We take a detailed look into the current anti-money laundering regulations in the European Union, and what they mean for your business on a daily basis.
February 9th, 2022
ShareLove this blog? Why not share it with the world?
It is estimated that in the EU alone transactions with "dirty" money account for about 1.5% of the GDP — that's about 133 Billion EUR (i.e. approx. 157 Billion USD). Money laundering and terrorist financing have been recognized as a real threat by regulators of the EU, resulting in a sizeable new package of legislative proposals on anti-money laundering and countering the financing of terrorism. These are in addition to the already applicable system of AML/CFT and connected directives. The question is how to make sure your business follows all necessary rules when it comes to AML.
In this article, we will give a brief overview of current EU AML regulations (mainly AMLD5) and shed light on the proposed new rules of the future EU AML compliance. All of this, through the prism of obligated entities (i.e. different businesses responsible for taking AML measures) – meaning, we will describe the main obligations and introduce how we can help you with AML compliance.
For this we will answer the following questions:
So let's get straight into question one.
Anti-money laundering (AML) is a broad term covering all kinds of activities against money laundering. The last being any act trying to bring money from illicit deeds into everyday financial circulation.
For example, a drug dealer is laundering money when he/she is showing money from selling drugs as legal income from an art project or consultancy business, and then later using this money from this illicit source, for buying everyday goods.
So, money laundering means the conversion or transfer of illicit funds into legal funds. Also, concealment of illicit funds and usage and possession of such funds. 'Anti-money laundering' refers to activities and measures taken to fight money laundering.
But why is it important that money laundering is fought against?
The official pages of the European Commission answers this question as follows: “Fighting money laundering and terrorist financing contributes to global security, integrity of the financial system and sustainable growth”.
The global dimension of AML may make it hard to grasp or relate to as a purposeful cause. However, in essence, AML measures are designed to benefit all of us by making it harder to launder money from criminal activities back to legal circulation. Hence, by exercising AML compliance measures market participants (that's everyday people, like us) contribute to a better and safer environment and financial markets.
To help this goal to be achieved the EU has created AML regulations.
You can read more about money laundering from our blog: “What is Money Laundering?”.
You can read more about the meaning of AML and how to differentiate between AML and KYC from our blog: “What is Anti-Money Laundering?”.
The AMLD4 states the main obligations and lays the foundation for AML measures, for example:
The AMLD5 changed and amended the AMLD4 adding main following obligations:
The AMLD4 and the AMLD5 are directives, which means that they have to be transposed into EU Member States’ local AML laws. This means that even though in general the AML principles are the same in the EU, there still can be local differences deriving from transposing the directives to the local AML laws. So, depending on the jurisdiction, specific obligations and differences from the directives may apply.
Nevertheless, certain measures are obligatory for many market participants. We will describe the main AML obligations in the following section.
You can read more about the AMLD5 from our blog “A Guide to Anti-Money Laundering (AML) Compliance”.
To make it easier to understand AML for your business, we listed the main AML measures one must take in the course of customer due diligence. Customer due diligence in itself is a set of AML measures.
Starting from the top, an obligated entity must (among others):
This list of the CDD measures is not exhaustive. All of this (and more) should be done for understanding and knowing your customer. It should then be possible to recognize unusual transactions and behaviour that may indicate money laundering.
The logic of AML measures in use must be described in an internal AML procedure document (i.e. AML policy).
It is also important to note that all measures taken must follow the principle of accountability – meaning, an obligated entity must be able to prove that the measures were taken (incl. when and by whom).
Data gathered when implementing AML measures must generally be retained for 5 years, incl. identification data. Together with AML regulations, an obligated entity must also think about applying personal data protection rules.
It is present from the share number of obligatory measures, that good AML compliance needs a thought-out and systematic approach. Effective AML compliance needs all the help it can get from different technical tools and solutions.
In addition to the abundance of different directives and laws – these directives and laws are constantly changing. Changes are needed to keep up with the creative criminal minds and developing tools. EU’s latest response for updating its AML regulations was an ambitious package of legislative proposals consisting of 4 new legislative acts.
You can read more about EU’s personal data protection rules and GDPR from our blog: “The Strongest Set of Rules for Personal Data Protection”.
The EU Commission proposed in July 2021 an ambitious legislative package to strengthen the EU’s AML/CTF rules.
In this section, we will briefly describe planned new rules and what EU Commission is trying to achieve through those initiatives.
The legislative package consists of the 4 following acts:
It is easily visible that the trend in AML is to broaden regulations and scope of obligations and range of obligated entities. There are many AML acts - these directives and regulations are packed with different obligations.
The responsibility of the obligated entity is to figure out how to start, and make sure that, their business’ AML compliance is suitable and adheres to applicable laws and regulations.
Good compliance starts with a knowledgeable team, a thought-out systematic approach, and good tools. In order to detect and prevent money laundering, one needs to implement AML measures – starting from proper customer due diligence.
Always make sure you know and understand your customer, their business, and transactions. All of which starts from identifying and verifying the customer and its representatives, knowing the structure of the customer and conducting PEP and sanction checks.
This is where Veriff's complete AML Compliance Solution, and industry-leading identity verification come into play - helping you meet regulations, and know your customers, so your business and your users are safe from criminals across the world.
Remember that you always need to be able to demonstrate that the AML measures have been taken!
EDD in banking involves gathering information in order to verify the identity of customers and calculate the exact level of money laundering risk each customer poses. During the EDD process, the customer is asked for a much greater amount of information than they are during the CDD process, as this information can be used to mitigate the risks involved.
When carrying out due diligence, a financial institution must determine whether they should perform customer due diligence (CDD) or enhanced due diligence (EDD). This is because FATF guidance suggests that companies should adopt a risk-based approach to due diligence that reflects the specific level of risk that each individual customer presents.
Synthetic fraud is incredibly dangerous and is a major problem facing the financial sector. Unlike third-party fraud, where an entire identity is stolen and used to defraud enterprises and victims, synthetic fraud frequently has no specific consumer victim.