Customer Due Diligence obligations – The Risk Based Approach

The 4th EU anti-money laundering directive will be transposed into Maltese legislation in 2017.  It will upgrade our existing laws and regulations in their fight against money laundering and terrorist financing. By means of this new Directive, the EU has confirmed its engagement to protect the Internal Market against criminal activities. The new directive requires subject […]

Written By Stephen Balzan

On July 28, 2016
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The 4th EU anti-money laundering directive will be transposed into Maltese legislation in 2017.  It will upgrade our existing laws and regulations in their fight against money laundering and terrorist financing. By means of this new Directive, the EU has confirmed its engagement to protect the Internal Market against criminal activities.

The new directive requires subject persons to have a new approach to money laundering and terrorist financing risks.  Subject persons are required to have a thorough knowledge of their customers as well as a full understanding of their transactions. Thus they are required to design Customer Due Diligence (CDD) processes that will allow them to monitor the activities of their customers and detect possible suspicious transactions.   Under the new Directive, subject persons will be required to implement systems which will enable them to determine the extent of CDD measures to be applied on the basis of an assessment of their AML/CTF risks, called the Risk Based Approach (RBA).

According to the RBA, the intensity of the obligation to carry out CDD is to be determined in accordance with the risk as it arises from actual facts and circumstances.  This means that subject persons should thoroughly analyse their client, assess the ML/TF risk, define a risk profile and apply the appropriate level of mitigation accordingly.  This is required in terms of Article 8 of the 4th AML Directive which requires Member States to ensure that subject persons take appropriate steps to identify and assess the risks of ML and TF, taking into account risk factors including those relating to their customers, countries or geographic areas, products, services, transactions or delivery channels.  These steps must be proportionate to the nature and size of the subject persons.

The RBA allows subject persons to be more efficient and effective in the use of their resources, while minimizing burdens on customers.  The RBA will allow subject persons to focus on higher risk threats, while allowing them to efficiently and effectively adjust and adapt as new ML and TF methods are identified.  Subject persons will be able to focus on higher risk activities, meaning that it will be more difficult for launderer to undertake criminal activities.

However the RBA requires more resources and expertise to develop procedures and systems and to train personnel.  It requires a sound judgment to be exercised in the implementation of procedures and systems.  It requires subject persons to have a good understanding of the risks through above all training and professional advice.

The 4th Directive requires subject persons to perform CDD when establishing a business relationship or when carrying out occasional transactions that amount to €15,000 or more, regardless of whether the transaction is carried out in a single operation or in several operations that appear to be related.  CDD is also required in the case of persons trading in goods, when carrying out occasional transactions in cash amounting to €10,000 or more, or for providers of gambling services, when carrying out transactions amounting to €2,000 or more. 

The 4th Directive makes it mandatory now that enhanced due diligence checks must be carried out on all Politically Exposed Persons (PEPs) including Maltese politicians.  Prior to the 4th Directive, Maltese legislation only required enhanced due diligence on foreign PEPs.  The Directive will also increase the period after which a PEP will continue to be considered a PEP to a minimum of 18 months after vacating the post.

In conclusion, the new Directive will certainly pose a challenge to both regulators and regulated entities.  However the shift to a risk based approach should result in a better deployment of resources, which will hopefully lead in the better management of our AML risks.

How can we help?  

For further information, please contact one of the firm’s tax partners, Stephen Balzan on [email protected] or Elaine Camilleri [email protected]. ACT can help you understand the changes to the tax rules and how these can impact your business.  

Apart from its offices in St. Julian’s Malta, ACT operates from a second office in Gozo, which is situated in the capital city of Victoria.  For an appointment in our Gozo office, please call on 00356 21378672 or send us an email on [email protected]. 

Disclaimer: This article contains general information only and is not intended to address the circumstances of any particular individual or entity. ACT, by means of this article is not rendering any accounting, business, financial, investment, legal, tax, or other professional advice or service. This article is not a substitute for such professional advice, nor should it be used as a basis for any decision or action that may affect your finances or your business. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Before making any decisions or before taking any action that may affect your finances or your business, you should consult a qualified professional adviser. ACT shall not be responsible for any loss whatsoever sustained by any person who relies on this article.