FinTechs warned over AML regulation preparation

Many FinTech firms will struggle to implement the new requirements of the upcoming 5th Anti-Money Laundering Directive (5MLD) coming into force on 10 January 2020, according to LexisNexis Risk Solutions.

The global analytics provider argued that businesses must ensure that they are taking the necessary steps to prepare for the impending regulation, or risk facing penalties for regulatory breaches.

Prompted by recent events, including the Panama Papers leaks, increased money laundering risks of cryptocurrencies and significant changes to the nature and frequency of terrorist attacks, the EU is cracking down on money laundering and terrorist financing with new legislation.

The UK government recently consulted with industry on the introduction of 5MLD, but has yet to issue a response.

LexisNexis has launched a guide outlining the key areas of the directive that the FinTech sector must account for in order to ensure compliance:

• Obliged entities: 5MLD has extended the scope of sectors classed as ‘obliged entities’ to include virtual assets such as cryptocurrencies, virtual asset service providers such as digital wallets, and high value art traders. These newly regulated sectors will need to implement full AML and counter-terrorist financing controls, to meet their new obligations.

• Politically Exposed Persons (PEPs): Member states will be required to maintain an up-to-date list of prominent functions that qualify as politically exposed persons in their respective countries. Key to maintaining compliance will be ensuring that the lists used for screening contain the holders of these functions for each state and are accurate, complete, up to date, and conform to Financial Action Task Force guidelines. Firms will also potentially face changes from currently used PEP definitions.

• Beneficial owners: Member states will be required to maintain registers of beneficial owners of corporate and other legal entities. Ownership information will need to be made public to those with ‘legitimate interest’ and must be accurate and verifiable.

• Customer due diligence: Where possible, 5MLD mandates that firms should be using electronic verification in their due diligence processes.

• Enhanced due diligence: To safeguard transactions that involve high risk countries with weak anti-money laundering controls, 5MLD mandates a common interpretation of enhanced due diligence measures which all obliged entities must follow.

• Prepaid cards: Card holders will need to be identified, and customer due diligence conducted for any prepaid card that has a value of €150 - or €50 if the card is purchased remotely - lower than the previous value of €250.

• Enhanced powers for FIUs: Financial Intelligence Units will have the authority to obtain a firm’s payment transaction registers and electronic data, even when a Suspicious Activity Report has not been filed.

Michael Harris, director of financial crime compliance and reputational risk at LexisNexis, explained that with such a broad financial landscape, criminals have more channels than ever to exploit and abuse, resulting in greater risks to society.

“Until now, digital currencies have been unchartered waters for regulators, so greater controls are welcome, and organisations need to take all necessary precautions to become compliant ahead of January.

“Failure to comply will have wide-reaching ramifications, both for organisations and society, so firms must leave no stone unturned when it comes to meeting the obligations of 5MLD,” he continued, adding: “We also fully expect that further regulatory updates will quickly follow.”

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