anti money laundering directives

Evolution Of Anti Money Laundering Directives: Key Advancements You Need To Know

Since the last decade, Regulatory bodies have faced challenges in fighting Money Laundering. Regulatory Bodies like European Union seem highly committed to knowing everything about the clients for keeping strong checks. For this purpose, they have initiated a periodic practice called Anti Money Laundering Directives. Basically, these are the regulatory requirements implemented by the European Union containing stringent policies to combat Money Laundering. This article is a key to 5 key advancements in the Anti Money Laundering Directives.

Overview of Anti-Money Laundering Directives

AML Directives are necessary regulatory policies in European Union. Primarily, they are applicable in the countries that are a part of the European Union. Mainly, mitigating the threats of Money Laundering and Terrorist Funding is necessary through these regulations. Basically, there are 6 Anti Money Laundering Directives that defined the boundaries for entities to stay compliant with KYC/AML guidelines. Notably, these directives are based on the guidelines provided by FATF (Financial Action Task Force). So, the EU Anti Money Laundering Directives are the procedures to prevent criminals from compromising the financial system.

It is the EU Parliament that issued the AML guidelines in progressive form within 31 years to date. Also, the EU is making further enhancements and planning to introduce the 7th Directive for AML soon. Below here is the “Timeline of Anti Money Laundering Directives” which explains the two phases in which rules against Money Laundering became stringent.

Timeline Anti-Money Laundering Directives

Firstly, the timeline shows two phases in which the 6 directives for AML are explained. The first phase is from 1991-2007 having 1st, 2nd, and 3rd directives. These three directives define the basis of Anti-Money Laundering guidelines, regulations & procedures. Moreover, they had many loopholes and progressively the need for superseding directives was direly felt. Below here is the Timeline of Anti Money Laundering Directives.

Timeline of AML Directives

Phase-1 of Anti-Money Laundering Directives

As the timeline shows, 1st - 3rd AML Directives are aimed towards introducing a systematic approach to combat Money Laundering.

1st AML Directive - 1991

  • Visibly aimed toward the prevention of Money Laundering in Financial Systems
  • A requirement imposed on financial institutions to perform CDD (Customer Due Diligence)
  • A requirement imposed on financial institutions to report any suspicious activity to authorities
  • Generally, it covered credit unions and financial institutions

2nd AML Directive - 2001

  • Improved version of 1st Anti-Money Laundering Directive covering a wider range of entities.
    Mainly, it included auditors, accountants, high-end goods dealers, and real estate agents
  • Introduced the role of Member States in establishing the Financial Intelligence Units (FIUs).
    A Requirement was imposed on businesses to have Anti-Money Laundering procedures, policies & Internal controls.

3rd AML Directive - 2005

  • It enhanced customer due diligence (CDD).
  • Improved the consistency in National Measures against Money Laundering
  • Further improvements in the role of Member States, measures, and policies.
  • Introduced the Employee Training for Risk Assessment and Strengthened the CDD.
  • Improved measures for International Cooperation and Coordinated activities against Money Laundering and Terrorist Funding.

Phase-2 of Anti Money Laundering Directives

Even after much stringency, Money Laundering was still on the rise, and criminals took advantage of loopholes in the system. Consequently, these loopholes hindered the overall financial security through KYC and AML regulations. After 2007, Money Laundering and Terrorism Funding hiked like never before. This is why the EU decided to implement an updated and enhanced version of the Anti Money Laundering Directive. So, the second phase of AML Directives has the following details:

Fourth Anti-Money Laundering Directive

It was Issued in 2015 and implemented in 2017, the 4th AML Directive has the following outline:

  • Primarily, it is aimed to combat Money Laundering and Terrorist Funding.
  • Scope: Banks, Financial Institutions (FIs), and DNFBPs such as Lawyers, Accountants, and Real Estate Professionals.
  • Entities are obligated to take a risk-based approach in Anti-Money Laundering initiatives.
  • CDD (Customer Due Diligence) measures are to be taken for occasional transactions above a specific amount and frequency. UBOs and customers are identified and verified during the CDD.
  • EDD (Enhanced Due Diligence) was introduced for high-risk customers and situations. Entities are obligated to apply EDD measures to ensure the second tier of verification.
  • UBO Register is to be set up by the Member States in which the beneficial owner's information of companies and trusts is recorded.

5th AML Directive

In 2018 the 5th AML Directive was introduced. It was implemented in 2020 taking 2 years for further proceedings.

  • Extended scope defines guidelines for Virtual Currency (Cryptocurrency and etc.).
  • It also defines the guidelines for prepaid cards and updated payment methods.
  • Beneficial Ownership explains the new requirements for improved transparency for making the criminal approach difficult to use for hiding assets.
  • The stringent Due Diligence verification process is one of the core parts of the 5th Anti Money Laundering Directive.
  • Centralized Bank Account Registers are established by Member States allowing authorities detailed investigation.
  • Criminal Sanctions are also refined and made more stringent in the 5th AML Directive. Basically, it harmonizes sanctions for Money Laundering all across the EU including penalties for a minimum to most serious cases.

6th AML Directive

So far, the 6th Anti Money Laundering Directive is the latest updated version of AML regulations issued by the EU. Primarily, it removes the loopholes present in the previous Directive and focuses on the domestic legislation of the Member States.

  • The Directive expanded the scope of AML regulations further and accommodates tax-related services, art dealers, and other entities.
  • For the first time, a directive listed the ‘Cyber Crime’ as a predicate offense.
  • The EDD in the 6th AML Directive introduces measures for high-risk third-world countries and enlisting them.
  • Suspicious transactions are to be reported to the FIUs in three working days.
  • Sanctions, penalties, and punishments became more stringent for implementing AML regulations.

Conclusive Thoughts

Overall, the EU’s Anti Money Laundering Directives proved to be a concrete advancement in fighting Money Laundering. Money Laundering and Terrorist Financing are prime concerns of global financial regulatory bodies. Now, every country is striving to fight Money Laundering for which public awareness is necessary. Also, staying compliant with the regulation of KYC/AML becomes easier if proper guidance is given to everyone. Similarly, the concerned personnel must embrace the importance of prevention of Money Laundering and other Fincrime. Through our KYC AML Guide, we provide a comprehensive description for staying compliant with ease.

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