14Fifth Anti-Money Laundering Directive
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Committee’s assessment |
Legally and politically important |
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Cleared from scrutiny; drawn to the attention of the Home Affairs, the Treasury and the Justice Committees |
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Document details |
Proposal for a Directive amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC |
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Legal base |
Articles 50 and 114 TFEU; ordinary legislative procedure; QMV |
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Department |
Treasury |
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Document Number |
(37927), 10678/16 + ADDs 1–2, COM(16) 450 |
Summary and Committee’s conclusions
14.1In December 2017 the European Parliament and the EU Member States agreed on amendments to the EU’s Anti-Money Laundering Directive (AMLD).226 The legislation requires banks and other businesses handling financial transactions (“obliged entities”) within the EU to apply due diligence to their customers, and report suspicious activity to the authorities. Since 2015 the legislation also obliges EU countries to maintain central registers of the beneficial ownership of both companies and express trusts.
14.2Under the changes to the Directive now agreed, which we have summarised in more detail in paragraphs 14.22 to 14.24 below, businesses and public authorities in the EU227 will face the following new requirements:
- the obligation to perform anti-money laundering checks will be extended to auditors, accountants, tax advisors, auction houses and estate agents (the latter only when renting out property where the monthly let is €10,000 (£8,824)228 or more);
- each EU country will need to create a central register or retrieval mechanism for ownership of bank accounts, enabling Financial Intelligence Units like the UK’s National Crime Agency to identify account holders;
- Member States will have to grant public access to information held on each EU country’s Register of Trusts, subject to a “legitimate interest” test, the conditions for which must be defined in law by each individual Member State;229
- in addition, access to the Register of Trusts must also be granted to any member of the public in relation to a trust which holds or owns a controlling interest in a company that is not incorporated in the EU (and is therefore not included in any Member State’s register of beneficial ownership of companies);
- Member States must put in place mechanisms to ensure that information on beneficial ownership in their registers of both companies and trusts is “adequate, accurate and current”; and
- Member States will have to ensure the interconnection between each other’s respective registers on companies and trusts via a Central Platform by early 2021.230
14.3The Economic Secretary to the Treasury (John Glen) informed us of the agreement on the new Directive by letter of 17 January 2018.231 He explained that the agreed legislation “meets many of the UK’s negotiating priorities, including avoiding public access to our register of trust beneficial ownership; ensuring appropriate criteria against which high-risk third countries will be assessed; and requiring other EU Member States to follow our leadership in establishing public registers of company beneficial ownership”.232 He noted, however, that a possible exemption from enhanced due diligence for domestic politically-exposed persons—which has been subject to controversy in the UK233—was not included in the final legislation. Instead, the European Commission will have to publish a report on this issue in 2019.
14.4The Directive is expected to be adopted by the European Parliament in mid-April 2018 and by the Council shortly after. Its transposition will be staggered, with changes to the Register of Companies likely to be due by November 2019; the enhanced access to the Register of Trusts taking effect in January 2020; and the live date for the register of bank accounts scheduled for June 2020. The European Commission is also tasked with ensuring that the national Registers of Trusts and Companies are interconnected by early 2021.
14.5We thank the Minister for this latest update on this important new Anti-Money Laundering Directive, which makes substantial changes to the scope and operation of anti-money laundering rules in the UK.
14.6Although the date when most of the new Directive is to take effect falls well beyond the UK’s scheduled date of exit from the EU in March 2019, it now appears likely the Government will agree to a post-Brexit transitional arrangement during which the UK would effectively stay in the Single Market to avoid an abrupt change in the trading relationship between the UK and the EU. In return, the other Member States have said234 the UK would have to continue applying EU law for the duration of that arrangement as if it were still an EU country. On balance, given the Government itself is seeking a transitional period, we consider it likely that most, if not all, of the new AMLD will have to be transposed in the UK as a matter of law.
14.7The likelihood that the new Directive will be applied in the UK has several important legal implications:
- although the new legislation does not go so far as to provide a general right of public access to the Register of Trusts, it still creates, for the first time in UK law, a requirement on HM Revenue and Customs to release information on the beneficial ownership of trusts into the public domain. The legal framework for granting public access (and in particular the “legitimate interest” test) will need to be established in UK law, subject to consultation by the Government;
- we are also concerned that the Government will have to invest in a centralised retrieval system for information on bank accounts, which it flagged as an area of concern when the Directive was first proposed in 2016.235 It noted that this will require a “significant change” to current practice, where the National Crime Agency accesses bank account information via credit reference agencies and individual banks; and
- the Directive will compel the Government to invest in the interconnection of its Companies and Trusts Registers with counterparts across the EU, when that interconnection may be severed as a matter of law at the end of the transitional period. This area is problematic as the interconnection is scheduled to go live in January 2021, which is just beyond the end of the transitional period as proposed by the European Commission. It will be important to ensure that technical changes and the allocation of resources to this element of the Directive are commensurate with the benefits to the UK once it ceases to be part of the EU’s networks and structures.
14.8The Committee is also disappointed that the exemption from enhanced due diligence for low-risk domestic politically exposed persons (PEPs), supported by the Member States, was not included in the final text of the Directive. This means that the problems Members of Parliament and their relatives face in accessing basic financial services as a result of the AMLD will persist at least until the Directive ceases to have force of law in the UK.
14.9There also remain outstanding questions about the manner in which the information on beneficial ownership of both companies and trusts registered in the UK is verified by Companies House and HM Revenue and Customs, which manage these registers respectively on behalf of the Government. We wrote to the Minister on this matter following the publication of the European Commission’s supra-national risk assessment report on money-laundering, which recommended that information held on these registers is “verified on a regular basis”.236 It remains unclear to us how such verification is being resourced and carried out in the UK.237
14.10With respect to the implications of Brexit for UK-EU financial flows after the transitional arrangement ends, the Minister has refused to outline in any detail its proposals for a UK-EU financial services deal although he expressed the Government’s confidence that such a deal will be reached. In this respect, the Committee is disappointed that it is yet to receive a reply from the Minister to its letter to his predecessor on the “process for establishing regulatory requirements for cross-border business between the UK and EU” on financial services, proposed by the Chancellor in June 2017.238
14.11As the Government is, broadly, content with the final text of the new Directive, and given its imminent adoption by the Parliament and the Council, we now clear it from scrutiny. However, we ask the Minister to write to us as soon as possible with the information we have previously requested in relation to:
- the verification of information held on the UK’s central Registers of Companies and Trusts, especially in light of the new requirement in the 5th Anti-Money Laundering Directive that “mechanisms” are put in place to ensure that the information is “adequate, accurate and current”; and
- the Government’s proposal for a joint regulatory approach with the EU to financial services under a future UK-EU trade agreement, in view of the fact that the Government wants to begin negotiating the future UK-EU economic partnership in the next two months.
14.12We expect to receive replies from the Minister to our requests for information on both points by 16 February 2018. We also draw this new legislation to the attention of the Treasury Committee, the Home Affairs Committee and, in respect of the changes to public access to the Register of Trusts, the Justice Committee.
Full details of the documents
Proposal for a Directive amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC: (37927), 10678/16 + ADDs 1–2, COM(16) 450.
Background
14.13The EU’s Anti-Money Laundering Directive requires banks and other businesses handling financial transactions (“obliged entities”) to apply due diligence to their customers, and report suspicious activity to the authorities. It also obliges Member States to maintain central registers of the beneficial ownership of both companies and trusts, although there is—at present—no obligation to make the latter accessible to the public.
14.14In July 2016, following the revelations of tax evasion contained in the Panama Papers, the European Commission tabled a proposal for a fifth Anti-Money Laundering Directive. The proposal sought to:
- enhance the accessibility of beneficial ownership registers and include more people in them by broadening the definition of “beneficial ownership” of a corporate entity;
- clarify the requirements for the register of trusts, make it partially accessible to the public and provide that trusts need to be registered in the Member State where it is administered (i.e. each Member State where trustees are established) rather than where it is registered; and
- strengthen customer due diligence rules for banks and other obliged entities.
14.15At the time the Government expressed concerns about some elements of the proposal, notably the envisaged expansion of the number of people on the register of beneficial ownership of companies; the requirement to make the central register of trusts at least partially accessible to the public for those with a “legitimate interest”; and the obligation for each Member State to establish a central banking registry or retrieval system to allow for quick identification of the owners of a bank or payment account.239
14.16In December 2016, the Government nevertheless supported a Council general approach on the draft Directive which was in line with the UK’s priorities for the file.240 The European Scrutiny Committee considered the proposal legally and politically important at its meetings in September, October and November 2016, and February and November 2017, and consequently retained it under scrutiny.
14.17The European Parliament and the Council engaged in trilogue negotiations to agree on the final text of the legislation between March and December 2017. The Parliament’s position diverged significantly from the UK Government’s objectives, as it has been arguing in favour of mandatory public access to the register of trusts, a lower registration threshold for beneficial ownership of companies and new standards on anti-money laundering that third countries would have to adhere to in return for a trade agreement with the EU on financial services.
14.18The Committee last considered the proposal in November 2017, in light of the information provided by the Minister on the state of the trilogue negotiations.241 We noted that the possibility of private information about the beneficial ownership of UK trusts entering the public domain as a consequence of the new legislation was the most significant element of the draft Directive.
14.19In the context of the UK’s withdrawal from the EU, the Committee also noted that it was likely the new AMLD would have to be transposed in the UK during any post-Brexit transitional period, when EU law would be expected to apply in much the same as it does while the UK is still a Member State.242 In addition, it identified some potential consequences for British banks and businesses after the UK becomes a “third country” vis-à-vis the EU for anti-money laundering purposes, including the ability of the National Crime Agency to obtain information from EU counterparts and the inclusion of UK-registered trusts in the central registers of EU countries where the relevant trustees are established.
14.20Given the clear legal and political importance of the draft Directive, the Committee retained it under scrutiny pending further information about the outcome of the trilogue process.
The trilogue agreement of 13 December 2017
14.21On 13 December 2017 the Estonian Presidency of the Council and the European Parliament announced that they had reached agreement on the new Anti-Money Laundering Directive.243 The agreed changes to the AMLD include:
The scope of the Directive
- Auditors, accountants, tax advisors, auction houses and estate agents will be brought within the scope of the Directive, requiring them to perform anti-money laundering checks (the latter only when renting out property where the monthly let is €10,000 (£8,824)244 or more);
Beneficial ownership of companies and trusts
- The registration of beneficial ownership of trusts will have to take place in the Member State where the trustee is established or resides. If this is a country outside of the EU, the beneficial ownership of the trust must be registered in the Member State where a trustee enters into a business relationship or acquires real estate in name of the trust;245
- Member States will have to put in place “mechanisms” to ensure that information on beneficial ownership in their existing registers of both companies and trusts is “adequate, accurate and current”;
- In particular, “obliged entities” as well as competent authorities within the EU will be under an obligation to “report any discrepancies they find between the beneficial ownership information available in the central registers and the beneficial ownership information available to them” in relation to both companies and trusts;
- With respect to each national Register of Trusts, members of the public will have a right to seek access information on beneficial ownership held therein, subject to a “legitimate interest” test (to the conditions for which must be defined in law by each individual Member State);246
- In addition, members of the public must also be granted access to the Register of Trusts in relation to a trust which holds or owns a controlling interest in a company that is not incorporated in the EU (and is therefore not included in any Member State’s register of beneficial ownership of companies).
Centralised information on bank accounts
- The Directive requires the establishment, in each EU country, of a central register or retrieval mechanism for ownership of bank accounts, enabling Financial Intelligence Units (FIUs) like the National Crime Agency to identify account holders.
Interconnection of the EU’s national registers
- By 2021, the Directive will require the interconnection between all EU Member States’ respective registers on companies and trusts via a Central Platform to be managed by the European Commission.247
Information on ownership of property
- Member States will have to provide FIUs and competent authorities with access to information which allows the identification “in a timely manner” of any natural or legal persons owning real estate within their territory.
14.22The exemption from enhanced due diligence for domestic PEPs such as Members of Parliament, as proposed by the Council, has been removed at the request of the European Parliament. However, the agreement does include a review clause requiring the European Commission to consider the proportionality of applying enhanced due diligence measures to Politically Exposed Persons, and to publish a report addressing this point in the course of 2019. The final Directive also does not maintain the Commission’s proposed amendment to one of the criteria for identifying the beneficial owner of a corporate entity, which would reduce the registration threshold for beneficial ownership from 25% to 10% of shareholding for some companies.248
14.23The Austrian Government has laid a statement critical of the trilogue agreement, expressing its concerns that the Member States’ Registers of Trusts should be fully accessible to the public. It also noted that the amendments to the AMLD “enhances [the] lack of transparency of beneficial ownership of trusts even more as it provides for the anonymity of beneficial owners of certain types of trusts”.249
The Government’s view
14.24The Economic Secretary to the Treasury (John Glen) informed of us of the Government’s position on the agreement by letter of 17 January 2018. He explained that the new Directive “meets many of the UK’s negotiating priorities, including avoiding public access to our register of trust beneficial ownership; ensuring appropriate criteria against which high-risk third countries will be assessed; and requiring other EU Member States to follow our leadership in establishing public registers of company beneficial ownership”.
14.25With respect to public access to the Register of Trusts, the Minister notes that Member States will have to define in domestic law who should be considered to have a “legitimate interest” in information held on that register. The Government “will consider how best to consult with interested stakeholders on how this definition should be applied in the UK, in view of the fact that many trusts are established for personal or family reasons”. The Minister also welcomed the fact that the Directive will not require trustees to register in multiple EU countries, but only where the trust is administered.
14.26With respect to Brexit, the Minister reiterated the Government’s position that the objective of the transitional period is to ensure that “businesses should only have to plan for one set of changes in the relationship between the UK and the EU”. In addition, he expressed his confidence that the EU and the UK will “secure a deal on financial services” after the transition, because “it is in the interests of all parties to [do so] and we are confident in our ability to do so, as we start from a unique position of regulatory alignment”.
14.27In response to the Committee’s question about continued cooperation of the UK’s Financial Intelligence Unit (the National Crime Agency) with its EU counterparts after Brexit, the Minister refused to be drawn on the substance of the Government’s approach. He stated only that the ambition is to establish a “UK-EU relationship [that] can be kept versatile and dynamic enough to respond to the ever-changing threat environment; create an ongoing dialogue in which law enforcement and criminal justice challenges and priorities can be shared and, where appropriate, tackled jointly”.
14.28The Minister also explained that the Government will maintain the current AMLD-derived Anti-Money Laundering Regulations when the Directive ceases to apply to the UK, “subject to minor amendments necessary to rectify deficiencies within the legislation caused by the UK no longer being a member of the EU”. As a result, he says, there will be a continued legal basis for a register of trusts with UK tax consequences as established in July 2017.
14.29The new Anti-Money Laundering Directive is due to be adopted by the European Parliament on 18 April 2018 and by the Council shortly after. The Minister requested that the Committee clear the proposal from scrutiny in view of the finalisation of the legislative procedure, so that it can vote in favour of the Directive when it comes to Council for formal approval.
Transposition of the Directive
14.30The transposition date for most of the Directive, including the changes to the Register of Companies, will be 18 months after its publication in the Official Journal. If the legislation is adopted in April 2018 and published in the Official Journal in May, that date will fall in November 2019. The modified Register of Trusts would then have to be up and running by January 2020, and the central register of bank accounts by June 2020. The interconnection of the registers between Member States via the Central Platform would be scheduled to go live in January 2021, depending on the speed with which the necessary technical systems can be put in place.
14.31Although these dates all fall after the UK’s projected exit from the EU in March 2019,250 it now appears likely the Government will agree to a post-Brexit transitional period during which EU law would continue to apply in the UK as if it were still a Member State. In those circumstances, the new AMLD would have to be implemented if its transposition dates occur within that period (which, considering the Prime Minister has said the transition is likely to be “around two years”, is likely to be the case for all three types of register).
Previous Committee Reports
Eleventh Report HC 71–ix (2016–17), chapter 6 (14 September 2016); Fifteenth Report HC 71–xiii (2016–17), chapter 4 (26 October 2016); Eighteenth Report HC 71–xvi (2016–17), chapter 8 (16 November 2016); and Thirty-Second Report HC 71–xxx (2016–17), chapter 4 (22 February 2017); and Second Report HC 301–ii (2017–19), chapter 18 (22 November 2017).
226 Directive 2015/849/EU on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.
227 The new Directive is marked as “EEA relevant”. The EU and the EFTA-EEA countries will therefore discuss in the coming months how the Directive will apply to Norway, Iceland and Liechtenstein. The 4th Anti-Money Laundering Directive has not yet been incorporated into the EEA Agreement.
228 €1 = £0.88723
229 The Directive states that “the criteria and conditions granting access to requests for beneficial ownership information on trusts and similar legal arrangements should be sufficiently precise and in line with the aims of this Directive”.
230 This Platform is to be established under Article 22 of Directive 2017/1132/EU (the Company Law Directive).
232 The UK legislated for making the beneficial ownership of companies public from April 2016 onwards, even though this is not required by the current AMLD. However, it is not clear how information on beneficial ownership submitted to Companies House is verified. The new AMLD will require all EU countries to make information on beneficial ownership of companies public.
233 The provisions on due diligence for politically exposed persons (PEPs) in the fourth AMLD (which are meant to apply stricter requirements to business relations with people in high public office considered more likely to be in receipt of laundered money) led to controversy in the UK, because they led to some Members of Parliament and their families being refused bank accounts. See HC Deb 20 January 2016, vol 604, col 1519. The amendment proposed by the Council (but not included in the final Directive) would have allowed Member States to waive the stricter requirements for “domestic” PEPs altogether.
234 European Council guidelines for the Article 50 negotiations (15 December 2017).
235 Explanatory Memorandum submitted by HM Treasury (5 September 2016).
236 European Commission, “Supranational Risk Assessment Report“ (26 June 2017).
237 See for more information the letter from Sir William Cash to the Economic Secretary to the Treasury of 22 November 2017.
238 Mansion House speech by the Chancellor, 20 June 2017.
239 Explanatory Memorandum submitted by HM Treasury (5 September 2016).
240 The previous Committee had granted a scrutiny waiver allowing the Government to support this general approach in its Report of 18 November 2016.
241 See our Report of 22 November 2017.
242 The European Council’s guidelines of April 2017 identified a “prolongation of the acquis” as an option for the transitional period. Following the Government’s explicit request for a transitional arrangement which would keep UK-EU market access arrangements intact immediately following Brexit, the European Council stated again that such a transition would require the UK to continue applying EU law even as a non-Member.
243 Council of the EU, “Money laundering and terrorist financing: Presidency and Parliament reach agreement“ (20 December 2017). See also Council document 15849/17.
244 €1 = £0.88723
245 Where the trustees of a trust are established or reside in different EU countries, or where a trustee based outside the EU enters into multiple business relationships in the name of the trust in different EU countries, the amendment to the AMLD provides that 2a certificate of proof of registration or an excerpt of the beneficial ownership information in a register held by one Member State.”; may be considered as sufficient to consider the registration obligation fulfilled”.
246 The Directive states that “the criteria and conditions granting access to requests for beneficial ownership information on trusts and similar legal arrangements should be sufficiently precise and in line with the aims of this Directive”. The new legislation also requires full public access to each EU country’s register on beneficial ownership of companies to all members of the public, but this has already been legislated for in the UK.
247 This Platform is to be established under Article 22 of Directive 2017/1132/EU (the Company Law Directive).
248 The Government was concerned that this would increase the number of persons on the register and the costs to businesses, and create difficulties for complex corporate structures where there could be some companies within a group that would meet the 10% threshold while others would not.
250 The two-year Article 50 period ends on 29 March 2019. However, the UK’s exit from EU membership could take place on a different date if the Article 50 negotiating period is extended, or if the Withdrawal Agreement fixes a different date.
2 February 2018