Regulated firms not meeting their 5MLD obligations

There seems to be a lot of quite understandable concern that many regulated firms are not meeting their obligations under the Fifth Money Laundering Directive (5MLD).

Research from LexisNexis Risk Solutions showed that those in the banking, lending, wealth management and estate agency sectors who were surveyed are only 55% of the way through their 5MLD implementation plans. Not being fully compliant with 5MLD carries with it the risk of being fined by the Financial Conduct Authority (FCA).The fact that the FCA may have to take action many companies it oversees is worrying.

Critics of such companies will point to the fact that 5MLD came into force back in January, and so compliance should be complete as we now head into autumn. They may also argue that all the firms that were already compliant with the earlier Fourth Money Laundering Directive (4MLD) should have been well positioned to meet the requirements of the new Directive; especially as it is the latest attempt to combat the growing money laundering problem facing Europe.

So should this be portrayed as an obvious case of regulated firms showing a lack of willing or ability when it comes to tackling money laundering? I would argue that the picture is not quite as clear as that. For a start, the confusion surrounding the Directive itself and the myriad of different approaches being taken should shoulder at least some of the blame.

It should be noted that while the research I mentioned earlier was being carried out, financial professionals were asked to identify the aims of 5MLD legislation. Fewer than half of them were able to correctly identify that 5MLD was brought in to prevent the financial system being used for the funding of criminals or that its purpose is to strengthen transparency rules to prevent large-scale concealment of funds. The fact that professionals are unaware of such issues relevant to the risks involved in their work suggests a major communication breakdown.

The problem appears to be that the European Union (EU) is trying to use decentralised national authorities to deal with an international problem. Unsurprisingly, this results in differing approaches being taken and disparities between countries. It could be said that this was highlighted just a matter of weeks ago by the FinCEN Files leaks. These showed the ineffectiveness of the UK’s suspicious activity report (SAR) regime, as well as the UK’s weak use of data, poor implementation of technology to tackle money laundering and scope for companies to use offshore entities to disguise the beneficial owners of assets. It is extremely unlikely that each of these factors is being replicated in each and every other EU state. But it is likely they will each have their own problems when it comes to money laundering.

If the EU really wants to tackle the international problem, therefore, it will need one EU body to exist to take responsibility for coordinating all 5MLD enforcement efforts. Only by doing this will any efforts to tackle money laundering prove to be worthwhile, rather than merely the latest in a series of well-intentioned but relatively ineffective measures.

Hopefully, the EU may be coming to realise this. Over the summer, the European Commission published an action plan, setting out measures it plans to introduce over the next year to improve the enforcement, supervision and coordination of the EU’s anti-money laundering and counter-terrorist financing (AML/CTF) rules. It is an approach built on the effective application of EU rules, a single EU rulebook, EU-level supervision, a coordination and support mechanism for member states’ Financial Intelligence Units (FIUs) and enforcing EU-level criminal law provisions and information exchange.

As far as the UK is concerned, the impact of Brexit on this needs to be considered. The UK transitional period after Brexit is due to come to an end at the end of this year. For now, the UK will continue to apply EU rules during the transition period. But if we exit under a “no-deal”, which is being threatened, there is, as yet, no clear indication whether the UK will adopt the enforcement of this legislation. This could bring a further lack of clarity to the UK’s already patchy approach to tackling money laundering.

By Nicola Sharp, Legal Director, Rahman Ravelli