HM Treasury – Transposition of the Fifth Money Laundering Directive

The proposals intend to clarify that if any of the measures in regulations 29 and 33-35 cannot be taken, firms are required to terminate the relationship and consider filing a Suspicious Activity Report (SAR).

Government is seeking views on whether this clarification should be made and whether to exclude those requirements which have ‘built-in follow up actions’ such as the requirement to gain approval from a senior manager before establishing a relationship with a Politically Exposed Person (PEP). In this example, if management approval cannot be acquired to on-board a PEP then a relationship cannot be formed in the first place and the firm would not need to terminate the relationship.

Additional Customer Due Diligence steps for financial firms (regulation 29)

• Requires insurance companies to identify and verify the beneficiary of the policy.
• Requires all firms to not create new anonymous accounts or passbooks.

Beneficial Owner Register Requirements for companies and trusts

5MLD requires that where firms enter into a business relationship with a company or trust that is subject to beneficiary ownership registration requirements they must collect either:

• Proof of registration on this register
• An excerpt of the register

Currently regulation 30 (2) requires a firm to verify the identity of a customer, any person purporting to act on behalf of the customer and any beneficial owner of the customer before establishing a business relationship or carrying out a transaction.

The government proposes to amend this regulation to include the requirements above to collect proof of registration or an excerpt of the register from the company of trust. However, this would only be required in the case of new business relationships.

The government proposes to put the onus on the company or trust to provide the proof of registration to the firm, upon the firm’s request (generally at the point a business relationship is being considered). The consultation notes that the Companies House register is public so the firm could potentially obtain the information directly if it so wishes.

Requirement for Ongoing CDD where there is a duty to review beneficial ownership information

5MLD requires that where firms have a legal duty to perform a review of beneficial ownership information (such as where they are required to obtain or confirm a company’s tax jurisdiction under international tax regulations) customer due diligence should also be performed.

New Register for Trusts

5MLD requires to UK to create a non-public register of trusts for which registration of new trusts will be required from April 2020. Where dealing with a trust, firms will be required to collect proof of registration on the Trust Register, however, the onus will be on the trust to provide this.

A HMRC technical consultation will be published this year which will consult on the information that the trustee would need to provide which is likely to be more than simply the trust registration number.

Changes to Enhanced Due Diligence

Transactions involving third countries

Firms are currently required to undertake Enhanced Due Diligence (EDD) in relation to high-risk third countries. During the implementation period, the UK will continue to use the EU list of high-risk countries but the UK government will legislate to for its own list of high-risk countries which will likely be closely aligned with the EU’s list.

The scope for when firms need to perform (EDD) will be changed from covering ‘natural persons or legal entities established in the third countries’ to ‘business relationships or transactions involving high-risk third countries’. This broadens the scope of when Enhance Due Diligence will need to be performed and will focus on whether the transaction involves a high-risk country rather than the nationality of the parties involved. Any enhanced monitoring required will also apply to this new scope.

What will constitute a business relationship or transaction involving a high-risk country?

The government is considering how broadly to define which transactions ‘involve’ a high-risk third country as the 5MLD does not set out directly what ‘involve’ means in this context.

The government sees merit in providing as broad a definition as possible; however, they acknowledge that issues will arise if the definition is set too broadly. For example, the government intends to narrow the definition to exclude UK citizens who are also nationals of countries identified as high-risk countries to be subject to EDD purely as a result from having such a connection. Including these people in the definition of involve could unfairly exclude them from financial services.

The government is seeking views what unintended consequences a broad definition of ‘involve’ could have.

Actions required for Enhanced Due Diligence

Currently firms are required to examine the background and purpose of business relationships and transactions with customers established in high-risk countries but under 5MLD firms will be explicitly required to obtain additional information on:

• The customer and beneficial owner(s)
• The intended nature of the business relationship
• The source of funds and wealth of the customer and beneficial owners(s)
• The reasons for the intended for performed transactions

Firms will also be expected to apply at least one additional measure to those carrying out transactions involving high-risk countries i.e.:

• Applying additional elements of enhanced due diligence
• Introduce an enhanced reporting mechanism or systematic reporting for financial transactions.
• Limiting the business relationships with natural persons or legal entities from the high-risk country.

Politically Exposed Persons

The Government will use the Financial Conduct Authority’s indicative list of Politically Exposed Persons (PEPs) for other sectors; there is no change for credit unions. Our information guide on PEPs can be found here.

Duty to report discrepancies to central beneficial owners lists

Article 30(4) of the 5MLD will require firms to report any discrepancies between the beneficial ownership information held on central registers (i.e. Companies House and People with Significant Control) and the information that they hold.

As a part of due diligence requirements, firms are required to identify and take reasonable steps to verify a customer’s beneficial ownership information and may utilise information from Companies House or People with Significant Control registers but may not solely rely on them.

If a firm notices a discrepancy with the information on the register it would need to report that discrepancy. The government proposes to use a reporting mechanism built into Companies House for this purpose. Companies House would then investigate by contacting the company and asking if the information held with them is accurate.

 

National Register of bank account ownership

5MLD requires the UK to establish a centralised automated mechanism which allows identification of natural and legal persons which hold or control bank accounts, payment accounts or safe deposits held by credit institutions in the UK.

This would be accessible to Financial Intelligence Units (FIUs) and other competent authorities. The government proposes that these will be:

• Financial Conduct Authority
• National Crime Agency
• Serious Fraud Office
• the 43 territorial police forces in England and Wales
• the police services of Scotland and Northern Ireland
• HM Revenue & Customs
• Companies House

This would include the following information:

• The name of the customer account-holder, and any person purporting to act on behalf of the customer, along with a unique identification number or other information needed for the purposes of CDD.
• The names of any beneficial owners of the customer account-holder (where relevant)
• The names of the lessees of any safe deposit boxes and the duration of the lease period.
• The IBAN numbers of the bank or payment account, along with the dates on which the account was opened and closed

The government is proposing to require credit unions to contribute to this register despite the lack of an IBAN number on members’ accounts. The government believes that excluding credit unions from the requirement would incentivise money launderers to exploit these accounts. However, the government acknowledges that the benefits of including such information on the register must be weighed against the costs of administrative and financial costs of doing so.

Scope of information included on the register

5MLD is not clear on the precise nature of the information to be displayed on the register but the government is currently proposing to require firms to submit the following:

• Person’s name
• Address
• Date of birth
• Unique identifying number provided by the credit union
• Date(s) the account was opened / closed
• For Trustees or unincorporated institutions, the individual account-holder’s details

The government is considering the merits of requiring registration of specific types of unique identifier such as passport numbers and/or national insurance numbers.

For companies the government are proposing to require:

• Registered name of legal person;
• Registered company number (or for non-UK companies an equivalent identifying number)
• Date(s) that the account was opened / closed
• Names of the ultimate beneficial owners of the legal person
• Unique identifying number provided by the credit union for the beneficial owners.

The government is also considering whether to require passport and / or national insurance numbers for the beneficial owners of the company.

Submission of information

The government currently envisages that updates to information contained on the register will be submitted on a weekly basis, with no obligation to re-submit data which has not changed since the previous date of submission.

The government is also considering a system where the relevant bodies can access the information on the register directly by accessing the systems of the reporting organisations which has been used in other jurisdictions which have implemented similar registers.