access to useful property information. Thus, institutions and organizations can be controlled more by civil society. 5AMLD aimed to ensure financial integrity and confidence in this decision.
Commercial and other legal entities can assist with legal regulations and investigations to fight against money laundering and terrorist financing.
5AMLD was introduced as a response to the growing threat of money laundering, terrorism financing, and other financial crimes. It aims to enhance financial integrity and confidence by introducing stricter rules and expanding the number of organizations required to comply with AML regulations. The directive takes into account the latest developments in technology and the financial sector and provides clear definitions and obligations for virtual currencies, anonymous prepaid cards, and luxury goods. It also requires organizations to identify and verify UBOs and PEPs and to implement measures to mitigate the risks of money laundering and terrorist financing. With 5AMLD, the EU is taking a proactive approach to combating financial crime and protecting the integrity of its financial system. The introduction of 6AMLD, the 6th EU Anti-Money Laundering Directive, will likely further strengthen the EU's stance on financial crime and continue to improve the efficiency of the AML framework.