Draft UK Regulations transposing 4MLD into national law were published on 15 March 2017.

The concept of Politically Exposed Persons (“PEPs”) and the need to apply Enhanced Due Diligence continues under the Fourth Money Laundering Directive (“4MLD”), although the distinction between a domestic PEP and a foreign PEP will be removed – see Regulatory Roundup 80.

The FCA has published consultative Guidance GC17/02 on the treatment of Politically Exposed Persons under 4MLD.

GC17/02 reminds us that Money Laundering and Transfer of Funds (Information on the Payer) Regulations 2017 (“UK Regulations”) Regulation 35 requires ‘relevant persons’ (a term which will capture firms authorised under FSMA) to have in place appropriate risk-management systems and procedures to determine whether a customer (or the beneficial owner of a customer) is a PEP or a ‘family member’ or a ‘known close associate’ of a PEP (please see Regulation 35(12) for definitions). This is in addition to the obligation under UK Regulation 18 for firms to identify and assess the risks of money laundering and terrorist financing to which it may be subject (and which must be made available to its supervisory authorities on request).

Paragraph 2.17 of the consultative Guidance provides the FCA’s view on indicators that a PEP poses a lower risk e.g. a PEP operating in the UK (higher risk indicators are addressed in paragraph 2.18). It ends with suggested measures that firms may take in lower-risk and higher-risk situations.

The consultation ends 18 April 2017.

As a reminder 4MLD must be applied in Member States by 26 June 2017.

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HM Treasury has published a Consultation Paper on the transposition of the Fourth Money Laundering Directive (“4MLD”) and the accompanying Fund Transfer Regulation (“FTR”). Although the latter is a Regulation, and hence binding upon all Member States, Article 17 of the FTR requires Member States to set out rules on administrative sanctions and measures for breaches.

The Consultation advises that the current Anti-Money Laundering and Transfer of Funds Regulations will be replaced by a “Money Laundering and Transfer of Funds (Information on the Payer) Regulations 2017”. It is intended that the new provisions will come into force in national law by 26 June 2017, in line with 4MLD (and FTR).

Like the current Money Laundering regime, the Consultation is not just aimed at credit and financial institutions but also draws in businesses such as estate agents, providers of gambling services, letting agents etc.

Areas addressed by the Consultation include, but are not limited to:

• When Customer Due Diligence (“CDD”) should be applied to existing customers (4MLD Article 14 mentions “at appropriate times”);
• Although the concept of Simplified CDD (“SDD”) remains (4MLD Annex II provides a non-exhaustive list of factors and types of evidence of potentially lower risk which can be taken into account when determining the validity of SDD), the Consultation is proposing to remove the list of products that could be subject to SDD (see Regulation 13 of the current Money Laundering Regulations);
• The possibility of removing the application of SDD to pooled client accounts e.g. pooled accounts held by notaries and other independent legal professionals (although this express provision applies under the current regime it is not repeated in 4MLD);
• The need for Enhanced Due Diligence (“EDD”) for Politically Exposed Persons (“PEPs”) continues and, of course, is widened under 4MLD due to the removal of the distinction between a domestic or foreign PEP. The government’s view is that a risk-based approach can be used in identifying whether a customer is a PEP and so different degrees of EDD measures can be used.  The Consultation provides an example of a PEP check not being required if the product being offered was assessed as being the subject of a low risk of take-ups by PEPs. Where a person is identified as a PEP, the enhanced measures can be tailored to the risk posed by both the product and the person – in low risk cases the government’s view is that UK PEPs (and their family members and close associates) should be treated at the lowest level of EDD.
• Still on PEPs, the Consultation also poses the question as to whether senior members of international sporting federations (“ISF”) should also be included in the UK’s definition of PEPs (4MLD does not expressly include members within ISF).
• Under 4MLD Article 54 imposes a maximum penalty of at least €5m or 10% of the total annual turnover (note that this only applies to credit and financial institutions, there are lesser maximum penalties for other types of entities).  The Consultation advises that the government does not intend to set an upper limit, believing that such a matter should be dealt with on a case-by-case basis. As for breaches of the FTR it is proposed that power to determine the measures and level of administrative sanctions remains with the relevant supervisory authority.

HM Treasury invites comments on the Consultation Paper by 10 November 2016.

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Around one week after HM Treasury published its Consultation Paper on the Fourth Money Laundering Directive (“4MLD”) – see previous article “4MLD: HM Treasury Consultation” – a supplementing Directive (2016/1675) appeared in the Official Journal.

Article 18 of 4MLD imposes an Enhanced Customer Due Diligence requirement in certain circumstances such as dealing with e.g. Politically Exposed Persons (“PEPs”) and high-risk third countries. Although the former is defined in the Directive, the latter falls to the Commission to identify high-risk third countries.

The identified high-risk countries appear in the Annex to the short four-page Delegated Regulation 2016/1675.

Of the list of 11 countries in the Annex, 10 of them are a mixture of those that have provided a commitment to address identified deficiencies and have either developed an action plan with FATF or are seeking technical assistance in the implementation of the FATF Action Plan.  The one exception is, as might be guessed, the Democratic People’s Republic of Korea, which is seen as an “ongoing and substantial money-laundering and terrorist-financing” risk.

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A press release advises that the European Commission is:

• Calling on Member States to commit to implement 4MLD by the end of 2016.
• Proposing a number of amendments to 4MLD.

This rethink arises from an ‘Action Plan’ (the – separate – Annex of which summarises the proposals in tabular form) to strengthen the fight against terrorist financing which, at least in part, has been fuelled by recent terrorist attacks in the EU and beyond.

Proposed amendments to 4MLD include (but are not limited to):

• Including a list of all compulsory checks that firms should carry out with regards to high risk third countries.
• Bringing virtual currency platforms under the scope of 4MLD.
• Lowering the identification threshold in respect of pre-paid cards etc.
• Enhancing the powers of EU Financial Intelligence Units.

The Commission will present a legislative proposal in respect of all of the amendments at the latest by Q2 2016.

Elsewhere the Commission will:

• Adopt an EU blacklist to identify high risk third countries (by Q2 2016).
• Publish a report on a supranational assessment on money laundering and terrorist financing risks and recommendations to Member States on measures suitable to address those risks (by Q2 2017).

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