Tag Archives: Money Laundering

EU AMLD: where are we now?

Emily Deane TEPOn 21 March 2017, the first political trilogue on the Commission proposals to amend the 4th Anti-Money Laundering Directive (4AMLD), proposed in July 2016, on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing took place at the European Parliament (EP).

In the wake of the ‘Panama Papers’ scandal the Commission has been intent on cracking down on the hiding of illicit funds by adopting a coordinated approach at both EU and international level.

The EP, Commission and Council have expressed their willingness to engage in negotiations with a view to a swift agreement, and the EP stressed the importance of transparency in fighting money laundering.

Beneficial ownership debate

STEP has concerns about some of the proposals to amend the Directive. In particular, the requirement for member states to set up publicly accessible central registers for the mandatory registration of the beneficial owners (BO) of all trusts (not just those with tax consequences), and similar legal arrangements (Articles 30-31).

The general consensus of the majority of member states is that the BO information on these registers should be publicly accessible. STEP is arguing that a publicly accessible register is likely to infringe data protection rights, the right for private and family life guaranteed by Article 7 of the EU Charter of Fundamental Rights, and Article 8 of the European Convention on Human Rights.

Publishing details of beneficiaries, particularly vulnerable beneficiaries, would leave them seriously exposed to potential abuse, given the risk of such information falling into the wrong hands and being disseminated for illegitimate purposes.

The state of negotiations:

• The definition of the BO of a company or trust remains in dispute.
• There are questions whether the information on the registers should be publicly accessible and if not, who should be granted access?
• Should registration of a BO be required where the activities are carried out, or where the entity is owned?
• MEP Judith Sargentini is hoping to reduce the threshold for the identification of a BO from 25% to 10% ownership. The Commission continues to state that this should only be the case if it’s a high-risk entity.

The trilogue parties intended to reach an agreement by the end of the Maltese Presidency on 30 June 2017, but the EP has stated it will be difficult to conclude it by then. Estonia takes over the Presidency on 1 July.

The next meetings are on 29 May, 7 June, 28 June 2017.

4AMLD – UK’s obligations

In the meantime 4AMLD implementation into national law is required by 26 June 2017.

The UK’s newly published draft of the Money Laundering Regulations 2017 will be its instrument to transpose the directive. This will revoke and replace the Money Laundering Regulations 2007.

The UK is required to implement a central register of trusts on 26 June, which will apply to worldwide trusts with UK assets that generate a tax consequence. The Directive leaves it to each member state to decide the level of transparency to be applied and the UK has confirmed that access to this register will be limited to law enforcement agencies on the grounds of privacy (see HMRC consultation on 4AML implementation).

The corresponding German bill has faced scrutiny at the committee stage whereby some of its members were pushing for full public access but other members have rejected a fully public registry of company and trust beneficial ownership. The bill will be subject to revision before it is enacted but it is unlikely that public access will be granted.

STEP will continue to monitor the progress on 4AMLD and the revised Directive and keep members updated accordingly.

 

Emily Deane TEP is STEP Technical Counsel

STEP attends FATF Joint Experts’ Meeting on Typologies in Moscow

money laundering
STEP attended the Financial Action Task Force (FATF) Joint Experts’ Meeting on Money Laundering and Terrorist Financing Typologies in Moscow late last month. STEP’s Co-Chair of its Public Policy Committee, John Riches TEP, also attended in his capacity as a trust expert.

STEP was invited to participate in a ‘Challenges of establishing beneficial ownership’ round table discussion. This focused on the private sector perspective of the challenges associated with identifying beneficial ownership for natural or legal persons, and examined the following points:

Is it suspicious to have accounts in other jurisdictions?

STEP was quick to point out that there may be a bona fide business purpose for having trust accounts in alternative jurisdictions. International families will often have their financial counterparties abroad, and this should not be grounds for suspicion. Many may prefer to use a bank or existing custodian to a new one, and trustees are understandably attracted to jurisdictions that are more economically or politically stable and have a clear understanding of trust arrangements.

In the UK it can take as long as six months to open a bank account for this purpose, so a well-regulated jurisdiction that can act faster may be more attractive to a trustee. Many offshore centres are highly regarded due to their regulation of Trust and Company Service Providers (TCSPs). They can also be more flexible and less expensive.

What are specific vulnerabilities in various types of trust arrangements?

Most of those present believed that advisors would not proceed to set up an arrangement unless they have obtained the requisite Know Your Client (KYC) documents, plus a clear understanding of the function and purpose of the arrangement. There should not be any uncertainty or lack of understanding regarding the client, location or objective of the vehicle.

If there was even a slight suspicion that the purpose was illegitimate, the client would be reported to the local authorities.

What are potential risk indicators to practitioners, i.e. red flags?

In its 2013 report, Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals, FATF identified some 42 risk indicators. Those discussed in the meeting included a client’s reluctance to provide information, data or documents to facilitate a transaction.

However, it was agreed that it would be unusual for an advisor to act illegitimately and run the risk of significant prosecution, reputational and regulatory penalties.

What challenges are associated with verifying the beneficial ownership?

Those attending agreed it can be challenging to identify a legal entity that is some way down the chain of ownership in multi-layered structures. It can also be confusing to verify the beneficial ownership of the ultimate holding entity. This is often not helped by an absence of proper documentation.

A particularly topical problem with legal arrangements is to ascertain what is meant by a ‘natural person exercising effective control’ in the context of trusts. Also problematic is a lack of understanding as to what information is required in the extended category of ‘beneficial owners’. This creates a lot of confusion and wasted effort for financial institutions and advisors.

Are there indicators of activities being undertaken to obscure beneficial ownership?

The use of shell companies and nominees to hide true beneficial owners appears to be much more common than the use of more sophisticated legal arrangements, such as common-law trusts and civil-law foundations.

It’s worth noting that professional advisors rarely report potential abuse of trusts or foundations in a money-laundering or terrorist-financing context.

Many of the advisors in the meeting confirmed that they have never actually encountered any suspicious activity in their own careers.

Are there particular risk indicators with certain arrangements or jurisdictions?

Most agreed that those with bad intentions would shun more complex arrangements like trusts and foundations in favour of simpler vehicles. These might include companies that can be misrepresented with false information about a single beneficial owner.

Any jurisdiction likely to be seen as requiring less exacting information in the formation of new legal entities will naturally be preferred.

However, public perception about particular jurisdictions can be misleading. Many offshore finance centres regulate TCSPs in a more stringent and well-considered way than ‘onshore’ jurisdictions.

• FATF is planning to collect some real life case studies among attendees to analyse for vulnerabilities and discuss in more detail with advisors. It is also collecting examples of adjudicated and publicly available cases to identify realistic money laundering concerns, which it will share. STEP will keep you updated in due course.

 

Emily Deane TEP is STEP Technical Counsel