Insights / 13-10-2020

Money laundering continues to dominate both headlines and the list of growing concerns for companies. As society and the business landscape evolves with new ways of working; distribution channels; products; and the pace of regulatory change, the status of compliance for companies also needs to keep in step. In 2019 alone, it was reported that over 220 international regulatory changes occurred every day, amounting to 80,000 updates that year[1].

Furthermore, with the scope of sectors extended from the implementation of the 5th Money Laundering Directive (5MLD) in January 2020, it is already time to focus on the 6th Money Laundering Directive (6MLD).

EU Member States are required to transpose the 6MLD into national law by 3 December 2020.  After which, relevant regulations must be implemented by companies within the EU Member States by 3 June 2021.

Therefore, it is critical that companies familiarise themselves with 6MLD to prepare for its implementation including, understanding and identifying the implications for compliance processes and the consequences of non-compliance on both the organisation and individuals within it, as well as, future growth opportunities.

The 6MLD seeks to close certain loopholes in the EU Member States’ domestic legislation by harmonising the definition of money laundering across the bloc. The 6MLD also places a particular focus on “predicate offences” as it expands the list of crimes to better reflect the modern threat landscape. 

It is worth noting that the United Kingdom has opted out of 6MLD as the Government considers  that the “domestic legislation is already largely compliant with the Directive’s measures, and in relation to the offences and sentences set out in the Directive, the UK already goes much further”[2]. However, any regulated/AML supervised UK businesses who operate in the EU must still comply with changes set out in 6MLD.  

The key provisions of 6MLD are set out below:

A harmonised definition of money laundering offences

The 6MLD provides a harmonised definition of what constitutes a “money laundering offence”. It specifies the types of conduct that will, when committed intentionally, be punishable as a criminal offence. The types of conduct are as follows:

• converting or transferring of property (assets of any kind) which is derived from criminal activity, for the purpose to hide or disguise its illicit origin or to assist anybody involved to evade the legal consequences of their actions;
• concealing or disguising the true nature, source, location, disposition, movement, rights with respect to, or ownership of, property, knowing that it came from criminal activity;
• acquiring, possessing or using property knowing, at the time it is received, that it had come from criminal activity;
• aiding and abetting, inciting and attempting these offences. Basically, this means that helping a money launderer (an accomplice/enabler) in any way is also punishable as a criminal offence.  

A single definition of predicate offences

The 6MLD also defines a ‘criminal activity’ in Article 2[3] and has been narrowed down to 22 predicate offences. A predicate offence is a criminal activity that enables a more serious crime. For example, a predicate offence would be any crime that generates monetary proceeds. The larger crime would be money laundering or terrorist financing.

The 22 predicate offences are wide-reaching and include environmental crimes, tax crimes and cybercrime, as well as more traditional examples such as terrorism, the trafficking of narcotic drugs and humans, corruption and fraud. Please see the list of 22 predicate offences below:

• Participating in an organised crime group or racketeering

• Human trafficking and migrant smuggling

• Sexual exploitation

• Illicit trafficking in narcotics and psychotropic substances

• Illegal arms trafficking

• Trafficking in stolen goods

• Corruption

• Murder and grievous bodily harm (GBH)

• Fraud

• Counterfeiting currency

• Counterfeiting and piracy of products

• Environmental crime

• Kidnapping and hostage taking

• Robbery and theft

• Smuggling

• Tax crime relating to both direct and indirect taxes

• Extortion

• Forgery

• Piracy

• Insider trading and market manipulation

Increased Penalties for Natural Persons

‘Natural persons’ will now face up to four years imprisonment for money laundering offences as the EU is requiring member states to increase the penalty of maximum of one year. This clearly demonstrates that the EU aims to take a stricter approach with individuals who are caught money laundering and want to deter individuals from carrying out these offences in the future.

Criminal Liability and Sanctions for 'Legal Persons'

It is not just the individual that can be punished. One of the significant changes in 6MLD is the extension of criminal liability to legal persons (e.g. a company or partnership). Organisations operating in the EU Member States will now be held criminally liable for failing to prevent the illegal activity conducted by a ‘directing mind’ within the company. Therefore, even if the criminal activity that generated illicit funds cannot be identified, an individual or legal person can be convicted.

Some of these sanctions and penalties contain criminal or non-criminal fines. These range from being disqualified from the practice of commercial activities (temporarily or permanently); going under judicial supervision; or, the temporary or permanent closure of the establishment which has been used for committing the offence.

Tougher punishments

The 6MLD ushers in a new, tougher enforcement regime in the EU. Apart from the increased imprisonment term for natural persons and the sanctions for legal persons, competent authorities will now be required to freeze or confiscate both the proceeds and instrumentalities used in the commission of money laundering offences in order to remove the financial incentives which drive perpetrators.

Cooperation of Member States

The 6MLD seeks to promote the EU’s commitment to enable more efficient and swifter cross-border cooperation Member States in the prosecution of firms/individuals who are conducting money laundering offences. For example, in Article 10(3), where a money laundering offence has occurred, within the jurisdiction of more than one Member State, the concerned Member States shall cooperate when deciding which will prosecute the individual/firm, with the aim of centralising proceedings in a single Member State.

6MLD also provides factors to consider when determining this, including where the offence was committed; the nationality or residency of the offender; the country of origin of the victim(s); and, the territory of where the offender was found.

Next Steps

The 6MLD’s focus is on accountability and enforcement. This alone should motivate compliance officers, MLROs and executives to review their AML programme including policies, procedures, risk assessment, monitoring, training and make any needed improvements.

Companies will need to pivot and view compliance as something that can enable rather than hinder business practices as 6MLD can empower companies to create more effective AML programmes that help the innocent victims of money laundering crimes. If 6MLD does anything, it creates the urgency for companies to implement a fool-proof AML programme. 

The broad spectrum of money laundering predicate offences means having to develop more flexible approaches to compliance. This can be achieved by employing AML/financial crime expertise together with utilising technology solutions to reduce the risk exposure to the growing threat of money laundering.

This article was co-authored by Christina Thakor-Rankin, Principal Consultant at 1710 Gaming.

[1] https://www.gfmag.com/magazine/april-2020/financial-crime-worries-rise

[2] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/684374/eighth-annual-report-to-parliament-eu-justice-home-affairs-matters.PDF

[3]https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2018.284.01.0022.01.ENG