4th Amendment Money Laundering Directive – Beneficial ownership in the spotlight

On 5 February 2013 the European Commission published their proposals (2013/0025 (COD)) for a Fourth Amendment to the European Directive in relation to money laundering (Directive 2005/60/EC of 26 October 2005). One of the key proposals relates to the collection by Member States of information identifying the beneficial ownership of companies. Whilst laudable in theory, the practical implementation of such a scheme has provoked much debate.

A register of beneficial ownership was quietly moved up the UK’s legislative agenda when the Queen addressed Parliament on 4 June 2014, although it appeared without reference to the Directive or money laundering, and buried amongst a host of other business related proposals. The Queen’s announcement of the Small Business, Enterprise and Employment Bill was as follows:

“New legislation will require ministers to set and report on a deregulation target for each Parliament. The legislation will also reduce delays in employment tribunals, improve the fairness of contracts for low paid workers and establish a public register of company beneficial ownership. Legislation will be introduced to provide for a new statutory code and an adjudicator to increase fairness for public house tenants.”

On 13th June 2014 the Council of the EU provided an updated Presidency compromise” on the Commission’s proposed 4th Money Laundering Directive. This provided:

With a view to enhancing transparency, beneficial ownership information should be stored in specified locations, for example in the case of companies in a public central company registry, or data retrieval systems, satisfying strict criteria of timely and unrestricted access to the information stored. In order to ensure a level playing field among different types of legal form, trustees should also be required to obtain, hold and provide to obliged entities taking customer due diligence measures, beneficial ownership information and to communicate this information to the specified locations or data retrieval systems and they should declare their status to obliged entities. Legal entities such as foundations and legal arrangements similar to trusts should be subject to equivalent requirements.”

Purpose

The proposals of the 4th Anti-Money Laundering Directive (4AMLD) are designed to bring further cohesion and cooperation across the EU to help prevent and reduce the ease with which criminals use company and trust structures to launder their illegitimate gains. The vast majority of businesses and their directors may not be concerned about this or may believe that it has little impact on their day to day trading. However the changes proposed are likely to add further levels of scrutiny and in relation to beneficial ownership, public scrutiny, which may well be unwelcome, albeit for honest and proper reasons.

Key Proposals

Of immediate importance to companies will be the requirement for Member States to ensure that corporate entities obtain and hold current and accurate information of their beneficial ownership (Article 29(1)). Member States must also ensure that this information is readily accessible by the relevant authorities such as Police, HMRC and the NCA (Article 29(2)).

It had been generally considered previously that the register would simply need to be accessible by the various government agencies, however the public status of the database is highlighted by the recent announcements by the Queen and the EU Council.

Beneficial ownership is defined by Article 3(5) as:

“Any natural person(s) who ultimately owns or controls the customer and/or the natural person on whose behalf a transaction or activity is being conducted. The beneficial owner shall at least include:

In the case of corporate entities:

The natural person(s) who ultimately owns or controls a legal entity through direct or indirect ownership or control over a sufficient percentage of the shares or voting rights in that legal entity, including through bearer share holdings, other than a company listed on a regulated market that is subject to disclosure requirements consistent with European Union legislation or subject to equivalent international standards.

A percentage of 25% plus one share shall be evidence of ownership or control through shareholding and applies to every level of direct and indirect ownership;

If there is any doubt that the person(s) identified in point (i) are the beneficial owner(s), the natural person(s) who exercises control over the management of a legal entity through other means.”

The definition of beneficial ownership requires careful thought by corporate entities especially during the formation process. If there is any doubt over the beneficial ownership then it would appear that the corporate entity or the State in relation to any public register, must consider who exercises control. This is likely to have tax implications because it may be in circumstances where there is uncertainty the answer determined as to beneficial ownership may differ from the intention of the owners or shareholders themselves.

Article 10 introduces a reduction in the limit to cash transactions where due diligence must be carried out. The limit previously applied was 15,000 Euro but the proposal is to reduce this to 7,500 Euro applicable to the trade of goods on an occasional basis. This may not prove to be too onerous for bigger businesses but it brings a new requirement for smaller businesses, where transactions previously fell below the limit. High Value Dealers can also expect to see this have a similar impact on the thresholds currently permitted for trades in cash.

Article 10 goes further and expands the requirement for the “gambling sector” to carry out due diligence on all transactions over 2,000 Euro. This sees a significant expansion from the current Directive which only applies to casinos. The expansion will cover many new entities which were previously exempt.

Conclusion

The 4th Anti Money Laundering Directive was published in February 2013 and prescribed that Member States have two years, until February 2015, to create domestic legislation to implement the changes. Given the relatively short time-scale which remains and the mention in the Queen’s speech we will expect to hear much more in the next few months.

Although the government is not broadcasting the changes loudly, the proposals mean that corporate entities will need to take advice and consider their own individual requirements so that they will not be caught out when the legislation is introduced.