The Role of EU Anti-Money Laundering Directives (AMLD) in Combating Money Laundering and Terrorism Financing Crimes

The Role of EU Anti-Money Laundering Directives (AMLD) in Combating Money Laundering and Terrorism Financing Crimes

Contents

  1. The Definition
  2. The 1st, 2nd, and 3rd EU Anti-Money Laundering Directives
  3. The 4th EU AML Directive (4AMLD) came into effect on June 26th, 2017
  4. The 5th EU AML Directive (5AMLD) came into effect on January 10th, 2020
  5. The 6th EU AML Directive (6AMLD) came into effect on June 3rd, 2021
  6. The 22 Anti-Money Laundering Predicate Crimes as per the 6th EU AMLD
  7. The Gist of EU Anti-Money Laundering Directives

The Definition

European Union (EU) Anti-Money Laundering Directives (AMLDs) are national legislations timely published by the European Parliament. The EU AMLD guidelines bridge the gap across all member states by bringing shared AML-CFT regulations and ascertaining regional typologies.

In December 2020, the EU implemented its 6th AMLD reforms to effectively combat Money Laundering and Terrorist Financing (ML-TF) threats. Previous to that, the EU’s 4th AMLD and 5th AMLD proved to be important AML-CFT regulatory trendsetters, closely observed and much talked about internationally.

The implementation of each new EU AML Directive would mainly be commensurate with the emerging ML-TF typologies, i.e., regional criminal methodologies, to be adopted by the respective states within a set deadline. The below content will discuss in detail the 4th, 5th, and 6th EU AMLDs and how each new version of the regulatory obligations set up the advanced measures to control region-specific ML-TF threats.

The 1st, 2nd, and 3rd EU Anti-Money Laundering Directives

1st EU AMLD implementation, 1991 – 1AMLD was introduced to control narcotics-related money laundering crimes. Identity verification and Suspicious Transaction Reporting (STR) were made compulsory for financial and obligated non-financial institutions.

2nd EU AMLD implementation, 2001 – The 2AMLD widened the scope of AML-CFT-regulated financial and non-financial institutions, as it also enhanced the space of money laundering predicate crimes. In addition, 2AMLD guidelines aligned with the FATF recommendations and were introduced to help the EU member nations follow international AML-CFT standards unanimously.

3rd EU AMLD implementation, 2005 – Basically, 4AMLD is a more stringent version of 3AMLD. The 3rd Directive introduced a Risk-Based Approach (RBA) model signifying the importance of Customer Due Diligence (CDD), Simplified Due Diligence (SDD), and Enhanced Due Diligence (EDD) practices. In addition, it brought the legal and accounting services under the AML-CFT scope to bring reforms in taxation and corporate operations. The Directive also added casinos as the non-financial obliged entities for heightened scrutiny.

The 4th EU AML Directive (4AMLD) came into effect on June 26th, 2017

The 4th EU AML Directive introduced an array of AML-CFT guidelines, which marked the future of AML risk regulations within the European Union. In addition, the major Financial Action Task Force (FATF) recommendations were also in line with 4AMLD to assist the member nations in pursuing the universal AML-CFT measures. 

The key features of the 4AMLD covered the risk-based approach, ongoing monitoring, beneficial ownerships, Customer Due Diligence (CDD), Politically Exposed Persons (PEPs), record keeping, and reporting obligations towards the Financial Intelligence Units (FIUs). 

Customer Due Diligence (CDD) reforms brought Designated Non-Financial Businesses and Professions (DNFBPs), credit finance, gambling, and e-money products/services under the regulatory ambit. Customer Due Diligence (CDD) measures in e-money and e-wallet; prepaid-card thresholds to hold anonymous payments were introduced. 

At the same time, all business and personal transactions exceeding €10,000 thresholds were also called for the Customer Due Diligence (CDD) procedures for better, controlled AML-CFT measures.

Ultimate Beneficial Ownership (UBO) declaration was made compulsory to record the nature of business and beneficiaries’ corporate and other wealth possessions. Trusts, in specific, were required to maintain clear records of their beneficiary trustees. In addition, the respective entities must keep updated the ownership information, which must be accessible to the authorities and departments with right-to-information.

Financial and other regulated institutes were required to adopt a Risk-Based AML-CFT Model to monitor client-risk profiles. The process would calculate the risk based on their nature of business, high-risk products/services, topography, transactional volumes, clients’ creditors and suppliers, etc. 

Local high-risk individuals were included under Politically Exposed Persons (PEPs) risk, with 4AMLD. The institution must validate Simplified Due Diligence (SDD) to avoid future risks. At the same time, all PEPs, domestic and international, would fall under Enhance Due Diligence (EDD) category.  Tax evasions began to be counted as money laundering predicate crimes, and reporting tax solicitor advice became obligatory to exercise better AML-CFT measures. The 4th EU AMLD applied Sanctions, imposed in the form of fines, on firms and individuals who don’t abide by the EU compliances.

The 5th EU AML Directive (5AMLD) came into effect on January 10th, 2020

Regulatory measures on cryptocurrencies drew main attention through the 5th EU AMLD or 5AMLD. The focus was on bringing more transparency for better AML-CFT measures in regulated financial and non-financial institutions.

Cryptocurrency (Crypto) Regulations – The 5AMLD brought the cryptocurrency and cryptocurrency exchanges under crypto AML-CFT rules. Both must be registered with the state financial authorities. Furthermore, the respective state Financial Intelligence Units (FIUs) were also given the rights-to-information on crypto owners and exchanges to repel the anonymity of the crypto userbase.

In short, the cryptocurrency or virtual assets must fulfill all AML-CFT-related Customer Due Diligence (CDD) and Suspicious Transaction Reports (STRs) obligations defined by the EU AMLD to be performed by other financial ‘obliged’ entities.

Ultimate Beneficial Ownership (UBO) – The member nations were required to inter-link their UBO registry within the EU states for strengthened identity verifications. The 5AMLD also brought forth the Company UBO registers accessibility to the public; and the bank accounts registers to the private domains, for instance, the state authorities.

Politically Exposed Persons (PEPs) – For better vigilance and individual risk-based identifications, an EU-level PEP list was also introduced that coexists with a conventional state-level PEP list. Furthermore, it stated that the PEPs also include the roles and the functions of individuals deemed to be politically disclosed.

Prepaid Cards – 5AMLD also reduced the prepaid-card payment thresholds with more rigorous monitoring, restricted transactions outside the EU, and brought limits to the transactions with the states without effective AML-CFT regulatory standards. It also introduced compulsory KYC identity verifications of the card holders holding €150 or above.

High-Value goods – The Directive placed special AML-CFT CDD measures in art and antiquities for transactions above €10,000. Gems, jewelry, precious stones, and other high-risk products, including arms, tobacco, and historical, cultural, and archaeological artifacts, were also included in the list.

High-risk countries – Enhanced Due Diligence (EDD) on high-risk nation customers was made obligatory to overcome the money laundering and terror financing loopholes. Additionally, identifying the nature of business relationships and the transactions, ultimate beneficiaries, and Source of Wealth (SoW) investigations became the compulsions.

The High-Risk nations listed by the EU are Afghanistan, Barbados, Burkina Faso, Cambodia, Cayman Islands, Democratic People’s Republic of Korea (DPRK), Haiti, Iran, Jamaica, Jordan, Mali, Morocco, Myanmar, Nicaragua, Pakistan, Panama, the Philippines, Senegal, South Sudan, Syria, Trinidad and Tobago, Uganda, Vanuatu, Yemen, and Zimbabwe.

After 5AMLD, the individuals and business executives who had to roll their sleeves up in terms of application of AML-CFT standards were virtual currency exchangers, estate agents, rental mediators, art traders, and investors applying for residency or citizenships.

There are a set of EU nations against which the EU AMLD authorities have formally sent a notice asking about their 5AMLD noncompliance. Additionally, the EU has asked these nations to apply the proposed EU AML-CFT measures, or they would be subject to financial penalties. These AMLD non-abiding EU nations are: – i. Belgium, ii. Cyprus, iii. The Czech Republic, iv. Denmark, v. Estonia, vi. France, vii. Greece, viii. Hungary, ix. Ireland, x. Luxembourg, xi. Netherlands, xii. Poland, xiii. Portugal, xiv. Romania, xv. Slovakia, xvi. Slovenia, and xvi. Sweden.

The 6th EU AML Directive (6AMLD), issued on December 3rd, 2020; came into effect on June  3rd, 2021

The 6AMLD discusses the following guidelines – 

  • regulatory harmonization to create an extensive money-laundering predicate offense list, thereby reinforcing financial penalties and minimum 4-year imprisonment for non-compliance,
  • coinciding the AML-CFT regulations with the ever-increasing criminal methodologies, for instance, by adding up cyber-crimes as an AML predicate crime,
  • enhancing the scope of financial institutions and state authorities to empower them with more regulatory controls they can exercise as part of AML-CFT measures,
  • better Know Your Customer (KYC) regulatory coordination among the member states to perform standard, identical measures and Sanctions, 
  • along with conducting ML-TF crimes, ‘aiding and abetting’ is also included under the scope of money laundering, which means not only the criminal but those who have profited from the crime must be prosecuted as well,
  • improved communication and information sharing amongst the EU member states to speed up transborder ML-TF trials,
  • beneficial ownership must include companies or partnerships, contrary to the earlier definition that includes only individuals as legal persons,
  • inter-state cooperation for prosecuting dual AML criminality cases involving two or more jurisdictions, wherein a crime is committed in one state, and the money is laundered in another, 

enhanced identity and judicial safeguards for whistle-blowers who aid state authorities in unearthing money-laundering and terrorism-financing-related activities.

The 22 Anti-Money Laundering Predicate Crimes as per the 6th EU AMLD

Participating in an organized crime group or racketeeringTerrorismHuman trafficking and migrant smuggling
Sexual exploitationIllicit trafficking in narcotic drugs and psychotropic substancesIllicit arms trafficking
Illicit trafficking in stolen and other goodsCorruptionFraud
Counterfeiting currencyCounterfeiting and pirating productsMurder
Kidnapping and hostage-takingRobbery or theftSmuggling
Tax crimes relating to direct and indirect taxesExtortionForgery
PiracyInsider trading and market manipulationEnvironmental crime
Cybercrime

The Gist of EU Anti-Money Laundering Directives 

The EU Parliament issues EU AMLD Directives to meet the international AML-CFT standards set by the FATF, Egmont, Basel Committee, Wolfsberg, etc. The 1AMLD only focused on banks and conventional money laundering crimes; eventually, as the crime typologies took various routes, the 2AMLD ran parallel with the continually updating FATF regulations.

The 3rd AMLD emphasized the importance of enhanced due diligence measures to combat terrorism-related crimes. The 4th AMLD brought in the gambling sector (beyond mere casinos) under the obligated AML-CFT institutions. The Directive also recommended adopting risk-based diligence, evidence-based measures, and centralized registers for beneficial ownership data retrieval.

The 5th AMLD strengthened regulations around prepaid cards, cryptocurrencies, crypto exchanges, and PEPs more susceptible to bribery, corruption, and related malpractices. Finally, the last and the most recent 6th AMLD presented some milestone AML-CFT measures covering AML harmonization, predicate crimes, inter-state KYC cooperation, beneficial ownership for companies, and enhanced protection for whistle-blowers.

Book a free AML-KYC Due Diligence Compliance Solution Demo with our IDMerit Customer Success team. Learn more about EU Anti-Money Laundering Compliances for your Business.

Jay Raol
Jay Raol

Jay Raol has been a Media Manager, Entrepreneur, Political Analyst and an Environmentalist. He aspires to climb the mighty Himalayas, and learn a new language every year. He lives in the beautiful city of Carlsbad in Southern California and owns a great collection of books. He is on schedule to publish his first book; 'Thou Art, Dope'. Co-founded two companies that provide futuristic solutions to the world while being quite enthusiastic about helping and investing in technology startups.

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