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The 4th EU AML Directive-Tighter legal framework on Money Laundering

In an effort to combat money laundering and the financing of terrorists’ activities and to increase transparency, the European Commission issued the 4th AML Directive in May 2015 and repealed the previous one.  The 4th AML Directive 2015/849 (which replaces the 3rd Directive) should be fully implemented by all EU Members States (and consequently Cyprus) by 26.06.2017.

The essence of the new legislation is the verification and control of the identity of the beneficial owners. As regards legal persons, the definition of the beneficial owner shall consist of natural persons who have the final ownership and ultimate control of the entity.   Emphasis is given on ultimate beneficial ownership and enhanced client due diligence.  

The Directive provides for 1. increased transparency through the creation of beneficial owners’ national central registers, 2. expanded definition of politically exposed persons (PEPs) and 3. enhanced risk – based approach requiring evidence-based measures.  Under this Directive tax evasion is considered a predicate offence.  

The Directive is applicable to all “obliged entities” as defined in Article 2(1) and which include the following: 1. credit institutions, 2. financial institutions, 3. auditors and accountants, 4. notaries and independent legal professionals, 5. Trusts, 6. estate agents etc.

All corporate and legal entities established in the EU are required to obtain and hold adequate, accurate and current information on their beneficial ownership.  This information will be kept in a central register by the member states and will be accessible by competent authorities.  Persons that can demonstrate a “legitimate interest” would be able to access such information.  

The legal framework tightens control of PEPs, their relatives, and personals known to be close associates to these PEPs, as the Directive broadens the “PEP” definition.  Important public figures are inter alia heads of states, heads of government, ministers, members of parliament, members of the governing bodies of political parties, members of supreme courts, board members of central banks, ambassadors, mayors, etc.  There is a distinction between domestic and foreign PEPs.   When a person stops being a PEP, obliged entities should for the subsequent 12 months continue considering that the same level of risk is created (enhanced due diligence should be carried out).

The Directive emphasizes that obliged entities must apply enhanced due diligence measures for PEP clients, transactions or business relationships with politically exposed persons.   Members states are required to show evidence that they have taken appropriate steps to identify, assess, understand and mitigate the risk and obliged entities are required to document their risk assessments.  

Furthermore, the Directive sets out a framework for minimum penalties regarding breaches in the areas of due diligence, suspicious transactions recording, book-keeping and other controls.  

The Directive sets out an indicative list of factors and types of evidence as to the existence of potentially higher risk:

Client Risk Factors:

  • The business relationship is conducted in unusual circumstances
  • Customers that are residents in geographical areas of higher risk
  • Legal persons or arrangements that are personal asset-holding vehicles
  • Companies that have nominee shareholders or shares in bearer form
  • Businesses that are cash intensive
  • The ownership structure of the company appears unusual or excessively complex given the nature of the company’s business