On 10th January 2020, the 5th Anti-Money Laundering Directive (5AMLD) came into force in the 27 member states of the EU (and in the UK prior to the end of the Brexit transition period).
In this blog, we explore how the financial industry has responded to these new rules relating to the disclosure of Ultimate Beneficial Ownership (UBO) details, as well as how the member states in the EU are progressing towards the creation of publicly available UBO registries.
5AMLD and UBO - a recap
Prompted in part by the release of the Panama Papers leak in 2016, 5AMLD introduced a number of new measures for fighting financial crime in the EU including:
- Increasing the transparency of beneficial ownership information
- Broadening the scope of the regulation to new types of service providers such as letting agents, art market participants and cryptocurrency to fiat money exchange and custodian wallets
- Harmonising and clarifying the Enhanced Due Diligence requirements for high-risk third countries
- Improving the identification of Politically Exposed Persons (PEPs)
- Lowering the threshold requirement for Customer Due Diligence (CDD) on prepaid cards.
Focusing specifically on ultimate beneficial ownership (UBO) information, 5AMLD sets out requirements both for obliged entities and member states with respect to national beneficial ownership registers.
Financial institutions (considered under 5AMLD to be ‘obliged entities’), during client on-boarding and ongoing monitoring, must now verify and collect appropriate evidence from the relevant beneficial ownership registry as part of Customer Due Diligence for entities that are themselves required to register UBO information. Complicating matters further is now an additional obligation for financial institutions to report to the registry within 30 days when there is a discrepancy between the data they hold and that within the register.
Member State Registries
For member states, the key requirements under 5AMLD enhance the 4AMLD rules for corporates and taxable trusts to obtain and hold information on their beneficial ownership and to register this with the national register. Access to this data was restricted to competent authorities, Financial Intelligence Units and obliged entities for the purposes of CDD.
Under 5AMLD, not only do all trusts have to register UBO information, all national registries must make all UBO data publicly available (though a legitimate interest has to be demonstrated for access to UBO information about trusts) and only charge access fees that are in line with the administration and maintenance costs of the registry.
Challenges for Financial Institutions
In the UK and some other European countries, the discrepancy reporting requirement has been quite a significant challenge, not least because the systems to report any discrepancies were not made available to financial institutions until (or even after) 5ALMD was in force on 10th January 2020.
We asked David McCurdie, Senior Expert in Financial Crime Prevention at Nordea about this: “In January, I had to react to the ‘Discrepancy Reporting Requirement’ in the countries which actually have established a Central Beneficial Ownership Registry (Denmark and Sweden), having had very little forewarning as to what their solution would be. In fact, we were only introduced to one such solution on the very day the requirement came into force. Of course, we always seek to collaborate with authorities as much as is practicable, but this particular one did represent something of a challenge for us!”
It was a similar situation for financial institutions in the United Kingdom, with Companies House only announcing how discrepancies should be reported on 10th January.
Availability of Data
But the challenge doesn’t end there. Despite the requirement for member states to establish official national registries and make the data publicly available, some countries have not yet achieved this. David McCurdie explains:
“In the Nordics, Finland and Norway do not have ‘official’ central BO registries established yet but we are working very closely with both countries with respect to the availability of data from their registries and the discrepancy report-back solution that they’ll provide.”
A report by Global Witness released in March 2020 showed that “17 of 27 member states (63%) do not yet have a centralised register of the beneficial owners of companies which is available to the public” which includes some countries who were not even compliant with the AMLD4 requirement to give access to those with a legitimate interest. In addition, only 5 member states (plus the UK) have centralised UBO registries which are free to access and publicly available.
Quality of Data
A final challenge is that there is still some way to go before regulated firms are satisfied with the quality of UBO information available from corporate registries. Speaking to Livia Benisty, Global Head of Business AML at Banking Circle, she said:
“The key issue remains whether we have enough trust in corporate registers to use them as sources of either information or verification. Until the details on there are independently verified, we may still need to get that reassurance elsewhere.”
Until or unless independent verification of corporate registry data becomes a regulatory requirement, regulated firms will continue to conduct time-consuming research to validate UBO details, often using secondary and tertiary sources with potentially poor data quality.
Kyckr and 5AMLD
One means of ensuring that all UBO information tallies with what is in corporate registries is to use a solution such as Kyckr. With real-time access to over 180 corporate registries, including most European countries, regulated firms can ensure they have the most recent UBO details associated with their customers, reducing the need for discrepancy reporting.
Every time a regulatory change is introduced, new challenges emerge for regulated firms. Amongst other things, 5AMLD strengthened the requirements around the need for UBO information to be accurate and reliable. Sourcing this data - and reporting any discrepancies - has proved to be a challenge, not least because the delay in the EU countries themselves creating company registries in line with the rules. Regulated firms can guard against any further changes in the requirements for UBOs by using automated solutions such as Kyckr to ensure they always have the most comprehensive and recent data.