Financial institutions and other relevant entities should take notice of two recent developments in anti-money laundering and counter-terrorism financing initiatives.  First, European Union member states had to transpose the EU’s Fifth Anti-Money Laundering Directive by January 10, 2020—that is, member states had to implement certain rules into their respective national legislations by that date.  Second, in February the U.S. Department of Treasury issued its 2020 National Strategy for Combating Terrorist and Other Illicit Financing.

Fifth Anti-Money Laundering Directive – Increased Transparency into Beneficial Ownership

While the Directive only applies to EU members, its amendments to the Fourth Directive are still instructive for anyone responsible for building strong AML and CTF functions. The Fifth Directive emphasizes transparency of an entity’s true owners.  The new Directive requires member states to set up beneficial ownership registers for corporate and other legal entities, as well as trusts and similar legal arrangements. Additionally, by September 10, 2020, member states are required to set up centralized automated mechanisms allowing for the identification of holders of bank accounts and safe deposit boxes.

The Directive also broadened the criteria for assessing high-risk third countries.  The European Commission’s list of countries with strategic deficiencies in their AML/CTF regimes will now include countries with low transparency on beneficial ownership information.  In summary, financial institutions and other entities concerned with combating money laundering and terrorist financing – whether located in the EU or elsewhere – should consider whether they adequately assess a customer’s true beneficial ownership.

Treasury Department’s National Strategy

The National Strategy similarly emphasizes increasing transparency of beneficial ownership information.  It notes that the “current lack of disclosure requirements gives both U.S. and foreign criminals a method of obfuscation,” and that FinCEN’s customer due diligence rule, which became fully enforceable in 2018, helped to address a “major aspect of this recognized vulnerability.”  This rule requires covered financial institutions to identify and verify the identities of beneficial owners of legal entity customers at the time of account opening and certain times after.

Although the report states that initial examinations by federal regulators “have not identified significant deficiencies with implementation,” it expresses concern that companies, at the time of formation, have no obligation to disclose beneficial ownership information.  According to the report, the Trump administration is working with Congress on the issue, and aims to pass beneficial ownership legislation in 2020.  The report recognizes that such legislative must “be balanced with individual privacy concerns and not be unduly burdensome for small businesses.”