On July 5, 2016, the European Commission published a proposal for a directive that will amend the Fourth Anti-Money Laundering Directive (“4AMLD”) in an effort to counter terrorist financing and increase transparency to prevent tax avoidance and money laundering. The Commission determined that the evolving terrorism threat in Europe and the large-scale concealment of funds in offshore jurisdictions revealed by the Panama Papers necessitated these proposed amendments aimed at addressing gaps in the oversight of financial systems.
The proposal has two aims: (1) to strengthen oversight over the financial instruments used by terrorists such as cash, trade in culture artifacts, virtual currencies, and anonymous pre-paid cards; and (2) to prevent the large-scale concealment of funds in offshore jurisdictions and enhance corporate transparency. Underscoring the urgency of implementing these changes, the proposal encourages Member States to implement the 4AMLD six months earlier than originally required by amending the transposition date from June 2017 to January 2017.
The most significant proposed amendments are addressed below. The Commission’s explanatory memorandum and full text of the proposal is available here:
- Include virtual currency exchange platforms within the scope of the Directive: Article 2 of the 4AMLD defines the obliged entities such as banks and financial institutions that are within the scope of the Directive. The Commission has broadened the definition to include virtual currency exchange platforms and custodian wallet providers. This change will require these providers to implement preventative measures and report suspicious transactions. The Commission was motivated to make these changes because transactions with virtual currencies benefit from a higher degree of anonymity than traditional financial transactions, and accordingly, there is a risk that they might be used by terrorist organizations to conceal financial transfers.
- Lower the maximum transaction limits for certain pre-paid instruments: Article 12 of the 4AMLD provides that Member States may allow firms not to apply customer due diligence measures with respect to electronic money for transactions below a certain threshold. The Commission has lowered the thresholds for exemption for non-reloadable pre-paid payment instruments from 250 to 150 EUR and eliminated the exemption for online use of prepaid cards. The rationale for the change is that limiting the anonymity of prepaid instruments makes them less likely to be used for terrorist or criminal purposes. The Commission sought to balance this interest against the need to maintain pre-paid cards as an accessible instrument which help promote financial inclusion and are a useful instrument and substitute for bank accounts.
- Provide Financial Intelligence Units (“FIUs”) with greater access to information on the holders of bank and payment accounts: FIUs seek to identify the financial operations of terrorist networks across borders. The Commission has recommended Article 32 of the 4AMLD be amended to facilitate FIUs cooperation and align rules for their access to information with international standards. The proposed amendment removes the former requirement that a prior suspicious transaction report have been made by an obliged entity before an FIU may obtain information. Under the proposed amended rule, FIUs are able to obtain information from firms for the purposes of preventing, detecting, and combatting money laundering and terrorist financing even if a report has not been filed. The Commission also adopted measures to require Member States to set up an automated centralized mechanism to enable FIUs to identify bank and payment account holders. Members States may choose between (1) establishing a central registry containing the necessary data for the identification of account holders and granting their national FIU and other authorities access; or (2) establishing other centralized mechanisms to meet the same objective.
- Enhance and harmonize due diligence measures for high-risk third countries: The proposal harmonizes the list of due diligence checks applicable to countries with deficient anti-money laundering and terrorist financing regimes. It requires financial institutions to carry out additional customer due diligence measures and mitigating measures on financial flows from these high-risk countries such as obtaining information regarding the source of the customer’s funds and exercising increased oversight over the business relationship. On July 14, 2016, the Commission identified the high-risk countries in a supplemental memorandum and annex thereto availablehere and here.
- Increase access to beneficial ownership information: Articles 30 and 31 of the 4AMLD set forth requirements for the collection, storing, and access to information on the ultimate beneficial owners of companies, trusts, and other types of legal arrangements. The current rules require these entities to hold accurate information on their beneficial ownership. Pursuant to Article 30 of the 4AMLD, any person or organization demonstrating a “legitimate interest” can access such beneficial ownership information. The proposal expands access to a limited set of information on beneficial owners by making it available to the public on demand without a showing of legitimate interest, subject to Member State determined exceptions necessary to protect the beneficial owner from fraud or other risks. The Commission has indicated that public access allows greater scrutiny by the public and the press and preserves trust in the integrity of business transactions and the financial system. The Commission hopes increased transparency will combat the misuse of legal entities and legal arrangements by helping investigations and through reputation effects. The proposal also calls for similar public disclosure of beneficial ownership information for trusts that carry on commercial activities.
The proposal is part of the implementation of the Action Plan for strengthening the fight against terrorist financing which the Commission adopted on February 2, 2016. The amendments will be adopted following agreement on the text by the European Parliament and the Council of Ministers under the legislative procedure of the EU’s decision-making system.