AML scrutiny tightens as new regulations take effect
Although the UK is set to leave the EU at the end of the month, that doesn’t stop the EU’s fifth money laundering directive from coming into force today.
Not only have accountants got to contend with the annual self assessment headache, but with the new money laundering regulations, they will have to also tighten their AML compliance.
The new money laundering regulations were transposed into national law on 10 January after the Treasury issued an 88-page consultation back in April 2019, which garnered over 200 responses.
The new amendments clamp down on cryptocurrencies, increase due diligence for individuals and businesses in high-risk countries and has stricter conditions for e-money and pre-paid cards.
Although the outcome of the consultation has not yet been published, the UK remains an EU member state and so its obligations under the fifth money laundering directive will apply.
The new regulations have seemingly sneaked up on some accountants, with one 2019 survey flagging that 61% were not even aware of the changes. But firms that fail to comply with the new regulations could face a significant fine.
The fifth directive amends the 2017 regulations. David Winch, a director at Bartfields Forensic Accountants, points out that this makes it more difficult to absorb the content as opposed to repealing the 2017 Regs and issuing a completely new set of 2019 ones.
“It’s understandable that the government did this, but a bit of a nuisance for users such as accountants,” Winch told AccountingWEB. “No doubt some accountants are still catching up with some of the 2017 changes, such as the firm-wide risk assessment under reg 18.”
Electronic ID checks and due diligence
Enhanced due diligence plays a major role in the 5MLD, and the regulations also include a push towards Electronic ID checking as opposed to asking to see documents like passports.
David Winch wondered whether accountancy supervisory bodies and HMRC will lean on accountants and tax advisers to adopt electronic ID.
“For comparison, we have seen the supervisory bodies progressively leaning more on accountants to produce evidence of criminal records checks of firms’ owners and managers.”
Among the changes to broaden the circumstances in which enhanced due diligence (EDD) is required, Winch says a new detail to watch out for concerns the requirement to obtain “information on the source of funds and source of wealth of the customer and of the customer’s beneficial owner”.
“Previously EDD has appeared to be concerned primarily with obtaining extra confirmation of the ID of the customer – but the real money laundering issue has to be about the source of the customer’s funds, not just their ID. This is now more recognised in the regulations,” said Winch.
Elsewhere, there is also a new responsibility to report discrepancies in registers under Reg 30A. But Winch expects in practice accountants will “pragmatically just say to their clients ‘we need to get the correct information on the register’ and get it sorted that way, rather than reporting a discrepancy to the Registrar”.
Another significant change is the clampdown on virtual currency, which up until now has been unexplored territory for regulators. This means cryptocurrencies will come into scope for the first time.
FA Simms and Partners Richard Simms highlighted the need to regulate crypto assets when he summarised the consultation, noting that “they’re online, their ownership is often unclear and have no set territories, and evidence suggests that they can be part of illicit activities”.
“Similarly, e-money and pre-paid cards are now more tightly regulated.
Trust registration service
One element that won’t immediately come into force with the rest of 5MLD is the trust registration service. This should come as a relief for agents and professional bodies like the CIOT, which has voiced concern that the scope of the existing trust register would have been significantly extended due to the directive.
HMRC confirmed to the CIOT and ATT that the trust registration elements will be part of a more detailed technical consultation regarding the implementation in early 2020. “Trust Registration Services must contain a robust and proportionate framework, and this consultation will include additional information on the proposals for the type of express trusts that will be required to register, data collection and sharing, and penalties,” noted HMRC.
HMRC’s response demonstrates that 5MLD is not the end of the road and further regulatory updates will surely be in the pipeline throughout this year.
Leave no stone unturned
The 5MLD directive is the latest in the government's effort to tighten scrutiny on AML compliance and respond to money laundering costing the UK an estimated £37bn each year.
As part of this, the past year has seen the launch of the Office for Professional Body Anti Money Laundering Supervision (OPBAS). The supervisory body made waves back in April 2019 by criticising accountancy bodies for a lack of enforcement action and prioritising subscription numbers over supervision.
HMRC’s “more robust approach to supervision” also means that its AML fees increased by 230% in order to recruit a greater number of staff to tackle non-compliance. However, yesterday HMRC reversed its decision to hike estate agents' AML registration fee 24 hours before these new regulations became a legal requirement.
Michael Harris, director of financial crime compliance and reputational risk at LexisNexis welcomed the greater controls but warned organisations to take all necessary precautions to become compliant ahead of the deadline.
“Failure to comply will have wide-reaching ramifications, both for organisations and society, so firms must leave no stone unturned when it comes to meeting the obligations of 5MLD.”