Fighting money laundering and terrorist financing is a key priority for the European Union (EU) as it contributes to global security, integrity of its financial system and sustainable growth. Accordingly, the EU creates laws, such as the EU AML Directives, to prevent the financial market from being misused for these crimes.
The single-currency region periodically issues Anti Money Laundering Directives (AMLDs) for its member countries, who are supposed to implement them as part of domestic legislation. These directives are formed based on the risk assessments carried out by the European Commission.
While creating the AML directives, the EU looks to respond to the threats of money laundering and terrorist financing at an international level. It also works with various networks of competent authorities at the international level.
In this article, we look at the various AMLDs issued by the EU, some of the key features of the directives and their objectives.
The Early AMLDs
As a formal political and economic entity, the EU’s initial AML efforts date back to 1990 when it adopted the First Anti-money Laundering Directive (1AMLD). The directive mandated banks and other obliged entities to apply measures, ensuring traceability of financial information.
The directive requires that obliged entities shall apply customer due diligence requirements when entering into a business relationship. The entities were required to identify and verify the identity of clients, monitor transactions and report suspicious transactions.
This legislation has been constantly revised in order to mitigate increasing risks relating to money laundering and terrorist financing.
In 2001, the EU set in place the 2nd Anti-money Laundering Directive (2AMLD). It aimed to align the EU’s anti-money laundering framework with that of international organisations such as the Financial Action Task Force (FATF). The key improvement in the 2AMLD was that it expanded both the predicate offences in which money laundering could apply and identified high-risk businesses to monitor more closely.
In 2005, yet another revision was introduced, with the 3rd Anti-Money Laundering Directive (3AMLD). This directive aimed to expand the scope of anti-money laundering by including certain non-financial businesses and professions into its purview, such as legal services or accountancy firms.
The 3AMLD championed a Risk-based Approach (RBA) to Customer Due Diligence (CDD). This also paved the way for more complex and thorough processes, including Simplified Due Diligence (SDD) and Enhanced Due Diligence (EDD).
The 4th Anti-Money Laundering Directive (4AMLD)
Implemented in 2017, the 4AMLD is an improved iteration. It comes with safeguards to bolster many of the anti-money laundering provisions outlined in the 3AMLD.
It aims to curb illegal financial activity by urging financial institutions to increase their transparency, thereby taking more accountability if financial crimes do occur. It also encompasses measures to bring the EU’s regulatory compliance standards up-to-par with the FATF’s latest guidelines, ensuring consistency in AML policies across the world.
The 4AMLD has revisions to aid more transactions being monitored and CDD and Know Your Customer (KYC) practices. A unique feature of the 4AMLD is that it regulates e-money products for the first time. Some countries had the discretion to make exceptions to these regulations – as long as certain base conditions are met.
The 5th Anti-money Laundering Directive (5AMLD)
On 19 June 2018, the EU published the 5th anti-money laundering Directive, which amended the 4th anti-money laundering Directive, in its Official Journal. The Member States had to implement this Directive by 10 January 2020.
The amendments in 5AMLD were introduced to better equip the region to prevent the financial system from being used for money laundering and for the funding of terrorist activities. The key provisions of 5AMLD are:
- Increased transparency about who really owns companies and trusts to prevent financial crimes via opaque structures
- Better access to information for Financial Intelligence Units through centralised bank account registers
- Tackling terrorist financing risks linked to anonymous use of virtual currencies and of pre-paid instruments
- Improved cooperation and exchange of information between anti-money laundering supervisors and with the European Central Bank
- Broadened criteria for assessing high-risk third counties and ensure a common high level of safeguards for financial flows from such countries
The 6th Anti-money Laundering Directive (6AMLD)
The EU’s 6th Anti-money Laundering Directive (6 AMLD) came into effect on 3 December 2020 and it had to be implemented by regulated entities by 3 June 2021. The directive focuses on standardising the approach of EU member states to money laundering, as well as expanding the scope for potential liability for money laundering and the sanctions that member states are to impose under national legislature.
Its mission is to combat money laundering by giving the government and regulatory authorities more prosecuting power while businesses are to ensure compliance. The 6AMLD focuses on an extended list of predicate offences to better represent and address the growing problem of money laundering in the region.
In addition, the directive aims to extend criminal liability to legal persons (i.e. companies or partnerships). This implies that legal persons, as well as individuals in certain positions (representatives, decision-makers or those with authority to exercise control) who commit offences for the benefit of their organisation, can now be held criminally if they are caught money laundering.
The 6AMLD also implemented tougher punishments for money laundering and added the requirement for member states to cooperate with one another in the prosecution of money laundering crimes.
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