The European Union's fifth Money Laundering Directive, commonly known as MLD V, was an amendment to the fourth which aimed to allow governments to know more about financial transactions and to eliminate the anonymity that they associated with crypto-currencies, the better to prevent fraudulent activity and combat terrorist finance.

The EU's member states had to transpose the directive's provisions into their domestic legislation by 10th January this year.

Key dates are as follows.

• 30th May 2018 – The EU published the Fifth Money Laundering Directive.
• 19th June 2018 – The directive became effective from this date onwards.
• 23rd December 2019 – HM Government published the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 in the United Kingdom.
• 10th January 2020 – The date the Fifth Money Laundering became applicable and had to be incorporated into the domestic legislation of all EU countries.

Is your wealth management firm affected by MLD V?

Most financial institutions are not affected by the amendment. However, there are particular types of firms that the extended scope of MLD V captures: crypto-asset exchange providers and custodian wallet providers; certain letting agency businesses; and participants in the art market that act as intermediaries.

What are the specific rules with which firms ought to comply?

• Customer due diligence (CDD). MLD V requires firms to do more to identify and verify their customers' identities and to collect proof of registration on beneficial ownership registers (where relevant). Letting agency businesses and firms in the art market, as well as crypto-asset exchange providers and custodian wallet providers, are also required to apply these CDD measures in conjunction with all other obligations that spring from the Money Laundering Regulations 2017, as amended. MLD V lowered reporting thresholds that apply to electronic money and prepaid instruments (such as anonymous payment cards). It forces firms to generate more information about beneficial owners.

• Enhanced due diligence (EDD). EU member-states have had to take a more standardised approach to various things. Their firms, for instance, have to apply enhanced due diligence to business relationships with HNW customers or transactions involving highly risky non-EU countries. The directive has expanded the triggers for EDD to include transactions relating to oil, precious metal, arms, tobacco products etc. These have all become new risk factors to be considered.

• A wider reach. The scope of the directive extends the reach of EU money-laundering legislation to persons beyond those subject to the Regulations of 2017, including: virtual currency providers and custodian wallet providers; art traders (with transactions of €10,000 or more); and estate agents who deal with letting transactions of €10,000 or more a month). Business entities that carry out intermediary services similar to accountants and tax advisors are also subject to money-laundering regulations for the first time. These changes are intended to close loopholes and to account for changes in people's behaviour that spring from new technology. In some areas, the Regulations of 2019 take a wider approach than that of the European directive. For example, they provide a wider interpretation of “crypto-assets” which captures exchange, security and utility tokens.

• Express trusts. English express trusts and some non-EU express trusts are required to register with Her Majesty's Revenue & Customs’ Trust Registration Service. The 2019 Regulations bring the beneficial ownership register into the public domain. The Regulations of 2017 had already opened this register to the gaze of people with a legitimate interest in seeing it, but now the public can look as well. The 2019 Regulations now include the registration of beneficial owners of taxable trusts, including express trusts. Firms will also be required to update their records to describe the beneficial ownership of corporate clients accurately. If there are any discrepancies between the details that a firm holds and those held by Companies House, the new mandatory "discrepancy reporting requirement" will require the firm to report the difference to Companies House. An exception does, however, apply if the information is protected by legal professional privilege.

Obligations to register – what should a crypto-asset firm do?

All relevant entities were required to register with a supervisory body. The Financial Conduct Authority is the appointed supervisory body for crypto-asset businesses. Therefore, any new crypto-asset businesses that are set up now, or after 10th January this year, must be registered with the FCA before they commence any activity. For crypt-ocurrency businesses that were already in existence prior to the aforementioned date, the date of registration was extended to 10th January 2021.

MLD V and Brexit

With the Brexit "transition period" scheduled to come to an end on 31st December, there is much debate about the UK’s adoption of the EU’s legal and regulatory rules afterwards. Article 89 of the Political Declaration (which sets out some vague rules for the future relationship between the UK and the EU) states that the nation and the bloc agree “to support international efforts to prevent and fight against money laundering and terrorist financing, particularly through compliance with Financial Action Task Force standards and associated co-operation.”

Further amendments to global AML/CTF standards are expected in the near future. In December 2019, the EU promised to reform its AML/CTF regime by producing a sixth Money Laundering Directive (MLD VI). As a leading member of the FATF, the UK is likely to pass legislation on the subject that is very similar to the EU's in future.

* Jonathan Greenstein can be reached at Jonathan.Greenstein@complyport.com