Anti-money laundering and anti-terrorism financing methods and forms (hereinafter – AML) have evolved along with the crimes against which they are aimed. Updating these measures and forms is a task that remains in the agenda of both government and non-government organizations of the world. In June 2015 a new, the 4th AML-Directive (Directive 2015/849) was implemented, which has replaced the previous Directive that had been effective for 10 years. It is reasonable to expect that the EU countries will adapt their legal systems to fit the requirements imposed by the new Directive in the coming years, which will result in determining what the effects of change of AML-eras were in the European community. It is only possible to say so far that the anti-money laundering measures aimed at preventing financial crimes involve a number of restrictive measures, which can hardly have a stimulating effect on economic development. In this regard, it is very important that the benefits brought by AML outweigh the associated costs and restrictions imposed thereby.
The third AML-Directive (Directive 2005/60/ЕС) included framework regulations while imposing minimal requirements to unification of the national legislation of the EU-countries. This led to the different countries imposing various requirements to contractors due diligence. As a result, the operating effect of the European AML-legislation was declining. For instance, it was stipulated that the customer due diligence before acceptance must comprise determination of the customer’s beneficiary owner1. The majority of states have issued detailed rules of identifying the beneficial owner but very often no such rules applied in relation to beneficiary owners of corporate entities the form of which was unknown to a particular legislation. Thus, generally none of the investors from investment funds owns 25% of shares required to acknowledge their beneficiary status; therefore, the fund administrator was not required to identify the beneficiary owner as there was no such owner.
Introduction of amendments into the third AML-Directive was initiated by the European Commission after the Financial Action Task Force on Money Laundering (FATF) issued new recommendations regarding anti-money laundering and anti-terrorism financing in February 2012. The amendments were aimed at unifying the national AML-rules and extending the scope of the Directive to new subjects. The 4th AML-Directive applied to the following obliged entities:
The 4th AML-Directive has codified the risk assessment principle as the basic operating principle of the entities obliged to conduct AML-procedures. The essence of the principle is to compare the extent of risk and the procedures conducted to prevent illegal actions. In execution of the 2012 FATF recommendations prescribing the concerned entities to arrange the identification, assessment, monitoring and AML-risks management processes3, the 4th AML-Directive introduces the centralized three-tier risk assessment system4.
The new AML-Directive pays a significant attention to cooperation of national financial intelligence units. An obligation to ensure a regular exchange of information related to individuals or legal entities involved in criminal activities, even if the type of a wrongful act is not yet determined at the time of the request, has been imposed on the EU member states5. The principle of equivalence of an investigation pursued upon the request of financial intelligence of the other EU member state to the investigation pursued at the national level id enshrined6. It has been established that the differences in definitions of financial crimes contained in national laws cannot impede the information exchange. The developers of the 4th AML-Directive tried to level any national differences which may hinder a united anti-money laundering front.
Tax crimes as they are defined in national laws and which entail a deprivation of liberty for not less than 6 months are included into the list of predicate offences, i.e. offences preceding the AML crimes7. This means that the subject of AML-legislation, which knows or has grounds to suspect any operation in entailing a tax crime must refrain from performing it. At the same time, it must submit a report on a potential tax crime to the national financial intelligence unit and provide all available relevant information. The third AML Directive drew a veil over tax crimes by overshadowing them with corruption and drug dealing. However, a so-called carousel fraud, when goods are repeatedly sold from company to company and each time VAT on operation is charged but not paid, is listed in FATF8 among other predicate offences9. In pursuance of the FATF recommendations entities selling goods for cash have been included into the list of subjects of AML-legislation.
Perhaps the biggest innovation of the 4th AML-Directive which will affect the largest number of participants in the economic process is the introduction of the centralized system of beneficial ownership information storage. An obligation to arrange the storage of this information in trade register or any other central register so that the information about beneficial owners be accessible to any interested person or entity has been imposed on the EU member states10. A study on the actual implementation of the third AML Directive performed by Deloitte in 2012 stated that one of the problems that the subjects of AML-legislation deal with during the customer due diligence is a lack of publicly available information11. Respondents to a survey conducted by Deloitte showed that trade registers of many countries do not contain transparent information on the real owner of the customer. Among other initiatives regarding the improvement of AML-legislation efficiency a creation of central registers of beneficial owners has been mentioned12. The developers of the 4th AML-Directive have followed the recommendations directly given by those who had to work with it. Now all subjects of AML-legislation shall submit information on beneficial owners of each customer to authorized state bodies, in turn the latter must make this information accessible to all interested persons or entities including public authorities of other EU member states. The rules on personal data protection have been done away with a stroke of the pen – personal data processing in the course of AML-legislation has been considered a matter of public interest13, which lifts a ban on the processing of such information without the consent of a personal data subject.
The similar register shall be introduced with regard to beneficial owners of trusts. Trustees shall disclose information on settlor of the trust, beneficiaries, protectors (if any) and other natural persons exercising control over the trust14 to the subjects of AML-legislation. Competent authorities of the EU member states shall be granted the right of access to such information and in cases when establishment of the trust results in tax consequences the information must be accumulated in a central register15.
Central registers shall be established within two years from the effective date of the 4th AML-Directive16. During this time, the EU member states must develop and adopt the necessary legal acts, texts, which will be immediately delivered to the European Commission. The latter has assumed a responsibility to prepare a report on assessment of efficiency of interconnected central registers of beneficial owners in all EU member states17. By virtue of this report the further legislative initiatives will be developed.
Thus, this summer the EU set a course for unification of AML procedures in its member states. It has been decided to improve the efficiency of these procedures by making the information on beneficial owners publicly available. As envisioned by legislators, this measure would help to avoid the cases of deliberate disclosure of false or corrupted information about the customer. The prohibition of personal data processing without the consent of the personal data subject has been sacrificed to Europe-wide anti-money laundering and anti-terrorism financing. What consequences it would entail for jurisdictions providing the establishment of trusts, and for a legal status of the trust in general, will become clear in the next 2 years. It is obvious so far that anti-money laundering in the form defined in the 4th AML-Directive has come into conflict with the very meaning of the trust structure aimed at preserving the confidentiality of the beneficial owner.
Common law states such as the United Kingdom and Ireland known by their long tradition of establishing trusts will have to implement the imperative norms of the 4th AML-Directive into their legislation anyway. The British Prime Minister D. Cameron has explicitly stated in his letter to the Overseas Territories dated April 25, 2014 that “beneficial ownership and public access to a central register is key to improving the transparency of company ownership and vital to meeting the urgent challenges of illicit finance and tax evasion”18. To which the Bermuda Finance Minister replied without prejudice: “If we agree to a public register while our competitors around the world do not, we will put ourselves at a distinct disadvantage, severely damaging our economy”19. It is obvious that implementation of norms of the 4th AML-Directive is contrary to economic interests of a number of states; what policy they will pursue in the current situation is a matter of time.
Another fundamental change concerns AML procedures performed in respect of customers from non-EU countries. The third AML-Directive provided a possibility of a simplified customer due diligence in case their states apply AML procedures equivalent to the procedures applied in the EU20. Each EU member state approved so-called “white” lists of states with equivalent AML-legislation. Each state had different lists and, in view of the said frameworkness of the Third AML-Directive, mostly the simplified customer due diligence was rather conventional. The 4th AML-Directive totally changes the approach: now a unified list of third countries shall be formed by AML-legislation underdevelopment criterion (“black” list) and approved by the European Commission for the entire European Community21. We can see that this has been a trend toward centralization.
The simplified customer due diligence procedure has been rethought. The Third AML-Directive contained a number of conditions subject to which the customer due diligence automatically became optional:
All these conditions have been transferred to the 4th AML-Directive but the availability thereof does not mean that the customer due diligence is not required. They appear as signs of a potentially low risk upon availability of which the subject of AML-legislation may apply the simplified customer due diligence measures23 in the new Directive, but not quite ignore it. The final decision on the application of the standard or simplified customer due diligence measures must be based on an intuitive risk assessment carried out on a number of factors.
The 4th AML-Directive is characterized by three main trends:
It remains to be seen how it will operate. We will be able to see the process of formation of a new AML-era in the European Union.
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