Turkish Law Blog
The Review of the 5th Anti-Money Laundering Directive of the EU
Founding Attorney Hatice Zümbül – Legal Intern Mehmet Turgut
The events such as Panama and Paradise Papers, Middle East migration crisis and Human trafficking, occurred during the period from the date of the 4th EU Anti-Money Laundering Directive to now, have revealed the necessity for new measures to counter money laundering and the financing of terrorism.
Recent terrorist attacks have brought to light emerging new trends, in particular regarding the way terrorist groups finance and conduct their operations. In order to keep pace with evolving trends, further measures should be taken to ensure the increased transparency of financial transactions, of corporate and other legal entities, as well as of trusts and legal arrangements having a structure or functions similar to trusts (‘similar legal arrangements’), with a view to improving the existing preventive framework and to more effectively countering terrorist financing.
In this sense, the European Union (the EU or the Union) has a new directive on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing [the 5th Anti-Money Laundering Directive (“5th AMLD”)]. The purpose of the Directive is to detect and investigate money laundering, in addition, to prevent them from occurring. In reaching this aim, the fundamental rights to the protection of personal data should also be considered while the aims of Directive (EU) 2015/849 should be pursued and any amendments to it should be consistent with the Union’s ongoing action in the field of countering terrorism and terrorist financing.
The Amendment to the 4th Anti-Money Laundering Directive brough stricter rules and expanded its requirements to new obligated entities. New rules as detailly explained below are related in order; prevention anonymous use of virtual currencies, strengthening the monitoring of transactions with high-risk countries, limit use of prepaid cards, supporting the Financial Intelligence Unit (“FIU”) network, increasing transparency of financial transactions and centralising data retrieval system.
The aim of this article is to provide a brief review on the key elements of the 5th Anti-Money Laundering Directive.
2. The Risk Carried by Virtual Currency
Terrorist groups, in the realm of possibility, can transfer money into the Union financial system or within virtual currency networks by concealing transfers or by benefiting from a certain degree of anonymity on those platforms because providers engaged in exchange services between virtual currencies and fiat (money) currencies are under no Union obligation to identify suspicious activity.
In this context, it is important to extend the scope of the Directive (EU) 2015/849 so as to include providers engaged in exchange service between virtual currencies and fiat currencies as well as custodian wallet providers. For the purposes of anti-money laundering and countering the financing of terrorism (“AML/CFT”), competent authorities should be able, through obliged entities, to monitor the use of virtual currencies.
The anonymity of virtual currencies allows their potential misuse for a criminal purpose. Actually, the inclusion of providers engaged in exchange services between virtual currencies and fiat currencies and custodian wallet providers will not entirely address the issue of anonymity attached to virtual currency transactions. A large part of the virtual currency environment will remain anonymous because users can transact without providers engaged in exchange service. In order to struggle this situation, all Financial Intelligence Units (“FIUs”) should be able to obtain information allowing them to associate virtual currency addresses to the identity of the owner of virtual currency.
In this context, 5th AMLD introduces closer regulation to virtual currencies and brings virtual currency platforms and custodian wallet providers within the definition of “obliged entities” in order to enable the FIUs to monitor the use of virtual currencies. This means that as obliged entities they will be under an obligation to identify and report suspicious activities.
3. Transactions Involving High-Risk Third Countries
Currently, Member States can determine their own levels of Enhanced Due Diligence (“EDD”) measures against countries carrying more risks that could potentially create deficiencies in managing relationships with entities in those territories. At present, Member States are not required to incorporate into their national regimes, a specific list of EDD measures to be applied in such instances. In this context, the 5th AMLD proposes a standardized approach to treatment of those relationships throughout the EU in order to avoid the disparities caused by different approaches Member States have.
It is important to improve the effectiveness of the list of high-risk third countries established by the Commission by providing for a harmonised treatment of those countries at Union level. In this sense, the 5th AMDL brings harmonised approach related with EDD measures, where such approach are not already required under national law. EDD measures to be applied require obligated entities to obtain additional information on the customer and the beneficial owner; on the intended nature of the business relationship; on the source of funds and wealth of both customer and beneficial owner and on the reason for transaction that is about to be performed.
4. The Limit on Prepaid Cards
Anonymous prepaid cards are easy to use in financing terrorist attacks and logistics. With lack of access to traditional banking, terrorism financing has moved to alternative payments methods, such as pre-paid cards. It is important to avoid terrorism financing in this sense by reducing the limits and maximum amounts under which obliged entities are allowed not to apply certain customer due diligence measures provided for by the Directive (EU) 2015/849. In this context 5th AMDL as stated under article 1(7), sets the threshold for transactions on payment instruments on a monthly basis and reduced it to 150 €. The maximum amount stored electronically also is not to exceed this amount. Member States will have an option to allow anonymous use of such cards only when the pre-paid card is used in store for a maximum transaction of EUR 150, or a maximum transaction online of EUR 50.
5. Enhanced Powers of Financial Intelligence Units (the FIUs)
The FIUs play an important role in identifying the financial operations of terrorist networks, especially cross-border, and in detecting their financial backers. Financial intelligence might be of fundamental importance in uncovering the facilitation of terrorist offences and the networks and schemes of terrorist organisations. In order to reveal the facilitation of terrorist offenses and the networks of terrorist organisations, financial intelligence might have importance.
There are no established international standards so that the FIUs maintain significant differences as regards their functions, competences and powers. Member states should make an effort for more efficient and coordinated approach to deal with financial investigations related to terrorism financing in addition that the FIUs should have access to information and be able to exchange it without impediments because information should flow directly and quickly without undue delays in the terrorism financing.
Delayed access to information by the FIUs and other competent authorities on the identity of holders of bank and payment accounts and safe-deposit boxes, especially anonymous ones, hampers the detection of transfers of funds relating to terrorism. Therefore, improving the effectiveness and efficiency of the FIUs by clarifying the powers of and cooperation between the FIUs has remarkable importance.
In this context, the FIUs will have access to more information through a centralized bank system as well as payment account registers or data retrieval systems. Member States will be able to cooperate more easily by creating centralized automated mechanisms. The FIUs should exchange information spontaneously or upon request, aiming to further increase transparency and improve the identification of account holders.
They can be seen in the directives under several amendment articles as under article 1(15/c) of the 5th AMLD stating that “The Member States shall ensure that the information on the beneficial ownership is accessible in all cases to competent authorities and FIUs, without any restriction”. Also, in the subparagraph (e) of the same article, it is given that “Member States shall ensure that competent authorities and FIUs have timely and unrestricted access to all information held in the central register referred to in paragraph 3 without alerting the entity concerned”. Moreover, cooperation between Member States and the FIUs is focused under the 5th AMLD as subparagraph (f) of Article 1(15) mentions that the Member States shall ensure that competent authorities and the FIUs are able to provide the information referred to in paragraphs 1 and 3 to the competent authorities and to the FIUs of other Member States in a timely manner and free of charge.
6. Increasing the Transparency of Financial Transactions
At present, Member states are required to ensure that corporate and other legal entities incorporated within their territory obtain and hold adequate, accurate and current information on their beneficial ownership. It is the main factor to trace criminals that the Member States obtain and hold accurate and up-to-date information on the beneficial owner.
Otherwise, criminals might be able to hide their identity behind a corporate structure. The possibility to hide and move funds around the world that money launderers and terrorist financiers have increasingly used is available in the globally interconnected financial system.
In this context, it is important to clarify which member state is responsible for the monitoring and registration of beneficial ownership information of trusts and similar legal arrangements that are, at present, not monitored or registered anywhere in the Union because of differences in the legal system of Member States. It is stated by the 5th AMDL that beneficial ownership information of trusts and similar legal arrangements should be registered where the trustees of trusts and persons holding equivalent positions in similar legal arrangements are established or where they reside.
Additionally, cooperation between the Member States is necessary to ensure the effective monitoring and registration of information on the beneficial ownership of trusts and similar legal arrangements. The cooperation would be provided like that the interconnection of Member States’ registries of beneficial owners of trusts and similar legal arrangements would make this information accessible, and would also ensure that the multiple registrations of the same trusts and similar legal arrangements is avoided within the Union.
In addition to them, Member States should be able to provide for wider access to information on beneficial ownership of trusts and similar legal arrangements if such access constitutes a necessary and proportionate measure with the legitimate aim of preventing terrorist financing because of the reason that the risks of terrorist financing involved can differ, based on the characteristics of the type of trust or similar legal arrangement and the understanding of those risks can evolve over time, for instance as a result of the national and supranational risk assessments. When determining the level of transparency of the beneficial ownership information of such trusts or similar legal arrangements, Member States should consider the protection of fundamental rights of individuals, in particular the right to privacy and protection of personal data. Access to beneficial ownership information of trusts and similar legal arrangements should be granted to any person under the condition of legitimate interest. Also, access to beneficial ownership information should be granted to anyone who files a written request in relation to a trust that holds or owns a controlling interest in any corporate or other legal entity incorporated outside the EU.
However, the criteria for that should be sufficiently precise and in line with the aims of this Directive and Member States should be enabled to refuse a written request that seems not in line with the objectives of this Directive. Moreover, each Member State shall identify the trusts or similar legal arrangements, considering that similar legal arrangements may have different legal characteristics throughout the Union. Thereafter, Member States should notify the Commission on the categories, description of the characteristics, names and where the applicable legal basis of those trusts and similar legal arrangements in view of their publication in the Official Journal of the European Union in order to enable their identification by the other Member States.
The 5th AMDL states that the Member States should set up these beneficial ownership registers for corporate and other legal entities by 10 January 2020 and for trusts and similar legal arrangements 10 March 2020 within 20 months. Central registers should be interconnected via the European Central Platform by 10 March 2021. Implementation of above will increase transparency and enhance the access of the FIUs to information.
7. Centralizing Data Retrieval System - Accessibility for the Public
The previous legislation was the first initiative to increase transparency to tackle financial crime and tax evasion, however, the 5th AMLD is putting even more scrutiny on beneficial owners and Member States to increase transparency. The 5th AMLD states that EU citizens will be granted access to beneficial ownership record.
Public access to beneficial ownership information allows greater scrutiny of information by civil society, including by the press or civil society organisations, and contributes to preserving trust in the integrity of business transactions and of the financial system. It can contribute to combating the misuse of corporate and other legal entities and legal arrangements for the purposes of money laundering or terrorist financing, both by helping investigations and through reputational effects, given that anyone who could enter into transactions is aware of the identity of the beneficial owners. In order to combat money laundering and terrorist financing, public access can have importance both by helping investigations and through reputational effects, given that anyone who could enter into transactions is aware of the identity of the beneficial owner.
Confidence in financial markets from investors and the general public depends in large part on the existence of an accurate disclosure regime that provides transparency in the beneficial ownership and control structures of corporate and other legal entities as well as certain types of trusts and similar legal arrangements.
Therefore, beneficial ownership information should be allowed by the Member States in a sufficiently coherent and coordinated way, both by establishing clear rules of access by the public and through the central registers in which beneficial ownership information is set out. In this context, those third parties are able to ascertain, throughout the Union, who are the beneficial owners of corporate and other legal entities as well as of certain types of trusts and similar legal arrangements.
The strengthened public scrutiny will contribute to preventing the misuse of legal entities and legal arrangements, including tax avoidance. In this sense, information on beneficial ownership remains available through the national registers and through the system of interconnection of registers for a minimum of five years after the grounds for registering beneficial ownership information of the trust or similar legal arrangement have ceased to exist.
The fair balance between the general public interest in the prevention of money laundering and terrorist financing and data subjects’ fundamental rights is crucial. In this context, Member States should be able to provide exemptions to the disclosure through the registers of beneficial ownership information and to access to such information, in exceptional circumstances, where that information would expose the beneficial owner to a disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation. It should also be possible for the Member States to require online registration in order to identify any person who requests information from the register, as well as the payment of a fee for access to the information in the register.
To sum up, Member States, under article 4 of the 5th AMLD, have to bring into force the laws, regulations and administrative provisions necessary to comply with the 5th AMLD by January 10, 2020.
The 5th AMLD contains a number of innovations designed to further enhance the Union’s drive towards transparency and anti-money laundering compliance.
It is important to ensure that anti-money laundering and counter-terrorist financing rules are correctly implemented by the obliged entities. In that context, Member States should strengthen the role of public authorities acting as competent authorities with designated responsibilities for combating money laundering or terrorist financing.
It is also essential to remember, as taking all measures mentioned above, that proportionality and fair balance between the prevention of crimes and fundamental rights. In all cases, both with regard to corporate and other legal entities, as well as trusts and similar legal arrangements, a fair balance should be sought in particular between the general public interest in the prevention of money laundering and terrorist financing and the data subjects’ fundamental rights.
The set of data to be made available to the public should be limited, clearly and exhaustively defined, and should be of a general nature, so as to minimise the potential prejudice to the beneficial owners. At the same time, information made accessible to the public should not significantly differ from the data currently collected. In order to limit the interference with the right to respect for their private life in general and right to protection of their personal data in particular, that information should relate essentially to the status of beneficial owners of corporate and other legal entities and of trusts and similar legal arrangements and should strictly concern the sphere of economic activity in which the beneficial owners operate.
Also, in order to respect privacy and protect personal data, the minimum data necessary for the carrying out of AML/CFT investigations should be held in centralised automated mechanisms for bank and payment accounts, such as registers or data retrieval systems. It should be possible for the Member States to determine which data is useful and proportionate to gather, taking into account the systems and legal traditions in place to enable the meaningful identification of the beneficial owners.
 DIRECTIVE (EU) 2018/843 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of Money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L0843&from=EN
 DIRECTIVE (EU) 2015/849 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC, https://eur-lex.europa.eu/eli/dir/2015/849/oj
 Fiat money is a currency without intrinsic value that has been established as money, often by government regulation. Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value. https://en.wikipedia.org/wiki/Fiat_money