Key Changes Under the 5th Money Laundering Directive and How to Prepare

With the 5MLD implementation date fast approaching, firms need to be ready for the latest round of regulatory change.

In direct response to the now infamous Panama Papers and shocking terrorist attacks in Europe, regulators moved to draft new rules for preventing the funding of criminal and terrorist activities through the financial system.

On 14 May 2018, EU member states adopted the 5th Money Laundering Directive (5MLD),featuring several key updates to the requirements set out by the far-reaching 4th Money Laundering Directive (4MLD). 5MLD must be implemented by member states by early 2020.

The primary objective of 5MLD is to increase transparency into often opaque financial activity that slips past current Know Your Customer (KYC) checks. To prevent the misuse of the world’s financial system, financial institutions need deep insight into who they are doing business with. The directive encourages firms to have robust KYC methodologies as well as efficient customer due diligence programs in place to close the door on individuals who want to hide their identity.

So what do firms needs to do to prepare for the 5MLD implementation date? Here we review the key 5MLD changes and three top priorities for financial institutions.

Key Changes Under 5MLD

While changes introduced by 5MLD are not as extensive as those under 4MLD, the drive for transparency has a number of significant implications for financial institutions as they seek to update KYC processes. Three are of note.

Opening of beneficial ownership registers

Following closely behind the requirements under FinCEN’s CDD Rule, beneficial ownership is one of the biggest areas of change under 5MLD. Member states are required to develop public ownership registers that are accessible and potentially interconnected across countries.

The ability to scrutinize ownership structures plays a big role in fighting the global money laundering problem. For financial institutions, the registers will provide more transparency on their clients, but the additional information searches may add significant workload for already stretched compliance teams.

Increased scrutiny of high-risk countries

Customers from countries deemed to be high risk will be subject to enhanced due diligence under 5MLD to combat the increased money laundering risk. With the first list of countries being rejected by the member states, this summer will see the new list put forward.

It’s likely that countries such as Iran, North Korea and Yemen will be included on the list, although others, including Saudi Arabia and Panama, are under discussion. When the final list is confirmed, firms will need to be more vigilant in relation to these countries and make sure extra checks are carried out.

Regulation of virtual currencies

There have been growing concerns on the role of virtual currencies in terrorist financing. Its borderless and peer-to-peer structure is well-suited for criminal activity. The 5th money laundering directive puts virtual currency exchanges under AML laws, requiring the verification of customer identities and the need for due diligence programs. This move, along with many other global regulatory changes, will bring oversight to a sector that needs greater transparency to achieve its full potential.

How to Prepare for 5MLD

5MLD will be implemented on 10 January 2020, and the need for firms to truly know who their customers are is greater than ever. Here are our top three tips to help your financial institution get ready for 5MLD.

1. Assess the strength of your KYC program

The 5MLD changes give firms an opportunity to take stock of their compliance programs and make necessary updates. Key questions to consider include:

  • How robust is your current KYC program and is it adaptable to meet 5MLD requirements?
  • Are you confident you can access the data provided in beneficial ownership registers?
  • Are your KYC analysts confident at interpreting ownership structures or is additional training needed?
  • What will your workflows look like for clients from high-risk countries?

Starting the review process early will give firms a strategic advantage by allowing them to make the transition as streamlined as possible. A smooth KYC onboarding program also is a win for customer experience, an important differentiator in a very competitive marketplace.

2. Factor in regular KYC reviews

Onboarding clients is only part of the KYC jigsaw. Under 5MLD, member states will be required to release lists of Politically Exposed Persons (PEPs), which need to be reviewed on an ongoing basis. Add to this the ever-changing sanctions landscape and the potential for changes in ownership, and it’s clear that firms need to have solid ongoing monitoring processes in place.

Establishing a strategy for ongoing checks throughout the customer lifecycle will reduce any unnecessary surprises and limit your compliance risk exposure.

3. Utilize the right technology

There’s no doubt that the implementation of 5MLD next year will add to the complexity of compliance programs for most financial institutions. Compliance teams will be faced with yet more tasks to complete and a growing requirement for more detailed KYC checks. Keeping a fully transparent audit trail and being able to quickly remediate client files will also be expected by the regulators with fines or penalties for non-compliance.

Regulatory bodies across the world have recognized the positive impact that the right technology can have on the compliance sector. From the FCA in the UK through to FINRA in the UK, regulatory technology (regtech) is seen as an important tool in helping to overcome compliance challenges.

Automated workflows provided by regtech solutions will give firms the productivity boost they need to successfully implement 5MLD and ensure that the high regulatory standards are met. By standardizing KYC systems and removing inconsistent processes, businesses will save both time and money. In addition, automation provides easily accessible audit trails and integrates complex global datasets.

In response to ongoing regulatory change, like 5MLD, and the growth of complex financial crime, we launched Opus Clarity KYC in January to simplify Know Your Customer compliance for financial institutions. Our solutions support onboarding, remediation, periodic and event driven reviews plus real-time risk insights on entities and beneficial owners.

Contact us to request a demo.

Kelvin Dickenson
Follow Kelvin on Twitter, @kelvindickenson