Preparing for the European Union Sixth Money Laundering Directive
Anti-money laundering (AML) law is constantly evolving. And necessarily so, given the increasingly sophisticated methods and technologies that criminals and terrorists use to move illegally earned funds through their networks. In the European Union, companies currently have until 10 January 2020 to comply with the current directive on money laundering (5MLD). And the European Parliament already approved, on 12 September 2018, a proposal for the EU’s next round of AML legislation, known as the sixth anti-money laundering directive (6 MLD) – just six months after the formal adoption of the fifth.
This is especially important because 6MLD represents a significant broadening of the scope of AML. One thing that is already abundantly clear is that it will not only affect companies based in Europe but also companies that have clients or subsidiaries in Europe. Thus, for example, there should be no talk of “Brexit uncertainty”. While the United Kingdom may not be directly bound by 6 MLD, and it is unclear as to whether it will adopt equivalent legislation for domestic purposes, British companies doing business in the EU will certainly need to comply.
So, what are the main points of 6 MLD?
A broader definition of predicate crimes
First, it offers a much tighter definition of what constitutes a money laundering crime, referred to in 6 MLD as “predicate crimes”. The aim here is that “the definition of criminal activities which constitute predicate offences for money laundering should be sufficiently uniform in all Member States”. The directive explicitly lists 22 categories of criminal activity. Member states must introduce national legislation to pursue and punish such activity if they have not already done so. Whereas most of these 22 categories, such as racketeering, drug and human trafficking, are obvious and well-established money laundering crimes, some of the newer predicate crimes are rather more nuanced. For example, legislators and corporate counsels will need to study a body of existing EU legislation to find out what 6MLD means in terms of “environmental crimes”, while other predicate offences, in particular cybercrime, tax crimes, and cryptocurrency present ever-moving targets.
Having digested the scope of these predicate crimes, firms will then have to conduct an impact analysis of the risk factors presented to their business models and the measures and controls they will need to introduce to ensure compliance. The enlarged scope of the directive means every company will need to seek advice and adapt accordingly.
6 MLD will also harmonise the penalties for anyone found guilty of money laundering offences within EU Member States, with a maximum of four years’ imprisonment. Currently, the severity of punishments for such crimes varies considerably.
Extension of liability
Until now EU law has focused the application of corporate liability to companies operating in regulated sectors, such as banking. Under Article 7 of 6 MLD, any company or legal person operating in an EU Member State can now be held criminally liable for failing to prevent money laundering – so this is also a significant extension of the scope of AML legislation. In concrete terms this means that company executives who are either aware of criminal activity, or who do not provide appropriate supervision or control over employees who enable money laundering, will be held liable and can be prosecuted.
Enhanced international cooperation
The new directive reiterates the EU’s commitment to combating money laundering by “enabling more efficient and swifter cross-border co-operation between competent authorities”. This commitment extends beyond EU and the European Economic Area. Essentially, local jurisdictions will be obliged to share information if there is a possibility to prosecute offences in more than one Member State.
The directive also explicitly addresses the fact that criminal activity may take place in one jurisdiction while the money laundering takes place another, the so-called principle of “dual criminality”. As the preamble to the directive states, “Given the mobility of perpetrators and proceeds stemming from criminal activities, as well as the complex cross-border investigations required to combat money laundering, all Member States should establish their jurisdiction in order to enable the competent authorities to investigate and prosecute such activities. Member States should thereby ensure that their jurisdiction includes situations where an offence is committed by means of information and communication technology from their territory, whether such technology is based on their territory or not.”
Article 10 of 6 MLD specifically addresses this issue. In particular, it is likely to make a material difference in relation to the reporting and prosecution of new predicate crimes such as the facilitation of foreign tax evasion.
Domestic law may be tougher
While 6 MLD aims to harmonise legislation across Europe and to enhance international cooperation, it is worth noting that some jurisdictions already have tougher legislation in place in some areas. The United Kingdom’s most recent overhaul of its domestic AML legislation was the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which came into force in June 2017. This implemented the EU’s fourth money laundering directive and imposes a maximum term of 14 years’ imprisonment in England and Wales for the principle money laundering offences, significantly stricter than the maximum four-year sentence proposed by the 6MLD.
Post-Brexit the UK will need to decide whether to adopt the broader list of predicate crimes and adopt the provisions of 6 MLD or amend existing legislation. But even if it does not, it is already clear that companies doing business elsewhere in Europe will need to review their risk position and AML processes. As far as AML is concerned, there will be no bonfire of the regulations!
There is no silver bullet
Smaller financial institutions will find it difficult to keep up with yet another regulatory round in AML. They will come under a lot of pressure to invest in new “future-proof” technologies and hear a lot of buzzwords. There is no shortage of RegTech companies out there, most of which have sprung up in recent years, who are keen to give you their sales pitch. Deloitte lists more than 60 companies specializing in the KYC and AML space alone.
The truth is, however, that there is no absolute failsafe solution and no silver bullet. Larger financial institutions that have invested billions in highly sophisticated artificial intelligence and machine learning solutions for AML compliance now find that real work has only started.
To minimize the risks of non-compliance while keeping costs under control, companies would do better to review and strengthen their AML processes, especially around know your customer, before committing to any major technology investments. I set out some of the most important considerations in this earlier post. However, each organization is different, and it is important to find the best technology fit. Therefore, I recommend seeking independent advice on how best to invest in improving data quality and automating the most time-consuming parts of your AML workflow before purchasing technology for the sake of technology.
Author: Paul Hamilton
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