The 5th Money Laundering Directive: Changes and Preparation

What is the 5MLD?

The EU 5MLD or 5th Money Laundering Directive, which was published on 19 June 2018 and is to be implemented by early 2020, sets out the legal framework for member states to “identify, understand and mitigate the risks” related to money laundering and terrorist financing. Whilst the 4MLD, which was implemented in 2017, is quite extensive and constitutes the main legal instrument of businesses and how to tackle money laundering, the 5MLD is a series of amendments to the 4MLD which considers the changing technological landscape and calls for greater transparency, still taking into account the fundamentals of applying a risk-based approach to Anti-Money Laundering controls.

The main objective of the 5MLD is to increase transparency in financial activity and to encourage firms to adopt vigorous and productive Client Due Diligence methodologies. As a result of this, there are a few significant changes that should be noted.

Data collection and Beneficial ownership register

EU Member States are required to develop beneficial ownership registers that should be made public and accessible to other countries. In addition, the requirements of trusts have become stricter, where a risk-based approach will be applied. This has had an unexpected knock-on effect where charities will be subject a new layer of supervision in relation to AML as the majority of charities are incorporated as trust.

Virtual currency regulation

The nature and obscurity of virtual cryptocurrency poses a threat to the financial Union and increases the chances of criminal- activity. In order to tackle this, virtual currency exchanges have been placed under AML laws under the 5MLD; this will, in turn, make monitoring and reporting of suspicious transactions a legal requirement.

Enhanced due diligence and increased scrutiny of high- risk countries.

Under the 5MLD, all customers from high-risk 3rd countries will be subject to enhanced due diligence. Regulated, or obliged entities will have to maintain a list of high-risk 3rd countries. The criteria used to allocate risk to a country will be more stringent looking at factors such as a country’s availability of information on beneficial owners.

What do firms need to do in preparation for the deadline?

The deadline for the implementation of the 5MLD is 10th January 2020. Whilst the new directive should substantially improve the existing rules, collective effort across the market and proper application are fundamental in order to effectively fight financial crime.

If obliged entities are to implement processes and controls which conform to the new directive, precise and effective planning is required:

1. Assess existing technology and ensure the right technologies are being used.

Further and stricter requirements will result in additional information searches, which will, in turn, add significant workload on compliance teams. It is vital to ensure that the technologies that are employed have a positive impact on the compliance sector. RegTech solution firms that offer automated workflows may enhance the productivity and efficiency of a firms CDD process and financial crime controls, ensuring the correct standards are met. With the introduction of the beneficial ownership register, there will be an extensive amount of data available to utilise and analyse. Adopting a formal process to obtain, record and update this should be developed. Both effort and cost can be reduced when standardised data systems are put in place.

2. Assess and adopt stronger KYC processes

Like with most regulatory changes, regulated firms are given a chance to assess and evaluate their current compliance programs and approach. It is crucial that a firm has both a good understanding of 5th MLD requirements and its current KYC processes to determine how adaptable the new requirements are. Firms should look at how they will access and interpret the beneficial ownership data and identify any necessary training opportunities.

How Lysis can help

  • We can undertake a gap analysis review to see what impact 5MLD will have on your organisation;

  • We can help assess and implement changes your organisation needs to make in order to comply with the new directive;

  • Provide training on the changes 5MLD brings to your personnel;

  • Utilise our expertise in technology and data with our broad experience in Financial Crime Compliance and Client Lifecycle Management to assist with systems selection and implementation to ensure compliance to 5MLD.

For more information please contact us at info@lysisfinancial.com


Author: Shola Ali-Arowoseklia, Consultant at Lysis Group