Asset Management & Investment Funds: EU & International Developments - April 2018

Fifth Anti-Money Laundering Directive

On 19 April 2018, the European Parliament announced that it voted to adopt the proposed Fifth Money Laundering Directive (5AMLD). The European Parliament published a provisional text of 5AMLD. The Parliament requires the European Commission to revert to Parliament if it replaces, substantially amends or intends to substantially amend the proposal. The next step is for 5AMLD to be formally adopted by the Council. It will enter into force 20 days after it has been published in the Official Journal of the EU. According to the provisional text, Member States must transpose the provisions of 5AMLD into national law 18 months after the entry into force date.

On 25 April 2018, the Council of the EU published an information note (including the draft text) following the European Parliament's first reading of 5AMLD. 

Some notable features of 5AMLD are set out below.

  • EU FIUs (police financial intelligence units) will be given new powers to request ML/ TF financing information from firms and will be given direct access to beneficial ownership information held by firms. Co-operation and information- sharing between EU FIUs will also be improved.
  • Providers of exchange services between virtual currencies and fiat currencies will be brought into scope, together with custodian wallet providers.
  • Enhanced due diligence requirements for financial transactions to and from high-risk third countries will be refined.
  • Member States will be required to introduce centralised national bank and payment account registers or central data retrieval systems and these will be directly accessible by EU FIUs.
  • Firms, when entering into a new business relationship with a corporate (or other legal entity), which holds a register of beneficial ownership will be required to obtain proof of registration or an excerpt of the register.
  • Firms will be obliged to report discrepancies they find between the beneficial ownership information available in the central registers and the beneficial ownership information available to them. In the case of reported discrepancies, Member States will be obliged to ensure that appropriate actions be taken to resolve the discrepancies in a timely manner and, if appropriate, a specific mention may be included in the central register in the meantime
  • Beneficial Owners of corporate or other legal entities will be obliged provide those entities with all the information necessary to comply with the requirements (to maintain a register of beneficial ownership).
  • Helpfully, in the context of PEPs, each Member State will be obliged to publish a list of prominent public functions.  The Commission will be obliged to publish a list of EU prominent public functions. The Commission will be obliged to publish a combined list of the Member State and EU lists of prominent public functions
  • Member States may choose to make the information held in their national central register of beneficial ownership available on the condition of online registration and the payment of a small fee. The accessing of such information would then be traceable.

Regulation on investment requirements under the MMF Regulation

On 10 April 2018, the European Commission adopted a Delegated Regulation on simple, transparent and standardised (STS) securitisations and asset-backed commercial papers (ABCPs), requirements for assets received as part of reverse repurchase agreements and credit quality assessment methodologies under the Regulation on money market funds (MMFs). The Delegated Regulation concerns MMF investment requirements and

  • ensures alignment of those requirements with corresponding provisions of  the STS Securitisation Regulation (which had not been finalised before the MMF Regulation was adopted)
  • specifies the quantitative and qualitative liquidity requirements for collateral received as part of reverse repurchase agreements
  • specifies the credit quality assessment methodology for the assets in which the MMF will invest.

The next step is for the Council of the EU and the European Parliament to consider the Delegated Regulation. If neither of them objects, it will enter into force twenty days after it is published in the Official Journal of the EU. It will apply from 21 July 2018, with the exception of Article 1 which will apply from 1 January 2019. The MMF Regulation enters into force on 21 July 2018.

GDPR: ESMA asks Article 29 Working Party to amend draft guidelines on derogations under Article 49

On 13 April 2018, ESMA published its response (dated 22 March 2018) to the Article 29 Working Party's February 2018 consultation on draft guidelines on Article 49 of the General Data Protection Regulation (GDPR).

The draft guidelines concern derogations relating to the transfer of personal data to "third countries". ESMA's response focuses on the importance of the "public interest derogation", which applies to international transfers of personal data necessary for important reasons of public interest. This is particularly important in the context of international co-operation between EU and non-EU financial supervisors so as to achieve effective financial supervision in the context of global financial markets. ESMA seeks some clarifications in the draft guidelines and considers that clarity on the scope of the derogations is essential to enable EU financial supervisors to fulfil their missions, while ensuring compliance with applicable EU data protection requirements (in particular, in the absence of comparable legal requirements in the relevant third countries).

ESAs report on risks and vulnerabilities in EU financial system

The Joint Committee of the European Supervisory Authorities (ESAs) published its ESA report for the second half of 2017 on risks and vulnerabilities in the EU financial system which finds the following risks as potential sources of instability:

  • sudden repricing of risk premia as witnessed by the recent spike in volatility and associated market corrections
  • uncertainties around the terms of Brexit
  • cyber-attacks
  • climate change and the transition to a lower carbon economy. 

The ESA report repeats the warning to retail investors investing in virtual currencies.

The ESAs advise the following policy actions by European and national competent authorities as well as financial institutions:

  • supervisory stress testing (repricing risk)
  • considering timely mitigation actions to prepare for Brexit including possible relocations and actions to address contract continuity risks (Brexit risk)
  • improving fragile IT systems, explore inherent risks to information security, connectivity and outsourcing (cyber risks)
  • considering sustainability risk in governance and risk management frameworks and develop responsible, sustainable financial products (climate change risk).

Proposed Directive to protect EU whistleblowers

The European Commission adopted a package of measures, including a draft directive, to protect whistleblowers reporting breaches of EU law. The proposed new directive will set minimum standards guaranteeing protection for whistleblowers who report breaches of a wide range of EU laws, including those relating to financial services, environmental protection, consumer protection, product and transport safety, data protection and privacy, as well as competition law and corporate tax (including VAT) rules. The directive would require Member States to establish safe channels for reporting both within an organisation and to public authorities. It would protect whistleblowers against dismissal, demotion and other forms of retaliation and require national authorities to inform citizens and provide training for public authorities on how to deal with whistleblowers.

Anti-Money Laundering/Combating the Financing of Terror/Corruption

5AMLD

On 19 April 2018, the European Parliament announced that it voted to adopt the proposed Fifth Money Laundering Directive (5AMLD). On 25 April 2018, the Council of the EU published an information note (including the draft text) concerning the outcome of the European Parliament's first reading of 5AMLD. The key highlights are summarised above.

A draft Directive on the use of financial and other information for the prevention, detection, investigation or prosecution of certain criminal offences has been introduced as part of the AML/ CTF reform package.

FATF private sector consultative forum: financial services aspects

On 24 April 2018, the Financial Action Task Force (FATF) issued a press release with a summary of issues discussed at its April private sector consultative forum. The forum is designed to give private sector representatives the opportunity to engage directly with the FATF and its members on AML/ CTF issues. Issues discussed that may be of interest to financial services practitioners include the following:

  • Combatting de-risking. This is a key priority for the FATF. Participants considered the latest market developments and ongoing initiatives to address de-risking. They discussed remaining challenges and the potential next steps, including through co-ordinated action at the international level, and by national policy makers, supervisors, financial institutions and industry bodies.
  • FinTech and RegTech. Participants discussed the private sector's experience of using digital identities to identify and verify their customers for the purposes of customer due diligence (CDD), as part of the on-boarding process. They also discussed the regulatory landscape for crypto-assets, and the extent to which the current FATF standards and guidance adequately address recent developments in this area. A more detailed summary of the discussions in this area has been published alongside the press release. To support financial innovation that is resiliant to money laundering and terrorist financing, the FATF launched a new platform
  • Risk-based approach for securities sector. Participants discussed ongoing work to develop risk-based approach guidance for the securities sector. In particular, they discussed the ML/ TF risks that are unique to this sector, as well as the role of intermediation and reliance. Participants also discussed the type of relationships covered by FATF recommendation 13 (on correspondent banking) in this sector, and the potential risk factors, indicators and measures to mitigate those risks.
  • Risk-based approach for life insurance sector. Participants exchanged views on ongoing FATF work to develop risk-based approach guidance for the life insurance sector (updating 2009 guidance). In particular, they discussed the scope and focus of the guidance, the nature and level of money laundering and terrorist financing risks associated with different types of life insurance products and their risk mitigating factors. They also discussed situations where simplified due diligence (SDD) and enhanced due diligence (EDD) could be applied.

Date published: 02 May 2018