AMLD5 was introduced in June 2018. The reason for this amendment was the increasing number of terrorist attacks and money laundering. This new directive targets virtual currency businesses, pre-paid cards, and art dealers. It has increased the scope of customer due diligence practices, to electronic KYC and online identity verification.
What is EU AML directive?
The anti-money laundering and counter-terrorist financing regimes of the European Union are developed for eliminating financial crime from the state. EU adopted the first AML directive in 1990 to prevent the use of the financial system for financial crimes like money laundering.
Since then the EU has given 4 other AML directives. The 5th AML directive was approved in June 2018. It is the response to several terrorist attacks that happened around the EU and the Panama papers leaks.
The fifth AML directive of 30th May 2018 came into force on 9th July 2018 and the deadline is 10 January 2020. The directive is tightening reins on virtual currency facilitators, wallets, etc and on the vendors selling expensive art products. This directive is aimed at covering the loopholes in current AML regulations of the EU.
The advent of FinTech enhanced the growth of financial sector and proved to be a venture for startups. Huge investments and several unicorns in FInTech increased competition in the industry. But it also increased the fraud risk. Because the industry is not very old and the global regulatory authorities are working on developing counter-crime mechanisms to prevent financial crime. The fifth AML directive is developed to stay one step ahead of financial criminals.
Key Amendments of 5th AML Directive
Identity verification threshold for prepaid cards
The prepaid card services were given the threshold of EUR 250 in the previous directive. But now the threshold is reduced to EUR 150. The service providers will have to perform identity verification on the person who makes the transaction or has deposited more than EUR 150 in his prepaid card account. This limit is on the monthly transactions and deposits. Also, the online transaction limit for identity verification is reduced to EUR 50.
In case a person deposits more than EUR 150 in his prepaid card account or makes an online transfer of EUR 50, the service provider will have to perform identity verification on the person.
Another regulation for the prepaid card is that the cards issued outside EU member states will not be accepted unless the country of issuance also practices the same AML regulations like the EU. These regulations are devised to control money laundering and terrorist financing in the European Union.
Traders of art and virtual currency facilitators also added to the scope of AML regimes
The fifth directive has widened the scope of AML regulations to art traders and virtual currency facilitators are also added to the scope of AML regulations. The identity verification and reporting requirements will be imposed on all transactions above EUR 10,000.
Other high-value goods that come under this regulation are oil, arms, tobacco, and precious metals. The reason behind widening the scope to these industries is the increase in exploitation of these industries in money laundering and terrorist financing.
Publically available PEP lists
The member states are guided to develop and maintain PEP lists that are publically available to the masses. The lists will include the offices and functions that qualify as politically exposed. Then EU will develop PEP lists for the masses to conduct fruitful AML screening.
Enhanced due diligence on clients from high-risk third countries
The fifth directive gave the list of some high-risk countries for KYC and AML screening protocols. The countries included in this list are Afghanistan, Korea, Syria, Iran, and Iraq. The businesses are required to perform enhanced due diligence on the clients from these countries or when accepting transactions related to these high-risk countries.
How will real-time KYC help in compliance with the fifth AML directive?
The fifth AML directive is developed to eliminate even the minor sources of money laundering and terrorist financing in the EU financial system. Online KYC and AML screening software is a feasible solution to cater to these problems. The reason being the global coverage and swift results provided with a high precision rate. Building and maintaining an in-house solution for KYC and AML screening solution is a costly and hectic task.
Most of the businesses in prepaid card services are in fintech and often these are startups. So developing such solutions and maintaining exhaustive global AMLD5 databases is not feasible for small businesses. Outsourcing such solutions is a global trend in the fintech industry.
Another thing that businesses need to practice for thorough compliance with these regulations is to develop in-house security protocols. The protocols will include Enhanced Due Diligence rules and processes, employee training, etc.
To wrap up businesses in EU and outside EU member states will be affected by the new directive. It will help prepaid cards, virtual currency and precious metal dealers and businesses in preventing risk through a proactive approach. Online KYC and AML screening will prove to be a long-term companion for these businesses in this era of digital transformation and rigid AML regimes.