Cyprus: Fourth And 'Fifth' Anti-Money Laundering Directives: Implementing AML Updates And UBO Registers In Cyprus

The European Union's Fourth Anti-Money Laundering Directive 2015/849 (4AMLD), was adopted by the European Parliament and Council on 20 May 2015. It needs to be transposed into the domestic legislation of all EU member states by 26 June 2017. 4AMLD repeals and replaces the EU's (and world) current benchmark regime in this area, the Third Anti-Money Laundering Directive 2005/60/EC (3AMLD). The so-called 'Fifth' Anti-Money Laundering Directive (5AMLD) is in fact a set of proposed amendments to 4AMLD, looking to strengthen its core provisions in light of intervening terrorist events in Europe. The EU institutions currently aim to finalise 5AMLD by June 2017.

Cyprus is one of the 28 member states of the EU and currently implements EU anti-money laundering directives through the Prevention and Suppression of Money Laundering Laws 2007-2013 (AML Law). The Advisory Authority for Combating Money Laundering (AML Advisory Authority), a public-private industry representative body established under the AML Law, is working to coordinate with local industry participants in relation to the transposition of 4AMLD, and in due course 5AMLD, through legislative amendments to the AML Law. We outline an update of implementing measures in the "Implementation in Cyprus" section below.

Background and context of EU anti-money laundering legislation

In economic terms the EU is the world's largest economy, its largest trading bloc and the largest trader of manufactured goods and services1 . Legislatively, the EU is the global standard bearer in implementing the requirements of the Financial Action Task Force's (FATF) International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation Recommendations 2012 (FATF Recommendations). So it is fair to say that when the EU updates its AML regime the world takes note and tends to follow suit over time. The transition from 3AMLD to 4AMLD has been a long time coming but developments in the financial services industry since 2005

mean that is it somewhat overdue. We examine the differences between 3AMLD and 4AMLD in the "4AMLD: What has changed?" section below.

Pan-EU treatment of AML rules

The current pan-EU regime acknowledges that the threats of money laundering, terrorist financing and organised crime remain significant problems which need to be dealt with at a Union level, especially bearing in mind the freedom of capital movements and freedom to supply financial services within the Union's integrated financial area. To recap:

money laundering is a process by which the origins and ownership of money, generated as a result of criminal activity, can be concealed. In effect, money is "laundered" through legitimate means and, as a result, the proceeds lose their initial criminal identity and appear to have originated from a legitimate source

terrorist financing, on the other hand, refers to the use of the financial system to channel either lawful or illicit money for terrorist purposes

History of EU and Cypriot anti-money laundering laws

Council Directive 91/308/EEC provided for the First EU anti-money laundering framework (1AMLD) and was aimed predominantly at drugs-related offences. 1AMLD introduced obligations on credit and financial institutions to verify the identity of their customers and report concerns of money laundering. Furthermore, it established key preventative measures that we today treat as standard such as obtaining customer identification and due diligence prior to entering into a business relationship, record-keeping and central methods of reporting suspicious transactions. Cyprus2 was not a member state of the EU in 1991, so did not directly transpose 1AMLD. Nevertheless, as a ratifying party to both the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention) and the 1990 Council of Europe Convention on laundering, search seizure and confiscation of the proceeds of crime (Council of Europe Convention), Cyprus remained at the cutting-edge of AML law at the time through the passing of the Confiscation of Proceeds of Trafficking of Narcotic Drugs and Psychotropic Substances Law 1992. The 1992 law was repealed and replaced by the comprehensive Prevention and Suppression of Money Laundering Activities Law 1996 (AML Law 1996). The First Mutual Evaluation Report of the Council of Europe (1998) described the Cypriot regime at the time as being "significantly in advance of any other country in its geographic sub-region."

Directive 2001/97/EC (2AMLD) replaced 1AMLD in December 2001. 2AMLD widened the scope of predicate offences and businesses covered to ensure compliance with FATF developments. Of particular importance was the expansion of the regime beyond credit and financial institutions to cover professions such as lawyers and accountants. At around the same time, rules were developed to target terrorist financing, following the September 11 attacks in the United States. In Cyprus, no amendments were made to the AML Law 1996 to reflect developments in the EU under 2AMLD. However, the Council of Europe in its Second Mutual Evaluation Report (2001) noted "Cyprus has made since the first round further progress towards building an effective and robust anti-money laundering regime. With the exception of the legal professions, there is a strong commitment from all institutions in the system, including the private sector, to join the anti-money laundering effort."

3AMLD replaced 2AMLD in October 2005 to introduce the concept of a risk-based evaluation of anti-money laundering and terrorist financing with, for the first time, distinctions being made between standard due diligence and enhanced due diligence measures depending on the risk profile of the customer. 3AMLD importantly entrenched the regime against terrorist financing as a central tenet of pan-EU AML policy. Cyprus joined the EU on 1 May 2004 as part of the Union's eastward expansion. As a new member state, Cyprus fully implemented 3AMLD within the standard two-year window, following its adoption at EU level through transposition under the current AML Law in 2007.

4AMLD: What has changed?

In order of importance, the developments now are as follows.

Beneficial ownership registers

Article 30 of 4AMLD mandates that member states must use a central register to hold information on beneficial ownership for corporate and other legal entities incorporated or based in their jurisdiction. We examine this further in the section "Central register of beneficial ownership information" below.

Increase in focus on risk-based assessments

Importantly, persons and institutions covered by the 4AMLD (obliged entities) may no longer avoid conducting risk assessments against regulated credit and financial institutions based in the EU or in 'equivalent jurisdictions'. Instead, obliged persons are required to have regard to the risk variables set out in Annex I of 4AMLD and undertake simplified or enhanced due diligence as appropriate. Annex II of 4AMLD provides a non- exhaustive list of potentially lower risk factors for the due diligence assessment. Annex III includes a list of higher risk factors.

As relevant, obliged entities should consider the following when determining risk:

  • the purpose of the account or relationship
  • the level of assets to be deposited and size of transactions
  • the regularity or duration of the relationship
  • assessment of due diligence on beneficiaries of insurance or investment policies at the appropriate time

Abandonment of 'white list' of equivalent jurisdictions

As a consequence of the move to focus on risk-based analysis, the approach of 3AMLD to determine certain third countries as being 'equivalent' to the EU looks to have been abandoned3. Despite the superficial appearance of extra bureaucracy, this approach is to be welcomed, bearing in mind the often arbitrary results of the previous regime.

For example, the US AML regime was treated as being equivalent to the 3AMLD, even though it featured shortcomings in certain areas, such as in the context of fund administration and as relevant to lawyers and accountants in certain circumstances. Equally, the UK Crown Dependencies (Isle of Man, Jersey, Guernsey) were treated as equivalent to the EU whereas the UK Overseas Territories (Bermuda, Cayman Islands, British Virgin Islands) were not even though all of these UK territories earned favourable and materially similar reviews from their peer groups reviews.

Instead, under 4AMLD it will be for the obliged entities to make the determinations as to risks bearing in mind the specific fact pattern of their customer and the circumstances.

"De minimis" threshold lowered for certain obliged entities

The requirement to comply with due diligence requirements and other obligations under the 3AMLD applied to businesses trading in goods and making payments in cash in an amount of EUR15,000 or more, whether as a series or one-off transaction. Under 4AMLD, this threshold has been lowered to EUR10,000 and also applies to businesses receiving, as well as making, payments in cash.

Member state discretion to exclude low risk businesses

In certain limited circumstances (expressly excluding the money transmission industry) member states may issue bespoke safe-harbours to the application 4AMLD to businesses otherwise covered as obliged entities. To qualify, the 'financial activity' must be: firstly limited in absolute terms; secondly limited on a transaction basis; thirdly not the main activity of such persons; fourthly ancillary and directly related to the main activity of such persons; fifthly the main activity of such persons must not be an activity referred to in Article 2(1)(3)(a) to (d) or 2(1)(3)(f) of 4AMLD (covering accountants, lawyers, trust companies, estate agents, gambling service providers); and lastly the financial activity must be provided only to the customers of the main activity of such persons and not generally offered to the public. In practice, this safe-harbour is likely to apply to certain categories of businesses now potentially caught by the 4AMLD as a result of the lowering of the de minimis threshold (see above).

Extension to the entire gambling sector

Under 3AMLD only casinos were mandatorily caught as obliged entities. This has now been expanded under 4AMLD to cover gambling business in general. Online gaming businesses will now therefore be caught as a matter of EU law. Inclusion of tax crimes as a form of money laundering offence Under the list-based system of determining which underlying criminal offences may lead to 'predicate' money laundering offences being triggered, 4AMLD clarifies that tax evasion and other similar tax crimes will now be included as classes of underlying offence. Such development is consistent with developments in international rules under FATF principles since 2012.

Politically exposed persons (PEP)

The definition of Politically Exposed Persons (PEP) has been expanded to include domestic as well as foreign PEPs. In addition, extra certainty has been provided on the meaning of a PEP which includes the following:

  • heads of states and governments and ministers and their deputies and assistants
  • members of parliament or similar and members of governing bodies of political parties
  • members of high level courts whose decisions are not subject to appeal
  • members of courts of auditors or boards of central banks
  • ambassadors and similar and high ranking forces officials
  • members of the administrative, management or supervisory bodies of state-owned enterprises
  • directors, deputy directors and board members or equivalent of international organisations

Helpfully, mid-ranking or junior officials are specifically excluded. Finally, as with 3AMLD, the definition continues to catch close associates and family members of PEPs.

Extra focus on transparency

4AMLD contains a number of outright prohibitions on anonymous accounts or passbooks and restrictions on bearer shares. Further importance is placed on identifying the customer and verifying their identity, on the basis of documents, data and information from a reliable and independent source. In addition, obliged entities must assess and obtain information where appropriate on the purpose and intended nature of the relationship (source of funds).

Central register of beneficial ownership information

Perhaps the most important development under 4AMLD is the requirement for each member state of the EU (and by extension the European Economic Area, ie the 28 EU member states plus Iceland, Norway and Liechtenstein) of a central register of ultimate beneficial owners (UBO) of corporate and other legal persons.

Article 30 and 31 of 4AMLD set out the applicable rules on the collection, storing and access to information on UBOs. Under 3AMLD obliged entities were, of course, required to hold such information as part of their internal books and records. Under 4AMLD such information will move to be held on a centralised registry. Member states have discretion to hold the information in a commercial register, companies register or a public register. At this stage there is no requirement that member states open the centralised register to be accessible to the public.

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