Firms should be aware there will be a narrow window in which to review and adjust to changes to the AML regulations expected in January.
Earlier this year the government consulted on proposals for the transposition of the Fifth EU Money Laundering Directive (5MLD) into UK law. Unfortunately, the government did not formally respond to the consultation prior to the dissolution of parliament and the commencement of the ‘purdah’ period.
Subject to the availability of parliamentary time, the incoming government is likely to proceed with the transposition as a matter of urgency. Until the text of the regulations is released there remains uncertainty about the direction of travel on some issues raised in the consultation (including the extent to which our suggestions on subjects such as trust registration have been taken on board).
In this article we look at the expected changes firms should be preparing for ahead of the transposition deadline of 10 January 2020. The Legal Sector Affinity Group, of which we are a member, will publish interim guidance as soon as possible once the text of the legislative changes is confirmed.
What changes can we expect to the current AML framework?
Although the scale of change is significantly smaller than the fourth directive, we can expect key amendments in several areas of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
Customer Due Diligence
Current obligations in relation to customer due diligence (CDD) on companies are likely to change to implement some proposals arising from the FATF Mutual Evaluation Report of the UK, which was published in December 2018.
This is likely to include an obligation to identify senior managers where reasonable steps to identify the beneficial owners of a corporate body have been unsuccessful.
Firms are also expected to be required to renew CDD in situations where they are under a legal obligation to contact an existing client.
Enhanced Due Diligence
Some of the more significant changes concern when and how enhanced due diligence (EDD) is applied, including:
- EDD will need to be considered where any one of the current red flags applies of transactions being either complex or unusually large; conducted in an unusual pattern or without an apparent economic or lawful purpose is present. Policies, controls and procedures will also need to be adjusted to identify these red flags
- the introduction of additional risk factors to consider when determining whether EDD should apply
- expanded EDD requirements where transactions involve a party established in a high-risk third country
- a mandatory package of EDD measures – a requirement to obtain senior management approval; to acquire additional information on the customer, beneficial owner, the nature of the business relationship and the reasons for the intended transaction, and to acquire information on source of funds and source of wealth in all EDD scenarios
Transparency of beneficial ownership
Much of the focus of the Directive is on improving transparency of beneficial ownership, including two significant changes.
First firms will be under a new obligation to report discrepancies between the information contained on public registers (such as the register of persons of significant control) and beneficial ownership information obtained through CDD.
Secondly, the initial consultation proposed a significant expansion of the requirement to register trusts. We raised significant concerns about the scope of the proposal, and it remains to be seen which categories of trusts will fall within scope. Changes to trust registration requirements are expected to commence from 10 March 2020, and further guidance will be provided as information comes to hand.
The further technical consultation on the subject that had been flagged earlier this year is unlikely to proceed given the time constraints.
Supervisors approval of beneficial owners, officers and managers
Firms may have been contacted by the Solicitors Regulation Authority concerning changes to approvals. After the transposition date, new beneficial owners, officers and managers (BOOMs) will be required to provide a basic DBS check when seeking approval under regulation 26.
It remains to be seen whether the incoming government will be able to meet the deadline of 10 January. Regardless, we anticipate the window between the draft regulations being laid in parliament and coming into law will be narrow. We're working with other legal sector bodies and government with a view to providing interim guidance as soon as the policy and text of the legislation is finalised.