Rinse and Repeat: EU implements 5th money laundering directive

March 4, 2020

3 min read

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What's going on here?

On 10 January 2020, the European Union’s 5th Money Laundering Directive came into force, after its introduction in March 2018. This marks the deadline for all EU states to implement its requirements. 

What does this mean?

This new directive means that EU member states are required to implement new procedures or amend existing rules regarding the prevention of money laundering. Some of these include: widening the definition of a tax adviser, scrutiny of both unusually large and complex transactions, increased scope of enhanced due diligence (including cryptocurrency exchanges) and more. These changes aim to increase transparency and reduce the pervasiveness of financial crime. 

What's the big picture effect?

These new conditions herald a stricter and far more extensive regulatory regime, presenting challenges and opportunities for all stakeholders involved. The effects on EU member states, companies doing business in the EU and the crypto-asset industry will each be discussed briefly. 

All member states will be required to create and maintain a database of “politically exposed persons” (PEP); i.e. individuals who are in prominent public service roles as they are generally at a higher risk for engaging in corrupt practices. While it is not prescribed what should be done with this information, it is likely to aid governments in discerning and thus mitigating the risk of corruption in the public sector. Similarly, registers of beneficial owners of legal entities and companies incorporated on each state’s territory will help law enforcement agents to identify stakeholders and their corporate interests. EU states will need to commit further resources to implement this directive, potentially diverting resources from other areas of development. These measures also raise potential privacy concerns for the private sector.

In addition to the privacy issues for companies, the costliness of carrying out the necessary due diligence to ensure compliance will be an area of concern. The directive expands the scenarios where enhanced due diligence must be applied, including complex or unusually large transactions, during dealings with high-risk third countries and various other considerations such as the type of trade that the individual deals in. All these new requirements will inevitably raise business costs and overall productivity may fall so long as companies are adjusting to the requirements of the legislation. Simultaneously, companies must reckon with the steep penalties; if they fail to carry out checks appropriately, there is a maximum fine of €5 million or 10% of annual turnover, with the additional threat of being banned from trading altogether. Individuals in breach of the directive’s conditions can also be barred from running businesses. These hefty consequences will undoubtedly incentivise compliance among company executives 

A new development in this law is the inclusion of virtual assets, which include cryptocurrencies and digital wallets. These assets are “obliged entities”, and relevant persons dealing with them will be subject to the enhanced due diligence procedure. This underscores the EU’s attempt to exert greater regulation over this new industry and represents a shift in the institutional recognition of virtual assets as mainstream entities in a newly legitimised industry. Given how those dealing with virtual assets must meet their regulatory obligations just like other sectors in this legislation, the industry is presented with an opportunity to market themselves to the more risk-averse. Such an opportunity could potentially expand the reach and use of virtual assets in the financial world. 

As some member states have yet to fully implement this legislation, the full effect of these new regulations remains to be seen. Future industry and political developments, once the directive is in full force, will be worth paying attention to, as they hold multi-faceted implications for the competitiveness of the European market and its ongoing struggle with financial crime.

Report written by Debra Lim

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