From the Panama and Paradise Papers to the more recent revelations about Danske Bank and ING, numerous money laundering scandals have taken the world by storm over the last few years.
As general awareness of the phenomenon strengthens (mainly thanks to journalists’ zeal), so does the pressure on governments to build structures to counter systemic money laundering. With every new revelation, inter-governmental bodies and national regulators gain a better understanding of the common practices used by financial criminals and, as a result, find themselves in need of expanding existing regulations to reflect their newly acquired insights.
This is part of the reason why, after roughly a year since the enactment of AMLD4 (the 4th Anti-Money Laundering Directive), the EU has released its successor, AMLD5 (the 5th Anti-Money Laundering Directive). It was published on 19 June 2018, and member states will have until 20 January 2020 to transpose the directive into national legislation.
From an international point of view, the key relevance of AMLD5 is that it confirms the EU’s leadership role in AML (anti-money laundering) legislation. Over the last few years, we have seen a similar effort from regulators across the Asian region to improve overall transparency in company structures and more extensive KYC (know your customer) and AML screening requirements, but the lack of a political and economic central body comparable to the European Commission makes it harder to coordinate strategy in the same way.
One of the key aspects of AMLD5 is that it mostly adds to the earlier iterations of the directive, instead of overhauling them. In particular, AMLD4’s framework for identity verification, AML and KYC procedures for financial institutions is mostly untouched. Its scope is somewhat extended (art dealers, for instance, will now be required to run AML and KYC checks on any customers buying or selling items with a value of EUR 10,000 or more), but its real targets appear to be the governments of member states.
For instance, the new regulation mandates that access to public beneficial ownership registers – which were first introduced by AMLD4 – should now be extended to members of the public across the EU, with the declared aim of allowing for “greater scrutiny of information by civil society, including by the press or civil society organisations”.
At the same time, AMLD5 covers instructions on how to enhance interconnection of member states’ beneficial ownership registers, especially regarding the display of information about the ultimate owners of companies in a consistent and coordinated way. This new approach could represent an important push for European countries such as Cyprus and Spain, which are currently lagging behind their regional counterparts in the way they collect and provide beneficial ownership information.
Following the same spirit, AMLD5 requires countries to set up national beneficial ownership registers for trusts, which have historically been a popular place to hide beneficial ownership from prying eyes thanks to their very opaque nature. Information about trusts will only be publicly accessible when there is a “legitimate reason” for requesting it, but nonetheless this is a big step and a clear sign of the EU’s commitment to better transparency.
In Asia, Singapore and Hong Kong are playing the most active role in changing the way ultimate beneficial ownership information is collected and accessed, but we are still far from the standard of mandatory public beneficial ownership registers now present in Europe. For instance, since 31 March 2017, all companies incorporated in Singapore must keep a register of all owners that control more than the FATF (Financial Action Task Force) recommended 25 percent of that entity, while Hong Kong’s FSTB (Financial Services and Treasury Bureau) is looking to reform its overall approach as part of its Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance introduced on 1 March 2018.
Another measure introduced by AMLD5, and aimed at governments more than financial institutions, is the requirement for European countries to specify what they mean by a ‘PEP’ (Politically Exposed Person) in a centralised register. One possible outcome of this requirement is a reflection by governments on their criteria for including certain people in their PEP lists. For instance, should the mayor of a small town in Germany be considered a PEP in the same way as the husband of German Chancellor Angela Merkel? After AMLD5 becomes effective, governments will be required to clear up this haziness.
Chances are that this clarification will have a global impact, including across Asia. At the moment, no official PEP lists exist, but financial institutions utilise the same international databases from established vendors for this type of screening, wherever they are in the world. The specifications required by AMLD5 might soon be reflected in the most prominent PEP lists, and as such they will be practically setting a new standard for other countries to follow.
Other areas AMLD5 touches upon are the threshold for identifying the holders of prepaid cards (lowered to EUR 50 in the case of payment transactions from outside the EU) and the extension of the directive’s scope to include virtual currencies, which will now be monitored by competent authorities.
It is interesting to see how the attitude towards virtual currencies, which AMLD5 unifies for all EU countries, varies greatly from country to country in Asia. At one end of the spectrum there is China, which became the first country in the world to ban ICOs (initial coin offerings) and local crypto exchanges in September 2017. In Japan, the FSA (Financial Services Agency) recognised Bitcoin as both an asset and a method of payment in April 2017, while also requiring crypto exchanges to comply to KYC rules.
Somewhere in the middle, we find Hong Kong and Singapore. In Hong Kong, no capital gains tax is currently applied to profits investments including in cryptocurrency trading, which has played a fundamental role in driving the sector’s growth. Interestingly, the Hong Kong government is also making an effort to provide detailed information regarding ICO and crypto trading to the public, reaching them via social media, on TV and even on public transport. In Singapore, MAS (Monetary Authority of Singapore) managing director Ravi Menon has publicly asked the banking industry to simplify access to banking services for local cryptocurrency start-ups to help boost the fintech ecosystem. Singapore is one of the top three largest ICO launch pads (after the US and Switzerland) and is home to some of the most prominent cryptocurrency exchanges.
Finally, what we at Know Your Customer consider the most revolutionary aspect introduced by AMLD5 is that it explicitly allows for eIDAS, the electronic signature standard in the EU. Once the directive is transposed into law, financial institutions will be able to digitise all the KYC forms of their onboarding processes. As a company providing solutions for digital onboarding, receiving clear guidance on this topic would be truly invaluable, as it formalises our forward-looking approach, while reassuring financial institutions that this type of due diligence information can definitely be provided in digital form.
In Asia, there is no unique standard similar to eIDAS, but e-signatures are legally binding across most of the region. In Hong Kong, for example, e-signatures have been legally recognised since the Electronic Transactions Ordinance Act of 2000, making them a viable option for businesses. Singapore’s Electronic Transactions Act was introduced more recently, but since 2010 e-signatures are legal in the country, although the most basic types might need additional evidence when under legal scrutiny. Meanwhile, because of China’s legal model being more open, e-signatures can be used without restrictions in the country, and under Japanese law, most types of e-signatures are considered legitimate and legally binding.
The direction exemplified by AMLD5 and some of its parallel regulations in Asia is towards an increase in digitisation and international cooperation in the fight against money laundering and terrorism financing. This trend is confirmed, for instance, by the introduction at the beginning of August of the GFIN (Global Financial Innovation Network), created by the UK’s FCA (Financial Conduct Authority) in collaboration with 11 other financial regulators and related organisations from around the world, including MAS and HKMA (Hong Kong Monetary Authority).
The benefits of an approach that leverages technology to foster collaboration between regulators are extensive, making the global financial industry better prepared to face the challenges that the new regulatory environment and the rising penetration of money laundering practices might bring. As such, we can only hope to see more of these initiatives – maybe on a global scale – emerge over the next few months and years.
This article first appeared in Regulation Asia on October 15th 2018.