The European Union (EU) has played a significant role in the design and implementation of anti-money laundering (AML) measures across the region. It has been issuing and constantly updating its directives to ensure that the regulatory framework within the EU remains robust and up to date with the fast-growing financial sector.
The 1st AML Directive
The EU adopted the 1st Anti-Money Laundering (AML) directive in 1991 with the purpose to combat financial crime. EU member states were required to transpose this directive and the upcoming ones into their national law, taking into consideration the specific risks they were facing. The directive required regulated entities to conduct Customer Due Diligence (CDD) procedures before establishing business relationships with their clients and at regular intervals. It also required transaction monitoring of accounts and reporting of suspicious transactions.
The 2nd AML Directive (2001/97/EC)
Published in December 2001, the 2nd AML directive expanded the types of predicate offenses and adopted a broader definition for money laundering. Additionally, it was brought under the scope of AML insurance companies, money transmitters/remittance service providers, investment firms and collective investments.
The 3rd AML Directive (2005/60/EC)
Coming into effect in 2005, and as a response to the financing of terrorism, the 3rd directive highlighted the obligations of obliged entities, to take measures, not only for money laundering prevention but also for terrorist financing. Designated Non-Financial Businesses and Professions (DNFBPs), including lawyers and accountants were now required to comply with anti-money laundering and countering financing of terrorism (AML/CFT) rules. The 3rd AML directive also introduced the idea of “the risk-based approach” which allowed obliged entities to take CDD measures taking into consideration the risk profile of the client. Where risks were lower, simplified due diligence (SDD) could be applied whereas, in high- risk cases, enhanced due diligence (EDD) measures would be appropriate.
The 4th AML Directive (EU 2015/849)
Following the updated FATF 40 recommendations in 2012, the 4th AML directive was issued in 2015 and applied all measures required by the FATF, ensuring consistency of EU member states’ national law.
With the main focus of the risk-based approach, it expanded further the “obliged entities” that were required to comply with AML rules to include all types of financial institutions and DNFBPs, including electronic money institutions and gambling services. It also lowered the threshold of transactions that need to be monitored.
The 4th AML directive also introduced the idea of a beneficial ownership registry that would be available to authorities and obliged entities. It also specified that the beneficial owner is any person who owns or has a controlling interest in an entity of more than 25%. All PEPs, domestic and foreign were to be subject to EDD.
The 5th AML directive (EU 2018/843)
Issued in 2018, the 5th AML directive amends the 4th AML directive. It expands further the definition of obliged entities to include crypto exchanges, custodian wallet providers, traders, and intermediaries of works of art. It also includes specific EDD measures to be implemented in case of customers with links in high-risk countries. Additionally, the beneficial ownership registries are to be available to the public. Obliged entities are required to report discrepancies between the information they hold as part of the CDD and the information contained in the registry.
Directive on combatting money laundering by criminal law (EU 2018/1673) Directive 1673/2018 has a different scope than the AML directives and focuses on criminalization of money laundering. The directive aims to close loopholes in the definition of predicate offenses for money laundering and establishes a new legal framework for the cooperation of authorities of EU member states.
The directive defines 22 predicate offenses for money laundering ensuring uniformity across the national law of the EU member states. “Aiding and abetting” money laundering or even “attempting to launder” is now to be punishable. Money laundering offenses are punishable by a maximum imprisonment of at least four years.
The upcoming 6th AML Directive
In 2021, the European Commission announced a new ambitious AML package. This will include a new AML regulation which will be directly applicable to all EU member states but also the 6th AML directive which will need to be transposed into national law. The new 6th AML directive will completely replace the 4th AML directive as amended by the 5th and will also include rules on national supervisors and financial intelligence units in Member states.