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Implementation of the Fifth Money Laundering Directive

Fifth Money Laundering Directive

This latest directive revisits certain areas of the Fourth Directive to further strengthen transparency and counter-terrorist provisions. The requirements of 5MLD must come into effect through national law by 10 January 2020 in line with Article 4 of the 5MLD.

The Fifth Directive introduces a number of elements to strengthen the UK Regime;

  • New obliged entities
  • Electronic money
  • Customer Due Diligence (CDD)
  • Obliged entities: beneficial ownership requirements
  • Enhanced Due Diligence
  • Politically Exposed Persons
  • Mechanisms to report discrepancies in beneficial ownership information
  • Trust Registration service
  • National register of bank account ownership
  • Reporting by Treasury
  • Pooled client accounts

There are a number of other technical issues such as the implementation of group-wide polices and clarification of the criminality check, the aim of this amendment is to make clear that self-declaration on relevant criminal convictions by those holding a management function or who are beneficial owners in the relevant sectors is not sufficient to comply with the regulations.

I will issue further articles detailing the new requirements placed on firms by the changes once the Government releases their consultation response giving greater clarity to their intentions.

I will however just briefly comment on the expansion of the definition of tax advisor and on beneficial ownership requirements, I have seen some comments which are not entirely correct.

Auditors, accountants and tax advisers are already in scope of the MLRs, which includes bookkeepers, payroll service providers, repayment agents and some customs practitioners and virtual assistants under the definition of an accountant, provided in HMRC guidance.

The services they provide can be recording, reviewing, analysing, calculating and reporting on financial information for other people (by the way of business). This includes:

  • professional bookkeeping services
  • accounts preparation and signing
  • giving a customer specific tax advice
  • help with completing and submitting tax returns or duty claims
  • advice on whether something is liable to a tax or duty
  • advice on the amount of tax or duty that is due

The Fifth Directive seeks to expand the scope of obliged entities in relation to tax matters. The UK definitions are already quite robust and already do include business who provide activities such as stock taking and will writing, (when the will mentions IHT or other taxation matters), these where debated and agreed at a meeting at Treasury I attended for the implementation of the 2007 Money Laundering regulations. The Financial Action Task Force in 2012 updated its predicate offences of Money Laundering to include tax crimes for both direct and indirect taxes, this was after the third directive was agreed. Despite the fourth directive focusing in the crimes of tax, some European States who based their definition around the third directive do not have such robust definitions so much of this expanded definition is aimed at those member states to update their national law.

In the UK most direct taxation advisory businesses are covered, however there are a number of deficiencies regarding indirect taxation. One which affects the accountancy and legal professions is stamp duty on share transactions.

Company secretarial support services are not a regulated activity, which is different from being appointed as a secretary. So, the support activities of preparing board minutes, resolutions of members or other forms for filing are not in any Money Laundering Regulation definitions and have been agreed by Treasury (same 2007 meeting) as not being a regulated activity. There will be a number of company secretarial service firms who are not Registered for AML Supervision.

As someone who undertakes a great deal of secretarial services to my accountancy and legal firm clients through my business (which is registered for supervision) I am regularly discussing and advising on issues such as S421J shares by the way of employment (Form 42) or with exemptions from such concerning a family restructure. Settlements legislation issues arise at regular intervals. Share for share transfers have tax implementations, certainly in a company purchase of own shares Stamp Duty applies in which case we advise the client on the amount paid at the bottom of box 2 on Form SH03 or advise on signing the exemption declaration at the end of the form. But one the simplest of transactions undertaken by a company secretarial support business is the transfer of shares, on the stock transfer form we enter the consideration and dependant on that amount we calculate and advise the Stamp Duty to be paid or to the signing of the exemption.

Unfortunately, in some firms the company secretarial functions are left to a more junior member of staff or administrators who may not be very experienced in aspects of beneficial ownership information for filing at Companies House or regarding the Money Laundering Regulations Customer Due Diligence requirements.

Any allotment or movement in shares should be minuted and consideration should be given as to any potential change to the PSC register, we use as standard in any relevant board minute, a clause such as below;

‘The Directors considered the need to maintain the register of people with significant control over the company (“PSC Register”) under Part 21A of the Companies Act’.

Any change then needs to be recorded (or a note of no change) and arrangements for the relevant forms to be filed at Companies House within 28 days.

Any change in PSC should prompt the firm to review the risk assessment of the customer for Money Laundering Compliance purposes and any new PSC would probably need verification of identity before the transaction is undertaken. Enforcement and enhancement to this view is contained within the Fifth Directive.

Article 14 of 4MLD requires obliged entities to verify the identities of their customers and beneficial owners before establishing a business relationship or carrying out a transaction.

Additionally, Article 14 requires that obliged entities apply CDD measures to existing customers on a risk-sensitive basis, including when the relevant circumstances of a customer change.

5MLD introduces further changes to the requirements for obliged entities on verifying the identities of customers or beneficial owners. Regulation 30 (2) Subject to paragraph (3) or (4), a relevant person must comply with the requirement to verify the identity of the customer, any person purporting to act on behalf of the customer and any beneficial owner of the customer before the establishment of a business relationship or the carrying out of the transaction.

There is also a requirement for ongoing CDD. 5MLD also requires obliged entities to apply CDD when they have any legal duty in a calendar year to contact the customer for reviewing their relevant beneficial ownership information.

The government envisages therefore placing a requirement under Regulation 27(8) of the MLRs for obliged entities to apply CDD where: The obliged entity has any legal duty in a calendar year to contact the customer for the purposes of reviewing that customer’s beneficial ownership information.  Further, the government envisages leaving it to the relevant person to determine what is ‘relevant information’ related to the beneficial owner. This would be in relation to the relevant person’s risk assessment for that customer.

The Government goes on to state that they consider the scope of legal duty in this instance to be where UK law requires obliged entities to contact customers for the purpose of reviewing any information which (i) is relevant to the risk assessment for that customer for CDD purposes and which (ii) relates to the beneficial ownership information of that customer.

Any change in shareholding which you participate in as a service is a transaction, therefore you should review the implications of any such transaction on the beneficial ownership information of the customer and your risk assessment of the customer, you should apply the appropriate customer due diligence before proceeding with the transaction.

If the customer is responsible for their filings and confirmation statements at Companies House, you will have that new requirement to contact the customer for the purposes of reviewing that customer’s beneficial ownership information.  This may be done as part of an annual review of the customers risk assessment, you may consider updating your policies accordingly.

There is also an Introduction of a requirement to report discrepancies of beneficial ownership information, this requires regulated firms within the AML/CTF-regulated sectors to report discrepancies between beneficial ownership information available at Companies House, and information which they obtain through their own compliance checks. This will enhance the accuracy of information at Companies House in the short-term.

The above statement is from the UK Governments Economic Crime Plan, 2019-2022, in which they state; Economic crime refers to a broad category of activity involving money, finance or assets, the purpose of which is to unlawfully obtain a profit or advantage for the perpetrator or cause loss to others.

This plan pulls together various aspects of methods to combat economic crime, I will be focussing on this in my next article. The Policies and Procedures our firms produce to comply with our obligations are laid out within the Money Laundering Regulations, these must consider the risks our firms face from the threat of Money Laundering. To do this we must have regard to other Legislation such as the Proceeds of Crime Act and the Criminal Finances Act.

I will be looking at and discussing various aspects of the plan such as;

  • Reform of Companies House
  • legislative changes to improve the Proceeds of Crime Act
  • Review of the SAR’s regime
  • The enhancement of FCA and HMRC supervision
  • Promote digital identity services
  • Review of professional body supervision
  • Transparency of overseas ownership of UK property
  • Reform of limited partnerships