The Fifth European Anti-Money Laundering Directive (AMLD 5)

18 July 2018

Dr Michael Jünemann, Johannes Wirtz

Published on June 19th 2018, the European legislator has agreed on a new Anti-Money Laundering Directive, effective from 9 July 2018. Member States will have until 10 January 2020 to implement the directive into national law.

We have taken a closer look at what is to come and the major changes the players of the financial market will have to adapt to as well as the accompanying opportunities and risks.

1. Coverage of the Crypto Market

The fifth Anti-Money Laundering Directive is one of the most significant changes that concern the crypto market. In the future, all platforms that offer the exchange of virtual currencies (crypto exchanges) and all providers of electronic wallets for crypto currencies such as Bitcoin, Ether or Ripple will be covered by the scope of AMLD 5. The European Union thus complements the positions of many national financial supervisory authorities who in the most recent past have issued numerous consumer warnings due to the lack of regulation and effective measures in regard to crypto currencies. Any and all crypto players will have to take a serious look into anti-money laundering measures. Whether or not the regulation will hinder the hype around crypto currencies remains to be seen.

2. Tougher requirements on prepaid cards

The issuance on non-rechargeable prepaid cards (sometimes misleading prepaid credit cards) will be limited under the AMLD 5 regime to an amount not exceeding €150.00 per month. This significantly lowers the existing limit of €250.00. However, some member states, such as Germany, have already set an even more restrictive limit in their last update of anti-money laundering regulation.

Payment recipients may continue to accept e-money only if the payment originating country follows similar money laundering prevention standards.

3. Easier Access to the Central Transparency Register

Following existing regulation, only government agencies, obliged entities and individuals with legitimate interest have access to the central transparency register. AMLD 5 creates public access. Information regarding individuals who have substantial influence in a company’s operation thus becomes freely visible as the European legislator aims to create better transparency of corporate structures for third parties.

Furthermore, the new directive arranges for obliged entities to undertake compulsory inspection of the transparency register before establishing and, if necessary refrain from, new business relationships.

The obligation to inform and be listed in the transparency register remains as it stands. Only those individuals whose share in capital or voting rights of an organisation exceed 25% or those who wield similar influential power must be reported to the register. The European Commission’s original proposal to lower this percentage to 10% was not accepted.

4. Dealing with business partners who maintain relationships in high risk territories.

According to AMLD 5, payment recipients will be bound to collect extensive information regarding all business partners with ties to high risk territories. This includes details regarding the nature of the relationship, the origin of the transferred fund as well as the partner’s motivation to liaise. Additionally, the recipient’s management board must give consent to and strictly monitor all new and existing business relationships. Member states are at liberty to impose a mandatory transfer of the first payment from an account registered with a financial institution that is subject to due diligence rules similar to the directive.

The commission is authorised to compose a rulebook identifying high risk territories.

5. Simpler monitoring through FIUs (Financial Intelligence Units)

Member states shall establish central national registries for bank and payment accounts to ensure the quick identification of all accounts of any individual by the FIU. Moreover, AMLD 5 allows for cooperation of the FIUs and national financial supervisory authorities to maintain an efficient exchange and flow of relevant information.

6. Conclusion

Continuous digitalisation within the financial sector leads to accelerated competition and thriving innovation of technologies and financing tools. They facilitate access to payment services, loans and equity capital. However, this acceleration is not free of risk or abuse but comes with inherent threats of money laundering and terrorist financing. To fight these risks, the European Parliament and the Council of the European Union has agreed to amend and expand existing anti-money laundering legislation. This 5th Anti-Money Laundering Directive (AMLD5) comes with a requirement for preventive responsibility of the crypto-currency market, an obligation to inspect and simultaneous creation of public access to the transparency register as well as requiring due diligence concerning transactions and of recipients of payments originating in high risk territories.

In total, AMLD 5 significantly limits anonymity in the financial sector. Critics voice the concern for complete surveillance of money transfers under the cloak of anti-money laundering and anti-terrorist financing. The implementation of national registries for financial accounts of customers in particular is criticised as a breach of data protection law, especially the General Data Protection Regulation (GDPR) which recently went into effect in May 2018.

Next to these substantial concerns, it is also the compliance efforts that worry companies and their compliance officers. Many companies still struggle with adapting their compliance management systems to just recently updated AML-regulation in some member states. Now, they have to address fresh changes in the shortest time frame. Crypto exchanges and providers of wallets need to prioritise their duties as obliged entities. A timely overhaul of their respective systems can only be recommended to all actors in the financial market.