January 2020 is a landmark month for European authorities’ efforts to combat financial crime. The 5th Anti-Money Laundering Directive (5AMLD) was due to be introduced into national law across all 28 EU member states by January 10, bringing in tighter controls on the movement of funds and more transparency around who owns companies, trusts and other assets.
The directive applies to a broad range of businesses, from banks and fintechs to gambling operators and art dealers, and the trade finance sector is no exception. One of the more eye-catching features for international financial institutions is 5AMLD’s stricter rules around due diligence and high-risk countries – particularly as EU authorities continue to row over which countries should be included on its high-risk blacklist.
There have also been question marks over rules requiring the registration of trusts, notably in the UK, where legislators chose not to include the new requirements in the domestic law.
Beyond the headline reforms, however, the new directive will result in other important changes for trade finance players. GTR speaks to Simon Cook, a trade and export finance partner at law firm Sullivan in London, about three potential adjustments firms will have to make and whether there are still unanswered questions around how the new requirements will work in practice.
1) Bank account registration rules
One way the new directive seeks to increase transparency around the movement of funds is to establish electronic registers that allow authorities to identify whoever holds or controls a bank account.
EU member states are expected to set up central registers or data retrieval systems by September 10 this year, while the European Commission is tasked with assessing how those national-level databases can be interlinked. According to Cook, that means the burden of providing that information may fall on financial institutions.
“Bank accounts are used a lot in trade finance transactions as they are generally receivables-backed deals, whether it’s a structured trade finance deal or receivables deal,” the lawyer says.
“The upshot is that banks – and this applies on a wider basis as well – will have to ensure that all relevant details of bank account beneficial ownership is passed through to this register.
“It’s not clear at the moment exactly whose responsibility that will be, or how that information is going to be provided, but it is likely to be the account bank because they’re the ones who know their customer.”
2) Relying on external providers for due diligence
Because trade finance transactions often involve large numbers of parties carrying out diverse activities, tougher due diligence requirements can impact the sector more than typical retail transactions. However, parts of the new directive “are potentially helpful to trade finance banks and funders, and possibly to other product areas”, Cook says.
“For example, you’ve got some provisions relating to the ability within parameters to use external providers for part of the on-boarding due diligence process.
“Before, everybody was very hesitant about relying on external providers in order to on-board customers, but there is now some scope for the use of those processes. It will now be about how it is put into practice.”
The previous directive only specified that due diligence information should be collected from a reliable and independent source.
But new wording in 5AMLD explicitly lets banks use information obtained from “electronic identification means, relevant trust services… or any other secure, remote or electronic identification process regulated, recognised, approved or accepted by the relevant national authorities”.
Further ahead, that could open the door to third-party repositories of information vital to trade finance banks.
“Ultimately, where the industry would like to get to in order to make on-boarding clients and carrying out due diligence for transactions as easy as possible would be to have databases set up that have up-to-date verified information that banks can just tap into, rather than having to obtain information from the parties every time a new financier tries to on-board a customer and/or enter into a transaction,” Cook says.
“This would make the whole process a bit more streamlined, but obviously this has to be balanced with the current regulatory approach.”
3) Transactions involving high-risk countries
The EU’s anti-money laundering regime requires banks to carry out enhanced due diligence on transactions linked to countries deemed high-risk in terms of financial crime. That includes collecting additional data on the customer and their source of wealth, as well as obtaining the approval of senior management when deciding to continue a business relationship.
The European Commission’s current list of high-risk countries features Afghanistan, Bosnia and Herzegovina, Ethiopia, Guyana, Iran, Iraq, Lao, North Korea, Pakistan, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, Uganda, Vanuatu and Yemen – though officials are under pressure to produce an updated list in the coming months.
Enhanced due diligence on these transactions was also a requirement in the fourth directive, but the language around high-risk countries has changed slightly in 5AMLD.
“Before, enhanced due diligence was supposed to revolve around where the relevant person or entity was ‘established’,” Cook says. “In practice, that essentially meant a company located and/or operating there or an individual residing and/or operating there or being a citizen of a high-risk country.
“That has now been changed to a business relationship that is ‘involved with’ a high-risk country – but it’s not clear exactly what is meant by ‘involved’ as the legislation is silent on this.”
The lawyer gives the example of an entity operating in a country not considered high-risk, but that happens to do business with a supplier in a high-risk country.
“To what extent does that matter, particularly for instance if that supplier does not have anything to do with that transaction? The lack of a definition could potentially cause some issues,” Cook says.
“Another example could be if an individual is a dual national with both say UK and Iranian citizenship. Would a transaction involving them require enhanced due diligence? Banks would hope not given the relevant individual has UK nationality, but it’s not clear yet how that is going to work.”