In July 2021 the European Commission set forward a series of proposals for a complete reform of the European Union’s Anti Money Laundering regime. The proposals contained the establishment of an:
- Anti-money Laundering Authority (AMLA)
- The first AML Regulation
- The 6th AML Directive, and
- A ‘recast’ regulation governing the transfer of funds and certain crypto assets.
The Commission’s AML package is going through the ‘ordinary legislative procedure’ process. Here the European Parliament and Council of the European Union separately and independently review and propose amendments to the Commission’s Proposals. In December 2022, the Council adopted its position (its amended proposals), and last Wednesday (19 April 2023) the European Parliament, via procedural motion, agreed its position and to enter into interinstitutional negotiations (the trilogue process). Trilogues are meetings between the Commission, Council and Parliament, with the purpose of drafting a compromise text which is agreeable to all parties. Once this is done the legislative proposal returns to the Council and Parliament for approval. It is possible that all parties will agree and approve the final text this Summer.
One theme that has emerged during this legislative process is that while the Commission’s proposals were seen to be bold at the time, with the passage of time both the Council and the Parliament have expressed an interest to be bolder.
The texts of the various proposals are long and detailed. Hence, this briefing note seeks to compare the proposals set out by the Commission, Council, and Parliament on a limited number of topics covered in the Regulation (which will form the basis of the new Single European Rulebook for anti-money laundering and the prevention of terrorist financing) and the Directive which places obligations on Member States.
For the Regulation, this briefing note zones in on the following set of themes:
- Who are the Obliged Entities (Subject Persons) – Article 3
- Compliance Functions – Article 9
- Identification of Beneficial Owners for corporates – Article 42
- Limits to large cash payments – Article 59
For the Directive this briefing note outlines aspects of the new proposed interconnected pan-EU beneficial ownership registries
- Beneficial Ownership registers – Article 10
- Specific access rules to beneficial ownership registers for the public – Article 12
- Real Estate Registers – Article 16
The developments in this legislative package are expected to be of direct interest to subject persons. For further information please do not hesitate to contact us on +356 2124 0363 or [email protected]
Charles Cronin, CFA
Head of Customer Relations and Business Development – Diligex
21 April 2023
Article 3 – Obliged Entities
Commission’s Proposal – Obliged Entities, or Subject Persons in Malta, are the entities that fall in scope of the EU’s AML regime. Building on the Fourth and Fifth AML Directives the Commission proposed to increase the list of entities with the inclusion of persons trading in precious metals and stones, crypto-asset services providers (though currently supervised in Malta under the VFA regime), crowdfunding service providers, creditors of mortgage and consumer credits, and investment migration operators.
Council’s Proposal – is more granular, for example persons trading in precious metals and stones have been further defined as ‘jewellers, and goldsmiths’. ‘Works of Art’ have become ‘Cultural goods’. The Council has increased the scope of the Regulation by including ‘horologists’. These persons do not fall in scope of the Regulation until the value of a transaction or linked transactions meets or exceeds €10,000, which makes it consistent with the current regime. Crypto asset services providers have been reclassified as financial institutions; hence deleted from Article 3 and brought in scope through inclusion under definitions in Article 2. The Council have also introduced a group called ‘third-party financing intermediaries’ who operate digital platforms in order to match or facilitate the match of funders with project owners. These are distinct from ‘crowdfunding services providers’, who are defined in Article 2(1)(e) of Regulation (EU) 2020/1503 – as a legal person who provides crowdfunding services.
Parliament’s Proposal – significantly increases the number of activities that become obliged entities, through increasing the number of business activities and lowering thresholds. The activities of professionals goes beyond tax advice to include investment or personal finance. Certified debt collectors, wealth and asset managers become obliged entities. The range of activities for notaries and lawyers that could fall in scope increases through the inclusion of the buying and selling of virtual property and the opening or management of crypto assets accounts. The monthly rental threshold for real estate agents is reduced to €5,000. Property developers are brought in scope, as are persons trading in luxury goods, other than metals and stones. There is a new Annex IIIa which defines luxury goods, which includes motor vehicles, aircraft, and watercraft that exceed €50,000 in value, and garments and clothing accessories that exceed €5,000 in value. The thresholds for jewellery and clocks etc., is set at €5,000. The threshold for works of art is reduced to €5,000. Persons providing services for the sale and purchase of unique and non-fungible crypto assets are also brought in scope. Online platforms which make it possible for consumers and traders to conclude distance contracts become obliged entities where payments exceed €10,000. Another new category is the football sector which includes sports agents, high-level professional clubs, and football associations which are members of the European Football Association.
Article 9 – Compliance Functions
Commission’s Proposal – as the basis of the new single AML rulebook the requirements of the compliance function are very detailed compared to very limited coverage in Article 46 of AMLD4. Key phrases of interest are that the compliance manager should be appointed from one executive member of the board of directors. The compliance manager shall be responsible to implement the obliged entity’s policies, controls, and procedures. The board shall also appoint a compliance officer in charge of day-to-day operation of the AML policies, and responsible for reporting suspicious transactions. Depending on the size of the business the functions of the compliance manager and compliance officer may be performed by the same person. Obliged entities ‘shall’ provide the compliance function with adequate resources (staff and technology) in proportion to the size, nature and risks of the business. Obliged entities shall ensure powers to propose any measures necessary to ensure effectiveness of policies, controls and procedures are granted to those responsible.
Council’s Proposal – is very similar to the Commission’s but refers to the appointment of the compliance manager from the management body. Scope is set out to develop the compliance function through any legal provisions (from the AML Authority), and any administrative act issued by any supervisor. The Council exceeds the Commission by including text to make sure that the compliance officer’s decisions are not harmed or unduly influenced by commercial interests; the compliance officer is also protected against retaliation, discrimination, and any other unfair treatment.
Parliament’s proposal – Is more granular than the Commission’s. Other notable features are that compliance officers cannot be dismissed unless it is unreasonable for the obliged entity to retain their services. In such circumstances obliged entities must notify supervisors of the dismissal of a compliance officer with the reasons for dismissal. The Parliament’s proposal extends upon the Commission’s which allows under certain circumstances for the compliance manager and compliance officer to hold both roles with the inclusion of ‘other functions’.
Article 42 – Identification of Beneficial Owners for corporate and other legal entities
This Article in itself is extensive and wide-ranging, hence the focus in this briefing note is limited to Beneficial Owners within corporates.
Commission’s Proposal – the existing 25% plus one remains. However, the discretion of Member States to lower this level of ownership is removed. The Article goes into depth on defining ‘control via other means’, which we summarise as: the right to appoint or remove more than half of the board of directors; the ability to exert significant influence on decisions (veto rights, decision rights, decisions regarding profit distributions), ‘or leading to a shift in assets’; control through formal or informal agreements; links with family members of managers or directors and those owning or controlling the entity; and use of formal and informal nominee arrangements. The Commission’s proposal starts to develop the requirement of beneficial ownership registries – which appear in Article 10 of the Directive – by requiring Member States to draft a list of corporate and other legal entities, with their beneficial owners to be passed to the Commission by 3 months after the date of application of this Regulation.
Council’s Proposal – slightly lowers the beneficial ownership threshold to 25% or more. The Council through this Article and in Article 2 ‘Definitions’, seeks to provide further clarity on the term beneficial owner. It further develops the Commission’s term ‘control via other means’, by including aspects in this definition in ‘control of a legal entity’ where it effectively includes most the definitions of ‘control via other means’ as defined in the Commission’s proposal. What is not included here appears further in this Article. The Council agrees with the Commission proposal requiring Member States to draft beneficial ownership lists to be passed onto the Commission, under the 3 month deadline. The Council adds that categories of corporate entities that are associated with higher money laundering and terrorist financing risk, where it is appropriate to mitigate this risk, to set a lower beneficial ownership threshold for those defined as having an ‘ownership interest’. The Council empowers the Commission to define that lower threshold.
Parliament’s Proposal – reduces the threshold of beneficial ownership to 15% plus one. However, this threshold is further reduced to 5% for extractive industries, and legal entities deemed to be exposed to higher levels of risk from money laundering and terrorist financing. On the topic of ‘control via other means’, like the Council the Parliament is more granular on this topic and includes the concept of control through ‘debt instruments, or other financing arrangements’.
Article 59 – Limits to large cash payments
Commission’s Proposal – AMLD 4 and 5 are silent on large cash payments, though in Malta this has already been regulated through LN 81/2021. The Commission’s proposal covers any persons trading in goods or services, who may only accept cash payment up to €10,000 in a single or linked series of transactions. The Commission allows Member States to set a lower threshold in consultation with the European Central Bank. Transactions between natural persons not acting in a professional function above the €10,000 threshold are exempt, as are deposits at credit institutions, though in this latter case, such deposits are notifiable to the Member State FIU. Member States are required to take appropriate action, including appropriate sanctions, against natural or legal persons who breach this Article.
Council’s Proposal – Largely follows the Commission’s proposal, with the following exception. It extends the exemption for deposits over €10,000 to include electronic money institutions, and payment institutions along with credit institutions. It leaves it to the discretion of Member States to make such deposits automatically notifiable to the Member State FIU, but notes the obligation to report suspicious transactions to the FIU. The Council also adds an exemption for transactions between central banks, and a force majeure facility in the event of a national ‘unavailability’ of payments by other means.
Parliament’s Proposal – follows the Commission’s with a few additions. Concerning cash transactions, the Regulation will apply equally to residents and non-residents in a Member State. The Parliament removes the Commission’s exemption for payments between natural persons not acting in a professional function where the transaction relates to land and real estate, precious metals and stones, and other luxury goods, corresponding to the thresholds set out in new Annex IIIa. The Parliament also adds a new Article 59a concerning payments in crypto assets without the involvement of a crypto-asset services provider. Here the limit is set at €1,000, unless the customer or beneficiary can be identified.
Article 10 – Beneficial ownership registers
Commission’s Proposal – AMLD 4 and 5 require Member States to maintain up-to-date and accurate registers of beneficial ownership for corporates, and trusts. Competent authorities and FIUs should have unrestricted access to these registries. They should also be able to provide registry information to competent authorities and other FIUs in other Member States. Provision is also set out for the future development of interconnected registries with other Member States. The Commission’s proposal now extends coverage of the registry to legal arrangements. The information to be collected is set out in Article 44 of the Regulation. The scope also covers nominees shareholders and directors to report the underlying nominator to the legal personality for inclusion into the national registry (Article 47 of the Regulation). Where there are reasons to doubt the accuracy of beneficial ownership on a Member State register, Member States shall ensure that legal entities, and legal arrangements provide additional information on a risk sensitive basis. The bodies charged with maintaining corporate registries are required to keep the registries accurate and up-to-date. Where they believe there are discrepancies in information they must mention the fact on the entry, and this should be at least available to competent authorities and obliged entities. The body in charge of the registry is given powers to carry out checks, on-site investigations, and to sanction corporates and other legal entities for inaccurate information. All Member State registries must become interconnected under the European Central Platform, established under Article 22(1) of Directive (EU) 2017/1132.
Council’s Proposal – largely follows the Commission’s proposal, but extends registration to legal entities who are outside of the EU when they acquire real estate, are awarded public procurement for goods and services or concessions, or enter into a business relationship within the European Union.
Parliament’s Proposal – extensively expands the text, largely to increase the operational efficiency, and independent governance of Member State registries. Member States are to include in their registries beneficial ownership of legal entities and legal arrangements from outside the EU, where they qualify under Article 48 of the Regulation. In the Commission’s text this is where they do business with an obliged entity, or where they purchase real estate in a Member State. However, the Parliament’s amendments to Article 48 extend the text to include ‘land’ as well as real estate owned. Thereby bringing in land and existing ownership of real estate into the requirements. This information must also be available on the interconnected EU beneficial ownership database. Further registrars have to verify whether beneficial ownership information concerns people and/or entities targeted by financial sanctions.
Article 12 – Specific access rules to beneficial ownership registers for the public
Commission’s Proposal – AMLD 4 and 5 required registries of beneficial ownership which are accessible to competent authorities, FIUs, obliged entities in the course of customer due diligence, and any person or organisation that can demonstrate legitimate interest. In the Commission’s proposal Member States must make the following information on interconnected central registries available to the public: names and surnames, month and year of birth, country of residence, and nationality of the beneficial owners or senior management (where the beneficial owner cannot be identified), and the nature and extent of the beneficial interest held. The same applies for legal arrangements and trusts. Member States may decide to include additional information such as date of birth or contact details. Member States may choose to make this information available to the public on condition of electronic authentication and payment of a fee that does not exceed the administrative costs of making the information available, including costs of maintaining and developing the register.
Council’s Proposal – limits access to information to natural and legal persons who can demonstrate a legitimate interest in having access to this information. Natural and legal persons deemed to have legitimate interest are journalists and civil society organisations connected with combating money laundering and terrorist financing, and persons who are likely to enter into transactions with a legal entity, and financial institutions and authorities in so far as they are involved in the prevention and combating of money laundering and terrorist financing.
Parliament’s Proposal – is significantly longer than the Commission’s and effectively improves upon the Council’s proposal. The information to be provided is more granular, as are the requirements to prove legitimate interest, and continue to have access. Access is granted across interconnected central registries. The following persons are deemed to have legitimate interest: journalists, or any form of expression in the media with an interest in prevention or combating money laundering or terrorist financing; civil society organisations for the same reasons; higher education institutions for same reasons, persons likely to enter into business transactions or business relationships with a corporate entity, legal entity or arrangement; persons likely to perform a task or engage in a business relationship for the same reasons, and financial institutions, external agents and services providers, and authorities, as part of their obligations to prevent money laundering and terrorist financing. The Parliament adds another Article 12a – Searches in Beneficial Ownership Register, which sets out the technical search criteria across the European Central Platform of the interconnected registries.
Article 16 – Real estate registers
Commission’s Proposal – provides for competent authorities to have access to information in a timely manner of any natural or legal person owning real estate. The information will include details on transactions including economic value, details of the natural and legal persons concerned, and also when appropriate, details of any legal arrangement for whom a legal or natural person acted on behalf of.
Council’s Proposal – does not amend the Commission’s proposal.
Parliament’s Proposal – considerably amends the Commission’s text, with the purpose of making the registries more efficient, and by increasing the scope of registries. In Article 16, ‘Land’ is added to real estate. There is also a requirement to identify beneficial ownership in cases of ownership via legal arrangements. The Parliament also adds three new articles. Article 16a on interconnection of registries. Article 16b requiring the provision of beneficial ownership information on motor vehicles, aircraft and watercraft whose estimated value exceeds €200,000 for competent authorities. Where the stated or estimated value of these items exceeds €2,000,000 the following information must be set out in the contract or proof of purchase: identification of all the parties involved in the transaction, the means of payment, and source of funds. Beneficial ownership must be recorded for legal arrangements, and foreign persons, as qualified by Article 48 of the Regulation. Article 16c access to beneficial ownership information contained in freezones.