The fifth anti-money laundering directive (5MLD) has now been passed into law with the aim of tackling the financing of terrorist groups in Europe by enforcing enhanced checks, and closely regulating cryptocurrencies and prepaid cards.
The new regulations introduced by the directive have also changed the role that accountants play, giving them an important role in conducting due diligence that will help to tackle organised crime.
David Savage, a Partner in Stewart’s Financial Crime department said: “What is clear from the new rules is that the expectations of “obliged” entities, including accountancy firms, in respect of the fight against financial crime continue to expand. With HMRC investigating and fining numerous accountancy firms for breaches of anti-money laundering rules, it has never been more important to ensure compliance with the law.”
Many accountants will not have been exposed to anti-money laundering (AML) regulation before and LexisNexis Risk Solutions has issued a guide on how to cope with these new regulations.
Mike Harris, Director of Financial Crime Compliance at LexisNexis Risk Solutions, explained what the regulations introduced in 5MLD means for accountants: “There’s a whole swathe of sectors that weren’t subject to AML regulation that now are, so an accounting practice with any business exposure in that area is going to have to go through and review all of its policies and procedures. If they deal in those sectors, they’re going to have to take a different approach to risk than they would have done up until today.
“Our guide was our effort to provide something that just touched on the issues that compliance have got to be thinking about. The compliance considerations as a result of all this new regulation are significant.”
Reporting Discrepancies
The new regulations have been designed to reduce local interpretation and make sure that enhanced due diligence checks have been performed where AML and Combatting and Fighting Terrorism checks are weak. These checks will need to be carried out by accountants as well as their clients.
“They [accountants] have to do their own work to be satisfied that they understand who the beneficial owners are at any given client relationship and if they find discrepancies through the national registers, report them,” said Harris.
“Then you’ve got the whole issue of trusts and foundations and, the special purpose entities that will be less widely available in terms of publicly available information on beneficial owners, so there’ll be additional work to be done there.”
Many firms carry out their own due diligence checks but without the correct support this can be time-consuming and expose clients exposed to unseen risk. LexisNexis Risk Solutions’ guide suggests that the key is having access to local experts with local market knowledge when dealing with clients overseas.
“When enhanced due diligence searches rely mainly on the use of popular search engines, there is a danger of missing vital information. For example, checks on breaches of regulation, litigation cases, bankruptcy or insolvency notices require access to information that is often hidden behind firewalls or accessible only via subscription. Knowledge of regional sources and the ability to conduct checks in languages other than English is essential when dealing with overseas entities.”
Politically Exposed Persons (PEPs)
The new directive stipulates that member states are required to keep an up-to-date list of PEPs and the exact functions that qualify as prominent public functions.
Harris was keen to point out that this new regulation was not just an issue for governments or their clients, but also accountants as they are now obliged to carry out additional checks to PEPs that their clients are dealing with.
“The whole area of PEPs, not just for accounting firms, but everybody’s got to get to grips with the new regime where individual countries are having to develop their own list of prominent individuals that now fall into being designated PEPs. In fact, if one is in your client relationship, then you’re clearly going to have to conduct additional checks and subject them to enhanced due diligence.”
Electronic Identity Verification
Another area that many accountants are going to need to get to grips with is the acknowledgment in the directive that electronic identity verification is a reliable source of evidence, and can be used as the sole form of client verification.
Martin Cheek, managing director of anti-laundering software firm SmartSearch, said: “The Government – and the EU – are right to want to see more use of electronic verification. It’s been shown to be more reliable, quicker and more cost effective than manual checks. Plus, firms can have highly efficient screening and ongoing monitoring for Politically Exposed Persons and Sanctions, all of which are a requirement of the Anti-Money Laundering rules.
“It’s a pity the regulations didn’t appear until so late in the day, but it is imperative that firms take action now to show they comply with the new regulations or else they could face a significant fine. There is increased national and international focus on the scourge of money-laundering and terrorist financing and electronic verification is an easy way to help prevent this.”
The introduction of electronic verification is only going to become more prevalent as more clients take advantage of the convenience of conducting business remotely. However, Harris raised concerns about how well-prepared firms were, to integrate and use the new technology.
“Have they got the technology? There’s going to be a requirement to have the appropriate technology to conduct electronic ID verification processes. More and more customers wish to act remotely, and you have to have a robust and trusted system to carry out remote identification. So that’s going to be an additional requirement.”
Challenging Crypto
Cryptocurrency is increasingly being used by terrorist groups to get around the verification checks needed to set up traditional bank accounts and to avoid the money being traced.
Malcolm Wright, Chief Compliance Officer at Diginex who provide digital financial services and solutions, expressed concerns that many firms don’t fully understand cryptocurrency yet, and they’ll need to get up to speed quickly if they’re to become compliant with the new directive.
“Looking back at the MLD4 [anti-money laundering directive] not all countries implemented in the required time including Greece and Romania and it would appear that the 5AMLD may be no different. One particular challenge is that a high degree of technical knowledge is needed to implement an effective regime for cryptocurrency firms, and some regulators may not yet have such knowledge.”
“Firms that are now coming to terms with the new reality that AML requirements apply to cryptocurrency firms, may struggle if this is something that they have not paid close attention to in the past, particularly if they have a large user base or tight operational margins.”
Brexit and 5MLD
The sixth anti-money laundering directive is already being drafted by the EU, but there is still a lot of uncertainty around how and whether any further directives will be integrated into UK law.
While Harris conceded that this is still very much undecided, he emphasised that by using data analytics as part of due diligence checks, accountants and their clients should focus on what they can control instead.
“So far, the fifth money laundering directive is operating in parallel with the timetable that was established by the EU when it when it was launched, a year or so ago. We’re on the same timetable up to this point and the sixth money laundering directive is already in train from the EU, but the big question will be, will the UK adopt it on a like for like basis to the same timetable? We don’t know the answer to that at this time.”
“We talk about policy and procedures and words on paper, but when it boils down, you’ve actually got to do something and you’ve got to be checking, using good technology to carry out the analysis with that data, so that you can spot something unusual. If you’re concerned about potential wrongdoing, then data analytics can really help you understand the trends and whether or not that’s something you should be concerned about.”