Neighbours on seashores and the banks of tidal rivers tend to raise their flood defences at the same time, so nobody is caught out by the higher water on the next flood. The higher the defences, the worse it is for anyone leaving a gap. Similarly, EU member states were all due to update their anti-money laundering (AML) regulations to implement the Fifth Money Laundering Directive (MLD5) on 10 June 2020. The UK did so, for example, but Ireland did not. And based on how long it took to transpose MLD4, Ireland might not officially close the new gaps in its AML defences until the end of 2021. Meanwhile, Irish firms themselves will need to guard against fraud or other illegal activity that might suddenly flow their way as a result of tougher AML defences elsewhere... starting with the art market. Early action should also mean less work when the Irish regulations are updated.
Please contact us at Leman Solicitors if you would like our help in understanding the risks and controls in this area.
Expanded scope of AML regulation (under MLD5)
The range of firms covered by MLD5 now includes art market participants (discussed further below); letting agents; and cryptoasset (e.g. virtual currency) exchange and wallet providers. The definition of tax adviser is also extended to those who provide material aid or assistance on tax.
This means that activity from these types of firms might flow to Ireland to escape AML controls elsewhere (see especially the discussion of 'art market participants' below).
Certain limits are lowered to catch more e-money transactions, while new restrictions are imposed on acquiring anonymous prepaid card transactions.
The authorities will also have powers to obtain information about safe-deposit boxes and accounts held with banks, building societies and credit unions. So the contents of some these boxes and accounts may also move to avoid inquiries.
Art Market Participants (under MLD5)
Recent allegations reveal that a complex web of people and international locations are often involved in art fraud. Not only does this type of fraud itself produce dirty money, but high prices, inconsistent record-keeping, subjective valuations, questionable authenticity and anonymity also create a fertile environment for laundering cash generated by other crimes.
Meanwhile, digital technology and encrypted communications have made it increasingly hard to detect and prove fraud and money laundering after the fact. Prosecution of art fraud across national borders has been difficult.
The art market is already partially within the scope of the AML regime, as it applies to "high value dealers", who are defined as:
"a firm or sole trader who by way of business trades in goods (including an auctioneer dealing in goods), when the trader makes or receives, in respect of any transaction, a payment or payments in cash of at least 10,000 euros in total, whether the transaction is executed in a single operation or in several operations which appear to be linked."
MLD5 broadens the scope of dealers affected, with perhaps some ambiguity. So the UK has now defined the additional category of “art market participant” as a firm or sole practitioner who either:
(i) by way of business trades in, or acts as an intermediary in the sale or purchase of, works of art and the value of the transaction, or a series of linked transactions, amounts to 10,000 euros or more [regardless of whether it's paid in cash or not]; or
(ii) is the operator of a freeport when it, or any other firm or sole practitioner, by way of business stores works of art in the freeport and the value of the works of art so stored for a person, or a series of linked persons, amounts to 10,000 euros or more.
A “work of art” means anything from a long list in the VAT Directive.
A “freeport” means a warehouse or storage facility within an area designated as a special area for customs purposes (free economic zones).
Changes to due diligence measures generally (under MLD5)
MLD5 also adds various requirements or layers to existing AML controls. These are summarised below.
When you adopt new products, business practices (including new delivery mechanisms) or technology you must take appropriate measures in preparation for, and during, that process to assess - and if necessary mitigate - any money laundering or terrorist financing risks that the new product etc. may cause.
If your firm is a parent organisation, you must establish and maintain throughout your group all the various policies, controls and procedures for the purposes of preventing money laundering and terrorist financing - including for data protection and sharing information and including policies on the sharing of information about customers, customer accounts and transactions.
You must take appropriate measures - and keep records to prove - that you train your employees and agents whose work is relevant to your AML compliance or the identification or mitigation of the risk, prevention or detection of money laundering and terrorist financing. The training must be in the law relating to money laundering and terrorist financing, and related data protection requirements; as well as how to recognise and deal with suspicious transactions and other activities or situations which may be related to money laundering or terrorist financing.
The triggers for applying customer due diligence measures now include:
- at appropriate times for existing customers, on a risk based approach;
- when you become aware that the circumstances of an existing customer relevant to your risk assessment for that customer have changed;
- when you have a legal duty to contact an existing customer for the purpose of reviewing any information relevant to your risk assessment and relates to the beneficial ownership of the customer, including information which enables you to understand the ownership or control structure of a legal person, trust, foundation or similar arrangement who is the beneficial owner of the customer;
- when you have to contact an existing customer to fulfil a duty under the International Tax Compliance Regulations.
The obligation to understand the ownership and control structure of a customer applies whether the customer is a body corporate or other legal person, trust, company, foundation or similar legal arrangement.
Where you've exhausted all possible means of identifying the beneficial owner of the body corporate and either you haven't succeeded or you aren't satisfied that the individual identified is in fact the beneficial owner, you must keep written records of all the actions you've taken to identify the beneficial owner and take reasonable measures to verify the identity of the senior person in the body corporate responsible for managing it, as well as all the actions you've taken and any difficulties you encountered in doing so.
Before establishing a business relationship with a customer, you must collect proof of registration or an excerpt of the relevant company or partnership registry (as the case may be) and report to the relevant registrar any discrepancy between information relating to the beneficial ownership of the customer that you collect from the register and information that otherwise becomes available to you in the course of carrying out your duties under the MLRs.
There are new triggers for carrying out 'enhanced' customer due diligence measures, as well as a specified (non-exhaustive) list of such enhanced measures.
It is possible, but less likely, that activity would move away from jurisdictions that adopt these types of additional measures ahead of other countries.
Irish firms themselves will need to guard against fraud or other activity that might suddenly flow their way as a result of tougher AML defences elsewhere... starting with the art market.