The deadline for the EU’s 5th Anti-Money Laundering Directive (5AMLD) is fast approaching. How should organizations approach beneficial ownership screening in order to ensure they are ready for 5AMLD ahead of the January 2020 implementation date?
- The tightening of UBO legislation, including the EU’s 5th Anti-Money Laundering Directive (5AMLD), has increased pressure on organizations to have an effective program in place.
- In Europe, the race is on for jurisdictional registries that hold ultimate beneficial ownership information to ensure their information is the required standard for 5AMLD.
- For organizations to be ready for 5AMLD, they need to be able to access the correct data and have the UBO tools in place to make sense of often complex company hierarchies.
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Anti-money laundering (AML) and sanctions regulations require financial institutions and other ‘obliged entities’, such as lawyers and accountants, to identify and verify their clients’ ultimate beneficial owners (UBOs).
The Panama Papers in April 2016 and the Paradise Papers leak in November 2017 focused global attention on the often complex nature of legal entity structures and how this can obscure the identities of UBOs and allow financial crime to flourish.
Incidents such as these have prompted legislators in many jurisdictions to tighten up existing laws around UBO identification and validation.
Failure to comply with these UBO-related laws and regulations carries the risk of significant regulatory and law enforcement action, often hefty fines and potentially devastating reputational damage.
It is therefore critical that organizations ensure that they take appropriate steps to establish the true owners of entities before engaging in any business relationship.
Tighter UBO requirements
The European Union’s 4th Anti-Money Laundering Directive (4AMLD) set out requirements for its members, including that companies must obtain and hold “adequate, accurate and current information” about their beneficial owners.
This information must be accessible by authorities and held in central registries that must be interconnected.
In July 2018, the EU issued the 5th Anti-Money Laundering Directive (5AMLD), incorporating new elements around UBO transparency and strengthening 4th AMLD by introducing “effective, proportionate and dissuasive measures or sanctions” for those failing to comply with UBO-related requirements.
The 5AMLD also extends the requirements relating to central registries, requiring that they be enhanced to ensure that their information is adequate, accurate and current.
In many circumstances, members of the general public will be able to access this information, although a ‘legitimate interest’ has been maintained for trusts.
Beneficial ownership registers
Variations in progress on these registries is highly evident, with France, Germany, the United Kingdom and some other EU member states already having established them.
In contrast, the Netherlands is still in the process, having introduced a Bill to create a central registry on 4 April 2019, and Ireland’s registry is to come into operation on 22 June 2019.
The Directive states that EU member states should set up beneficial ownership registers for corporate and other legal entities by 10 January 2020 and for trusts and similar legal arrangements by 10 March 2020.
Central registers should be interconnected via the European Central Platform by 10 March 2021.
The Directive adds: “Member States should set up centralized automated mechanisms allowing the identification of holders of bank and payment accounts and safe-deposit boxes by 10 September 2020.”
Time is neither on the side of EU member states nor those obliged entities who have to comply with the EU directive.
How to be ready for 5AMLD
Complying with UBO-related laws and regulations, including 5AMLD, is far from straightforward.
Substantial challenges exist for obliged entities, including the fact that varying definitions of beneficial ownership exist across the globe.
In some instances the term UBO includes those with a 25 percent or greater equity interest or voting rights, but may also encompass those who control a legal entity and/or those who benefit from a legal entity.
Moreover, a lack of independent and reliable UBO data sources and often complex multi-layered ownership structures can render the process of identifying UBOs both difficult and time-consuming.
In order to comply with requirements, organizations will need to secure access to reliable, accurate and complete UBO data as well as capabilities to unravel even the most complex corporate structures, so that they can identify UBOs to required thresholds before screening them for potential links to financial crime.
The implementation deadline for 5AMLD is fast approaching.
Those organizations that have not already done so should urgently investigate the leading-edge solutions available and ensure that they are able to identify and screen UBOs in compliance with the requirements of 5AMLD and as part of wider global efforts to combat financial crime.