AML - more changes, more transparency

Why is it being introduced?

Recent terrorist attacks in London, Paris and Barcelona have highlighted how terrorist groups are increasingly using modern technology and alternative financial systems to finance their activities. Money can easily be moved between several bank accounts around the world in a matter of hours and existing legislation aimed at countering terrorist financing has, in some areas, failed to keep pace with these developments. MLD5 aims to plug the gaps by bringing within scope a wider range of financial activities and increasing the transparency of financial transactions. We outline two of the key new provisions relating to (i) bank accounts and (ii) trusts below.

Register of bank accounts – limited access

MLD4 (implemented into UK law last year under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017) required each Member State to establish a financial intelligence unit (FIU). The purpose of the FIU is to prevent, detect and effectively combat money laundering and terrorist financing. The UK's FIU is the National Crime Agency. Speedy access to information on bank accounts is a key tool used by FIUs in preventing money laundering and terrorist financing and MLD5 facilitates this by requiring Member States to establish a centralised automated means of identifying the holders and controllers of bank accounts and payments accounts so that all national bank accounts listed to one person can be identified. Member States will be able to determine how this will be achieved, for example, through a central register or an electronic data retrieval system.

The register will be an intelligence tool to help FIUs access information on bank accounts and transactions. The information held within the central register must be directly accessible in an immediate and unfiltered manner. It will show details of: 

• the account holder or a person acting on the account holder’s behalf;
• the beneficial owners; 
• the IBAN account number; and
• the date when the account was opened and, where relevant, closed. 

The register will not contain information on the balance in the account or transactions made on the account.

Access to the central register will be limited to FIUs and national crime agencies. However, there is a concern that differences between Member States as to which agencies are allowed access to the registers and the discrepancies between them could be exploited by criminals. To address this, the European Commission has consulted separately on broadening access to the information to ensure uniformity of access across the European Union. At the time of writing the findings from the consultation have not yet been published and we will be watching this space for developments that may mean more information becomes available than is currently anticipated.

Register of trusts – wider access

MLD5 has not only been triggered by recent terrorist activity in Europe - it is also a response to the data leak known as the Panama Papers. A key component of this response is widening the access to information on the beneficial ownership of companies, trusts and other legal entities.

The EU register of trusts was introduced with effect from 26 June 2017. Under MLD4, the register was not open to the public. It was only accessible by “competent authorities” and FIUs. We focus on some of the changes to accessing the register of trusts in this briefing.

MLD4 allowed access to anyone who can demonstrate a legitimate interest to information on the trust register in relation to the identity of:

• the settlor;
• the trustees;
• the protectors;
• the beneficiaries or class of beneficiaries; and
• any other natural person exercising effective control of the trust.

However, there was no clarification of what might constitute a ‘legitimate interest’. The concept of legitimate interest has been clarified to some extent by MLD5. A 'legitimate interest' (which may relate to the prevention of money laundering, terrorist financing and associated offences) must be "justified by readily available means, such as statutes or mission statements of non-governmental organisations, or on the basis of demonstrated previous activities" relating to the fight against these offences.

For example, an investigative journalist who can prove he or she has a 'legitimate interest' in particular information may be able to access the register. Once they have demonstrated a legitimate interest, they will have a strong argument for publishing the information freely but will of course remain subject to privacy and data protection laws that place limits on what information can be made available in the public interest.

MLD5 also provides for Member States to ensure that breaches of the requirement to register beneficial ownership information are subject to effective, proportionate and dissuasive measures or sanctions. Further, there is a requirement for beneficial owners to provide all the information necessary for corporates and other legal entities to comply with their registration obligations. It remains to be seen what form these measures will take.

Interconnectivity

Under MLD5, the national registers of different EU Member States will be interconnected to facilitate cooperation and allow for the exchange of information between Member States.

Member States will also be required to put in place verification mechanisms of all information collected by the registers so as to ensure the accuracy and reliability of the registers.

Restrictions on access

It will be up to individual Member States to implement into national law restrictions on access to the information to ensure the “legitimate interest” qualification is upheld when accessing information about trusts. It is anticipated that in many Member States anyone accessing the information will be required to register and give their own details and a small fee could be payable.

Restrictions will also be placed on the availability of information where there is a disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation or where the beneficial owner is a minor or legally incapable. However, restrictions will only be granted in exceptional circumstances.

The new General Data Protection Regulation (GDPR) will also impose safeguards in relation to the availability of individuals’ personal information and the Member States will have to find a balance between their citizens’ rights to privacy and the EU-wide drive to increase transparency.

Brexit and MLD5

MLD5 is a minimum harmonising directive, and although it sets a high level of common standards, each Member State can choose to apply more stringent requirements at a national level. As such it is too early to comment on how each Member Sate will apply the new rules.

The European Council adopted MLD5 on 14 May 2018 and Member States have just over 18 months in which to transpose MLD5 into national law. Of course, this will be after the UK has left the European Union in March 2019 and the extent to which the UK will apply and implement European directives passed before that date, including MLD5, is still under negotiation. 

In an increasingly transparent world careful thought is required to navigate the maze of new legislation introduced over the past couple of years. Part of Farrer & Co’s role is to ensure that our clients understand and comply with their obligations, and also to consider more pro-actively how to deal with confidentiality concerns. We will be monitoring the UK's implementation of MLD5 and any associated measures (such as the enforcement of public beneficial ownership registers on the British Overseas Territories, including the BVI and the Cayman Islands) and will ensure that our clients and contacts are kept up to date on new developments.

If you require further information please contact Katy Ruddell or Nicola Pomfret, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2018