The sequel to the Third Money Laundering Directive (3MLD), in force since 2005, will finally be released, over a decade later — but ahead of schedule. The deadline for transposition of the Fourth Money Laundering Directive (4MLD) by Member States has been moved from June 26, 2017 to January 1, 2017. Subject persons, now known as “obliged entities,” will need to prepare themselves for this early transposition date by ensuring that their internal policies have taken the latest additions brought forward by this new directive into account.

The primary changes associated with this new directive include more emphasis on a risk-based approach. It includes stricter Customer Due Diligence (CDD) rules, which now apply to traders of goods when carrying out transactions in cash amounting to €10,000 (as opposed to the previous threshold of €15,000) and gambling service providers, in addition to casinos, being required to carry out CDD for transactions of €2,000 or over. The scope of fines and penalties has been expanded as well.

The supervisory function of the national authorities has also been extended, and the 4MLD imposes obligations such as:

  • Developing central registers indicating beneficial ownership of legal entities (including trusts)
  • Broadening the definition of ‘Politically Exposed Persons’ (PEPs)
  • Introducing stricter rules on customer due diligence/know your customer (CDD/KYC) obligations.
  • Conducting national risk assessments
  • Ensuring that obliged entities have policies, controls and procedures to mitigate and effectively manage money laundering risks. The 4MLD provides that the policies, controls and procedures should be proportionate to the nature and size of the obliged entities.

So what actions do obliged entities need to take now?

  • Assess their risk-based approach
  • Review anti-money laundering (AML) policies, including any procedural manuals
  • Review client and business acceptance policies
  • Revisit and update forms and other documentation
  • Review existing data and files regarding information on UBOs
  • Train employees

The real impact will be felt when the 4MLD has been transposed by the national authorities. Transposition of a directive comes with the phenomenon of ‘gold-plating,’ in which certain provisions are interpreted in ways that result in fragmentation of the rules. This means that some Member States will have stricter AML rules, while other Member States may be more lax in certain aspects. This results in an uneven playing field, particularly in the e-commerce and payment services market. The EU institutions are aware of this trend, so if AML legislation is being given such importance these days, why wasn’t a Regulation drafted instead of a Directive?

How could the 4MLD differ within the EU?

Certain provisions stipulate that Member States may provide certain exceptions and allowances. For example, the 4MLD provides that Member States may decide to exempt providers of certain gambling services (except casinos) from specific provisions on the basis of proportionality and risk (see Article 2(2) of Directive (EU) 2015/849). Clearly, some Member States will take on a more restrictive stance to this, especially those that heavily regulate gambling services, such as Germany and Finland.

Another discretion provided to Member States is to decide whether to apply the provisions of the 4MLD for “persons engaged in a financial activity on an occasional or very limited basis where there is little risk of money laundering or terrorist financing.” (see Article 2(2) of Directive (EU) 2015/849).

The 4MLD also retained derogations and discretions that were in the 3MLD, such as the fact that Member States may allow verification of the identity of the customer and beneficial owner to be completed during the establishment of a business relationship if necessary so as not to interrupt the normal conduct of business and where there is little risk of money laundering or terrorist financing. The qualification of “little” risk as well as the fact that verification must be completed “as soon as practicable after initial contact” are elements that are rather subjective and therefore, the interpretation is prone to fragmentation of this rule.

It has yet to be seen how the 4AMLD will be transposed and implemented. Perhaps, if glaringly obvious gold-plating takes place, it might prompt the Commission to consider the possibility of enacting a Regulation in the future. Wishful thinking? Perhaps.

Rachel Gauci is Legal Counsel for Credorax.