The 5th Anti-Money Laundering Directive (5AMLD) only came into effect as of January 2020, but change is already on the horizon. The 6th Anti-Money Laundering Directive (6AMLD) is the European Union’s latest set of regulations to crack down on financial crimes. 6AMLD is due to be transposed into national laws by December 2020, with member states required to implement the new regulations by June 3, 2021.
While it is still a year and a half away, it is crucial that all businesses who service European clients start preparing for the upcoming changes now. In this article, we outline the key changes you need to know about 6AMLD, and the impact it will have on the financial industry as a whole.
Before we dive into 6AMLD, it’s important to understand what it is built upon – 5AMLD. The 5th AML Directive was announced in June 2018 and introduced a number of important changes for businesses servicing European clients. Here’s a brief summary of the important changes it initiated:
- Cryptocurrencies – 5AMLD was a landmark regulation when it comes to cryptocurrencies, as this was the first time that crypto service providers were classified as obliged entities. This means that platforms that managed their users’ private keys now have to conform to the same AML and CTF requirements as mainstream financial institutions. Additionally, any crypto platforms and wallets need to register with their local authority.
- Politically Exposed Persons (PEPs) – Under 5AMLD, PEPs are now treated as high risk individuals regardless of where they are located. Prior to 5AMLD, PEPs who resided in the same national jurisdiction as a service provider did not have to be treated with any added due diligence. In addition, 5AMLD requires that EU member states create and publicly release a functional list of PEPs.
- Ultimate Beneficial Owner (UBO) – Businesses will now need to establish who is ultimately controlling and benefiting from the business relationship. If transparency cannot be established, the client should be turned away. Additionally, 5AMLD emphasizes the importance of keeping up to date records on UBOs.
- Financial Intelligence Unit (FIU) – 5AMLD gave the FIU sweeping powers, including the ability to obtain the addresses and identities of cryptocurrency holders. That being said, it’s still unclear as to how exactly the FIU will now be able to obtain that information, especially given the anonymity of crypto.
- High risk third countries – Companies that do business with customers from high risk third countries (such as Iraq, Syria, and North Korea) are required to perform enhanced due diligence measures under 5AMLD. This is specifically focused on addressing the deficiencies in those countries’ AML procedures and the risks they present. Additionally, it is required to obtain approval from senior management prior to establishing or continuing business relationships with clients in high risk third countries.
The changes that 5AMLD initiated marked a huge change, particularly for anyone dealing with digital assets. Financial institutions and other organizations within the European Union are now required to perform extensive monitoring of their potential and current clients. If you want to learn more about 5AMLD, we’ve written an extensive overview of it which you can read here.
What changes in 6AMLD?
The 6th AML Directive is coming fast on the heels of 5AMLD, and is instating some massive changes in order to fight money laundering. Here’s an overview of some of the biggest changes in 6AMLD:
- A harmonized definition of money laundering offences – Specifically aimed at removing any loopholes from weak legislation, 6AMLD provides a harmonized definition of what constitutes a money laundering offence. The 22 predicate offences that are outlined in 6AMLD truly reflect the changing nature of the money laundering landscape, and now include offences such as cybercrime, insider trading, and environmental crime. Significantly, 6AMLD includes “aiding and abetting” and “attempting and inciting” money laundering as crimes, which means that criminal liability will now be extended beyond those who actually commit the crime. This will make it easier for financial authorities to go after those who act as accomplices in money laundering schemes.
- Extension of criminal liability to legal persons – While previously only individuals could be convicted for committing financial crimes, this has now been extended to include legal persons (ie. companies or partnerships). Lack of supervision or control by a “directing mind’” within the organization which leads to money laundering (even if the offender or root of illegal funds is not identified) now qualifies business leaders to experience penalties themselves. This is a remarkable step in the right direction for AML legislation, and puts organizations on the line for their lack of compliance.
- Tougher punishments – In a significant step, 6AMLD has amended the maximum imprisonment for money laundering offences from one year to four years. While it is still not nearly long enough, it is a big step in the right direction for the EU, and we can only hope that the maximum imprisonment length will continue to increase. Additionally, any sentence may be supplemented with sanctions and fines (up to €5 million), including the complete shut-down of a business. Once 6AMLD is set into law, expect to see harsher punishments across the board.
- Cooperation – Under 6AMLD, EU member states are now required to cooperate with one another in the prosecution of money laundering crimes. For example, if a financial crime takes place across two different member states, they now need to work together to prosecute the offender and agree to prosecute in a single member state.
6AMLD is due to be transposed into national laws by December 2020, with member states required to implement the new regulations by June 3, 2021.
Although 6AMLD will cover all regulated entities throughout the European Union, the United Kingdom is not exempt even though it has left the EU. Any UK organizations that are operating within the EU will still need to comply with 6AMLD; Brexit does not exempt them in any way.
The future of compliance
Despite the fact that 6AMLD is very much in line with previous regulations, organizations will need to review and update their existing AML processes. It will also be important to look for areas of improvement, especially in areas regarding potential customer screening and monitoring. Given the potentially mammoth task this represents, many organizations are turning to third-party regulatory screening solutions to save time and money.
However, it is important to remember that 6AMLD is more than just another major deadline; it is another marker in the never ending battle against money laundering and other financial crimes. New threats will continue to emerge, and as a result, the frequency and scope of new regulations is bound to increase.
Companies would be wise to view compliance as something that helps their business rather than hinders it, especially as regulations continue to develop. Instead of just focusing on what is needed to be compliant with 6AMLD, companies should take a more proactive approach when it comes to compliance in general. By establishing a framework that operates above and beyond the current rules means that adapting to future regulations is far easier and painless.
At this time, doing the bare minimum is no longer acceptable when it comes to AML compliance. If 6AMLD tells us anything, it is that the punishments are only going to get stricter and are broadening to include sanctioning inaction as well. The traditional approach of barely scraping by is simply no longer feasible in the fast moving digital world. Rather, compliance should be seen as a priority and a way to dominate the market. By establishing that your company has the systems in place to quickly and easily adapt to changing regulatory requirements, you are ensuring that you can be the first to market with new services and products while minimizing overall risk.
For years criminals have managed to stay ahead of the law when it comes to money laundering. Part of the reason for that is that regulations have not been strict enough, but the other part is that organizations haven’t been following the rules. 6AMLD aims to change all of that, and it is in a company’s best interest to make the necessary changes, otherwise they will face punishment too.
Conclusion – Start preparing now
It’s pretty clear that instead of taking a reactive approach and focusing on solely being compliant with 6AMLD, businesses should focus on a more proactive approach when it comes to compliance. Keep in mind that 6AMLD is set to come into effect only one and a half years after 5AMLD, and it is likely that 7AMLD isn’t that far off either. Regulations are only going to become stricter and be updated more often.
As we begin to focus on 6AMLD this year and the next, it’s important that organizations broaden their horizons. Focusing on 6AMLD is a must, but it is necessary to look to the future and see compliance as an opportunity to achieve a higher level of governance to set yourself apart. In our future economy, it is going to be essential.