As individuals and business owners, we need to ask ourselves if we are doing our best to stop money laundering, or if we are opening the door to criminals and money launderers to exploit weaknesses in the system.
Financial service providers and obliged entities have increased responsibility to implement a more effective Anti-Money Laundering (AML) programs and prevent money laundering crimes. If you’re part of a company that operates in the EU, then you’ll need to be ready for the introduction of the EU’s Sixth Anti-Money Laundering Directive, also known as 6AMLD, these updated regulations have to be implemented this month.
Preventing money laundering and terrorism financing have become top priorities for regulators in recent years, with stricter regulations to ensure financial transparency around business ownership.
Many fraudulent parties have been found to use company structures as a front for financial crime and terror financing activities. Organized crime is often masked in a complex web of ownership structures to dodge the identity of Politicians/PEPs, sanctioned entities, and criminals.
Obliged entities are expected to know who they are doing their business with and comply with Know Your Customer (KYC) requirements. This requires detection of the ownership structure and their business relationships. Ultimate Beneficial Owner (UBO) legislation has been put into place to give financial institutions and corporates clarity on who they’re doing business with. A UBO is the person or entity who is the ultimate beneficiary of the company. The Financial Action Task Force (FATF) provides for the definition of a ‘Ultimate Beneficial Owner’:
"the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted.”
We consider obliged entities, but not limited to, all types of financial institutions, lawyers, accountants, real estate agents, virtual assets such as cryptocurrencies, and recently high-value art traders.
2021 will be essential for obliged entities to demonstrate accurate management of risk, prevention of illegal activity and the ability to respond to regulatory requests. The 6AMLD brings further change and complexity; it will increase the need for companies and compliance staff to monitor, record and ensure they meet local regulatory requirements of disclosure.
If you are an obliged entity, compliance with the 6AMLD will require effort to mitigate risk, and smart solutions to verify the identity of your clients in the different stages of their relationship with your company (digital onboarding, authentication, and signature). You should update your processes, systems, and risk assessments to achieve this. The delivery of comprehensive training and the proper internal procedures will be crucial for everyone to understand the new liability.
The EU has set Anti-Money Laundering (AML) and Counter Terrorism Financing (CTF) as one of its top priorities for 2021. The EU Commission is a member of the FATF, together they are strengthening their requirements on Customer Due Diligence (CDD) measures and adding new guidance on the identification of UBO's. They are also encouraging the use of innovative solutions and digitalization to identify and verify customer identities.
In the UK, the Financial Conduct Authority (FCA) continues to enhance their approach to tackling money laundering. The UK post Brexit will not deviate too far from the EU’s position as The Sanctions and Money Laundering Act of 2018 will be enforced in the UK. However, UK firms operating in an EU member state will need to consider the 6AMLD in the operations they undertake outside of the UK. Firms not complying could be impacted when looking to gain access to European capital markets. Those operations undertaken in EU member states will come under the directive.
Verifying UBO’s is critical for obliged entities to fully comply with laws and regulations implemented such as the Fourth and Fifth Anti-Money Laundering Directive and most recently the 6AMLD.
The 6AMLD affects all financial institutions and obliged entities operating in the EU. It gives greater responsibility to obliged entities to fight against terrorism financing and money laundering. To help increase cooperation between member states, the 22 predicate offences have been defined so as to ensure that their AML regulations apply a standard terminology and clear definitions, with the main aim of removing loopholes in the domestic legislation of member states.
Big changes introduced in 6AMLD include; cooperation among member states, the extension of criminal liability to legal persons, staff AML training, tougher punishments, and penalties for money laundering offenses/failure to supervise.
Under the 6AMLD, the personal liability of AML compliance officers is increasing, and regulators and prosecutors will be more willing to prosecute and fine those who fail in their duties. While previously only individuals could be convicted for committing financial crimes, this has now been extended to include legal persons like companies or partnerships and more. ‘Legal persons’ also cover individuals and businesses acting on the company’s behalf, for example, consultants, lawyers, and accountants.
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.
Obliged entities must implement appropriate safeguards for key compliance persons to be able to operate in their role effectively. The expansion and potential severity of the compliance regime introduced under 6AMLD could potentially increase regulatory actions and global enforcement fines.
Recent examples of fines for failing to meet AML compliance obligations include The Financial Crimes Enforcement Network (FinCEN) $450 K penalty against a chief risk officer of the US Bank National Association and The Financial Conduct Authority (FCA) fine of the London branch of Commerzbank £37 M for not having adequate AML controls in place.
With implementation imminent, now is the time for obliged entities to review existing AML systems and processes, comply with the 6AMLD regulatory requirements, and cope with new threats from tech-savvy accomplices.
Given the increasing regulations governing UBOs, a best practice approach begins with securing reliable access to accurate and current UBO data, so that compliance teams can make a risk-based decision based on verified information. The main ones, in line with the 6AMLD, are:
Obliged entities must demonstrate that their compliance program obtains and holds “adequate, accurate, and current” information on their beneficial owners. Improving transparency and verifying beneficial owners from accurate sources will make it easier to manage risk and identify potential problems.
Regulators, guided by the FATF, have started to embrace digital technology for fraud prevention and AML. By embracing new technology, obliged entities can automate the KYC compliance function and leap ahead of the competition, providing the type of onboarding experience regulators demand and customers expect.
Weak processes or lack of training can facilitate financial crime. Firms need to train employees on what suspicious activity to look for concerning the 22 predicate offenses.
In the face of increasing regulatory demands, increasing cost pressure and a legacy of inefficient technology, obliged entities are struggling to meet their financial crime compliance obligations, which leads to significant compliance risk and costly regulatory fines, both individually and corporate.
With regulators prioritising AML and the 6AMLD requirements around ‘legal person liability’ obliged entities should take this opportunity to address gaps, improve transparency and understand the roles and responsibilities within your business.
Understanding who ultimately has control of your customer plays an important role in detecting, disrupting, and preventing money laundering and terrorism financing. Essentially to be ready for 6AMLD, obliged entities need to know their customers, whoever they are.
Be prepared on time with UBO Service, our online API let's you automate the KYC process to seamlessly identify and verify beneficial owners and controllers. Our solution will reduce your overheads, reduce your risk exposure, and reduce customer delays. Analysts and compliance staff can make decisive risk-based decisions based on trusted UBO declarations, at a much lower cost than traditional manual approaches.