All six EU directives were issued by the European Parliament as part of domestic legislation to fight money laundering and terrorist financing. The first directive, referred to as 1AMLD, was introduced in 1991. While it marked a significant advancement in the EU regulatory framework, it suffered from several compliance gaps.
To overcome further challenges, over the years, the Parliament has been introducing due diligence laws to establish a consistent regulatory environment for all EU member states. The most recent EU AMLD has elevated the sentence duration for money laundering offenses, establishing a minimum of four years in prison. Additionally, this amendment has incorporated environmental crime and cybercrime into the roster of prohibited activities.
Naturally, this puts organizations in a complex position, once again, having to ensure various compliance requirements.
What is an Anti-Money Laundering Directive (AMLD)?
An anti-money laundering directive (AMLD) is a regulatory guideline issued by the European Union to establish rules and frameworks for member states to prevent and combat money laundering and terrorist financing activities.
However, since the first directive’s introduction in the 90s, the EU has accelerated the process of implementing new AMLDs. The main reason behind this is the need for new regulatory laws, especially in the complex landscape of financial operations. They now include novel avenues for monetary transactions like non-fungible tokens (NFTs) or cryptocurrency exchanges and iGaming networks.
The most recent AML directive dates back to November 12, 2018. Back then, the European Parliament introduced new regulations to enhance its fraud prevention measures in the ongoing battle against money laundering. This was accomplished through the 6th EU AML Directive (2018/1673), thereby reinforcing the AMLD5.
The History of All EU Anti-Money Laundering Directives
Europe was prevailing in a political atmosphere that was fostering international collaboration and more engagement towards anti-money laundering due to escalating political anxieties over the narcotics trade. The European Parliament had approved several resolutions advocating for the creation of a worldwide initiative to combat drug trafficking while, at the same time, incorporating measures to prevent money laundering.
This narrative resonated with all governments and legislative bodies across member states, resulting in several important factors for the future of EU Anti-Money Laundering Directives:
- The need for stricter security was recognized on a global level. In December 1988, the United Nations ratified the Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (referred to as the ‘Vienna Convention’).
- In July 1989, the G7 group of prominent industrialized nations, in collaboration with the President of the Commission, established the Financial Action Task Force (FATF) to serve as a worldwide authority in setting standards for anti-money laundering efforts.
The European Parliament has enacted six AMLDs in total, with each one building upon and replacing the previous. Let’s take a closer look.
The First Money Laundering Directive (1AMLD)
The European Council of Ministers approved 1AMLD on June 10, 1991, with member states required to integrate it into their national laws by April 1, 1994. The final national laws and regulations exhibited a shared resemblance due to mandated minimum standards while also allowing flexibility for member states to enact more stringent laws if desired.
1AMLD aimed to mandate member states to establish money laundering as a criminal offense. It also initiated assigning distinct AML responsibilities and select segments of the private sector, which would act as defensive protectors of the financial system. However, 1AMLD primarily focused on banks as the main obliged entities in the sector.
According to the 1AMLD, all EU member states were mandated to:
- Enact legislation that ensures the carrying out of Customer Due Diligence (CDD) and Know Your Customer (KYC) processes during customer onboarding. Additionally, there was the requirement to maintain records of the customer relationship for up to five years after its termination.
- Monitor customer activity while ensuring compliance with CDD obligations. In case of suspicious activity, 1AMLD required the obliged entities to report such transactions using a suspicious activity report (SAR). Although, this requirement had roots in the US Bank Secrecy Act of 1970.
- Conduct transaction monitoring, a requirement now met through technology. At first, financial institutions performed transaction monitoring manually. Despite this effort, they soon realized that the volume of transactions was far too large for a human to cover. This is why digital solutions started to emerge. They were designed to detect “flags” or suspicious patterns.
The major issue with the first directive was its narrow focus. Banks and financial institutions weren’t the only targets for money laundering. Fraudsters were becoming smarter with their ways of integrating illicit funds into different legitimate means.
Consequently, crimes like illegal weapon smuggling became a huge challenge. That’s when it was obvious that EU AML policies had to improve.
The Second Money Laundering Directive (2AMLD)
Shortly after the 9/11 terrorist attacks, the EU agreed on 2AMLD in December 2001. Yet, the directive itself, whose content had been established prior, focused more on addressing the gaps that needed to be covered in the initial directive. It included stricter regulations for additional obliged entities, including notaries, auditors, external accountants, and tax advisors.
2AMLD explicitly stated that reports on suspicious activities had to be submitted to the Financial Intelligence Unit (FIU). The directive also acknowledged that money launderers were not solely relying on financial institutions for moving illegal funds. This encompassed Money Service Bureaus (MSBs), grouped under the term Non-Banking Financial Institutions (NBFIs), along with designated non-financial businesses and professions.
The significant enhancement in the 2AMLD was its broadened scope of predicate offenses subject to money laundering regulations. For example, it highlighted high-risk businesses for stricter monitoring obligations. Notably, lawyers were now also under the directive’s obligations, and their professional confidentiality was no longer a safeguard in cases of money laundering.
The Third Money Laundering Directive (3AMLD)
3AMLD took effect in 2005, arriving quite soon if compared to the previous directive. Its implementation was driven by the urgency to address the so-called War on Terror. UK’s Terrorism Act 2000, and in 2003, FATF’s revised recommendations for Countering the Financing of Terrorism (CFT) influenced 3AMLD. It incorporated due diligence measures to ensure that obligated entities refrained from offering services to individuals or groups designated as terrorists or linked to terrorism.
But that’s not all. The third directive took a major turn by introducing the risk-based approach (RBA) to AML compliance, enabling some flexibility in applying CDD processes based on factors such as the client’s risk profile, industry, and service. However, this change came along with more challenging AML measures, including Simplified Due Diligence (SDD) and Enhanced Due Diligence (EDD).
Acknowledging the necessity for enhanced regulations on obligated entities, 3AMLD pioneered the introduction of penalties for breaches in anti-money laundering measures, marking a historic first. This was achieved through the establishment of a risk-based approach, the mandate to report suspicious transactions to member states’ FIUs, and the establishment of minimum penalties for non-compliance.
The Fourth Money Laundering Directive (4AMLD)
The EU approved 4AMLD in 2015, with member states mandated to incorporate it into their national laws by June 2017. Building on prior directives, it aligned with the 2012 FATF recommendations, which offered more comprehensive instructions for adopting a risk-based approach in CDD. Sectors like all gambling-based firms, which had previously remained exempt, were now included in the scope of AML obligations.
Additionally, ‘occasional transactions’ exceeding €10,000 outside of a business relationship were now subjected to AML regulations, although member states encountered challenges in implementing this requirement. Most importantly, while previous directives focused on tackling terrorism risks, 4AMLD emphasized transparency when tackling issues like corruption, tax evasion, and bribery.
As a result, a new requirement that included Ultimate Beneficial Owners (UBOs) was born. It stipulated that individuals owning 25% or more of a legal entity must be listed in national registries. This measure was designed to enhance transparency within corporate structures, reducing the potential for financial criminals to conceal themselves. 4AMLD also addressed EDD for Politically Exposed Persons (PEPs), broadening the definition to include foreign nationals and domestically affiliated individuals with political ties.
The Fifth Money Laundering Directive (5AMLD)
Slightly more than a year later, which was a new record for the EU, the fifth Anti-Money Laundering Directive (5AMLD) was enacted in 2018. A new requirement for obliged entities to perform mandatory EDD on clients from high-risk countries was introduced. Above all, CFT considerations influenced the directive’s structure.
Europe’s series of terrorist attacks, such as the Charlie Hebdo incident in 2015 and the London Bridge attack in June 2017, heavily shaped the directive’s content:
Prepaid Cards
A very important aspect of 5AMLD aimed to limit the financial channels exploited by the mentioned attackers that facilitated their assaults, and that was tackling terrorist financing risks linked to the anonymous use of virtual currencies and prepaid cards. Notably, a newly introduced prepaid card limit was implemented to address this concern.
Transactions originating from prepaid cards issued outside the EU were forbidden unless they were issued within a region adhering to AML/CFT standards equivalent to those of the EU. Under 5AMLD, the transaction limit on prepaid cards was lowered to €150, with online transactions further restricted to €50.
Crypto Exchanges
Continuing the trend of building upon the obligations outlined in previous directives, 5AMLD expanded the scope of obliged entities. The directive established a legal description of cryptocurrencies and included crypto exchanges engaged in fiat-to-cryptocurrency and cryptocurrency-to-cryptocurrency exchanges, along with crypto wallet service providers, the framework of existing AML regulations.
The directive mandated that cryptocurrency service providers must register with financial authorities. Additionally, 5AMLD granted financial intelligence units (FIUs) the authority to access the identities and addresses of cryptocurrency owners. As a result, the directive enhanced collaboration and information sharing among anti-money laundering supervisors, including the European Central Bank.
High-Value Goods
5AMLD extended the legislative reach to encompass additional forms of high-value goods. For instance, art traders and intermediaries were brought under AML/CFT reporting requirements and mandated CDD measures on their clients. 5AMLD introduced AML checks for transactions involving art valued at €10,000 or more.
In addition to that, the directive considered transactions involving various high-value commodities as high risk. Goods like oil, arms, precious metals, and tobacco were also included. In a concerted effort to counteract terrorist financing, the directive also recognized historical, cultural, and archaeological artifacts within the ambit of the high-value AML/CFT regulations.
Related: Identity Verification in the Art Market — Complete Checklist to Prevent Money Laundering
Beneficial Ownership
With the establishment of 5AMLD, UBO registers were made public in March 2020. Alongside this, national PEP lists were introduced to determine the positions that could be categorized as PEPs and those that couldn’t. Member states were also pushed to strengthen their mechanisms for verifying UBOs to ensure the accuracy and reliability of the information they contain. This necessitated the establishment of interlinked UBO national registers at the EU level, promoting collaboration and information sharing among authorities of member states.
The Sixth Money Laundering Directive (6AMLD)
6AMLD was enacted in June 2018, mandating transposition by December 2020 and an implementation deadline of June 2021. It went to the basic roots, facing many of the standard issues in the original AMLD, including analyzing what money laundering is and who is liable for its offenses.
The focal point of the updated directive is the formalization of 22 predicate offenses, encompassing new offenses for money laundering in the 6AMLD:
- Terrorism
- Fraud
- Smuggling
- Cybercrime
- Piracy
- Forgery
- Corruption
- Extortion
- Illicit arms trafficking
- Insider trading and market manipulation
- Trafficking in human beings and migrant smuggling
- Sexual exploitation
- Robbery or theft
- Illicit trafficking in narcotic drugs and psychotropic substances
- Illicit trafficking in stolen and other goods
- Counterfeiting of currency
- Counterfeiting and pirating of products
- Environmental crime
- Murder and grievous bodily injury
- Kidnapping, illegal restraint, and hostage-taking
- Participation in an organized criminal group and racketeering
- Tax crimes relating to direct and indirect taxes
With the complexity behind all EU money laundering directives, there’s no doubt that companies and their compliance teams will need to update their AML strategies constantly. This ensures that the risks associated with all these crimes are adequately addressed.
What are the Key Highlights of the ‘New’ Sixth EU AMLD?
With 6AMLD, the EU aims to bring greater clarity and standardization to AML practices, resolving rule disparities and strengthening information exchange among authorities. One of the key highlights is that the newest directive broadens the spectrum of offenses falling within the money laundering definition, adding aiding and abetting, which means that the new rules hold enablers accountable.
“Aiding and abetting” implies that people assisting money launderers become legally implicated in money laundering crimes. Consequently, companies should now revise their AML programs to encompass the detection and prevention of aiding and abetting money laundering, aligning with the extended list of predicate offenses.
In short, the key changes in AML compliance after introducing 6AMLD include tougher punishment guidelines, extended criminal liabilities, and member-state cooperation initiatives.
Key changes after the latest EU money laundering directive illustrate these rules:
- Companies can be held legally accountable for “aiding and abetting” money laundering activities.
- Companies can face criminal liability for the actions of their employees engaging in unlawful conduct.
- Any criminal offense linked to money laundering will result in a minimum prison sentence of four years (previously one year).
- The list of predicate offenses for money laundering now includes cybercrime and environmental crime.
- Definitions of various offenses like smuggling, human trafficking, and insider trading have been harmonized across the EU.
Related: AML Compliance Program: Step-By-Step Guide in 2023
How to Comply with EU AMLDs?
For businesses operating within the EU, complying means remaining proactive and well-informed about the potential demands of new AMLDs and all regulatory tools.
Running risk assessments, identifying loopholes in your company’s AML processes, screening your customers and your employees, and using automated AML compliance tools are all essential components of a robust AML compliance program.
Don’t know where to start? iDenfy provides KYC/KYB and AML tools for screening, ongoing monitoring, PEPs, sanctions checks, adverse media checks, and more – all in one place. Consult us for free today.
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