EU Anti-Money Laundering Directive (AMLD)

What is the EU Anti-Money Laundering Directive AMLD?

Money laundering refers to the processes and methods used to channel illegally obtained money or assets into legal financial and economic channels. Money laundering is a serious problem, not solely in Europe, as it is used to launder not only large sums of money from drug trafficking (à la Al Capone) and finance terrorist activities. Rather, it poses a continuously growing threat to the financial and economic system as a whole – and can also cause significant economic losses and reputational damage to affected companies.

To put a stop to these criminal activities, the EU Parliament introduced the Europe-wide Anti-Money Laundering Directive (AMLD) as early as 1991, which imposes a whole range of regulations and standards on financial institutions and other affected companies, on the basis of which the illegal origin of funds is to be identified and reported.

Objectives of the AMLD in Europe

Even before the AMLD guidelines came into force, which are binding throughout Europe, there were money laundering laws at the national level, for example in Germany, which at the time were primarily intended to stem the flow of illegally obtained drug money. However, the objectives of the current European Anti-Money Laundering Directive are more diverse:

• Preventing the financing of terrorism:
  Targeted measures for identifying and reporting suspicious persons and activities are designed to prevent terrorist financing.
• Increase transparency:
  The directive aims to increase transparency in business relationships and financial transactions, in particular by identifying the beneficial owners of companies and trusts.
• Risk-based approaches:
  The AMLD requirements aim to establish tools for assessing the risks of money laundering and terrorist financing in financial institutions and other obligated companies.
• Compliance:
  The aim of the regulations is to ensure that companies use their processes, technologies and responsibilities to ensure that all necessary measures to prevent money laundering comply with the AMLD requirements.
• Know Your Customer (KYC)
  The AMLD regulations are intended to strengthen customer identity checks to ensure that customers and their activities are legitimate.

Development of anti-money laundering guidelines in Europe

The EU has adopted several anti-money laundering directives over the years, with each version responding to new developments and challenges in the financial sector. These directives are an essential part of the EU’s efforts to ensure a secure and transparent financial system – they respond in particular to the growing complexity of the financial system and to constantly emerging threats and technologies.

1AMLD: The first EU anti-money laundering directive – 1991

• Objective: introduction of an EU-wide binding framework to combat money laundering, mainly in connection with drug offences.
• Main content: The directive obliged financial institutions to verify the identity of their customers when opening accounts or conducting transactions above a certain amount. It also introduced the obligation to report suspicious transactions.
• Scope: This first anti-money laundering directive was mainly limited to the banking and financial sector.

2AMLD: The Second EU Anti-Money Laundering Directive - 2001

Extension to non-financial professions and businesses, including lawyers, notaries, accountants, real estate agents and dealers in luxury goods.

• Terrorist financing: This new regulation introduced rules to combat terrorist financing.
• Extension of scope: The scope was extended from cash deposits to non-cash payments.
• Increased due diligence: It included increased requirements for companies’ due diligence obligations to verify the identity of their customers.

3AMLD: The Third EU Anti-Money Laundering Directive - 2005

• Risk-based approach: Companies should adapt their anti-money laundering measures to the individual or specific risk profile of their customers.
• Extended due diligence: This third version introduced the obligation to apply extended due diligence to customers considered to be politically exposed persons (PEPs).
• Improved cooperation: The focus here was on strengthening cooperation and improving the exchange of information between member states and their financial supervisory authorities.
• At national level: Countries were obliged to set up a national central office for reporting suspicions.

4AMLD: The Fourth EU Anti-Money Laundering Directive - 2015

• Transparency of beneficial ownership: Introduction of transparency registers for the beneficial owners of companies and trusts. The first electronic transparency register has been introduced in Germany.
• Tax crimes: The fourth anti-money laundering directive added tax crimes as a predicate offense to money laundering in the AMLD.
• Stronger sanctions: This made it possible to increase the penalties for money laundering offenses and expand the powers of the supervisory authorities.

5AMLD: The fifth EU Anti-Money Laundering Directive - 2018

• Regulation of cryptocurrencies: Inclusion of providers of exchange and wallet services for crypto currencies under the AML regulations.
• Improved accessibility: This anti-money laundering directive enabled public access to the registers of beneficial owners and a link between these registers at EU level.
• Enhanced customer due diligence: It introduced more stringent due diligence requirements for business relationships with high-risk third countries.

6AMLD: The sixth EU Anti-Money Laundering Directive - 2020

• Harmonization of criminal offenses: It standardized the definitions of money laundering offenses across the EU.
• Expanded scope: Due to the constant development of technologies and the resulting increase in risks, the scope is being expanded to include providers of crypto services and crowdfunding platforms.
• Extended prosecution: Criminal liability has also been extended to legal entities – and the limitation periods for money laundering offenses have been extended.
• Increased penalties: Along with this, tougher penalties for money laundering were introduced, including longer prison sentences.

Who has to comply with AML regulations in Europe?

In Europe, compliance with the AMLD regulations is mandatory for the following industries and professional groups in particular:

1. Financial institutions, such as banks, credit institutions, payment service providers, currency exchange offices and companies that provide loans.
2. Insurance companies, in particular those offering life insurance and other capitalization products.
3. Asset managers and investment firms, for example, companies involved in the management of investments, securities and other financial assets.
4. Brokers and real estate agents who purchase or sell real estate for their customers.
5. Organizers and facilitators of gambling, such as casinos and other gambling establishments, both online and offline.
6. Lawyers, notaries, auditors, and tax advisors who provide financial, real estate, or corporate services.
7. Dealers in high-value goods, such as luxury cars, art, jewelry, and precious stones, who allow cash transactions.
8. Trusts and company service providers that establish or manage trusts and companies for third parties.
9. Cryptocurrency platforms and wallet providers that enable the trading and storage of crypto currencies.

How does identity verification work under EU AML regulations?

Secure, AMLD-compliant identity verification is of particular importance as part of the european onboarding process for customers and during their review. As part of the identification process (also known as KYC or Know Your Customer), financial institutions and other obligated companies must ensure that they gather the true identity of their customers and, in particular, that they can prevent and avoid money laundering and terrorist financing.

The process of AMLD-compliant identity verification usually proceeds in the following steps

1. Gathering basic data: The first step is to collect basic identity information from the customer, such as name, date of birth, address and ID number. For legal entities, this includes the identification of the beneficial owners.
2. Document review: During the document review, official documents must be submitted for comparison and verification of identity, such as an ID card or passport. For companies, commercial register extracts, articles of association or other relevant company documents may be required.
3. Residential address verification: Confirmation of the residential address through documents such as utility bills, bank statements or official correspondence.
4. Sanctioned party list screening: Once the identification verification is complete, a background due diligence check is carried out, which includes a comparison with national or international sanctioned party lists, watch lists or lists of politically exposed persons (PEPs). If necessary, an extended due diligence check is carried out.
5. Regular review and update: AMLD-compliant identification verifications require regular review to ensure that the status of the identified person has not changed and to identify any unusual or suspicious activity.

AML regulations require companies based in Europe to take a risk-based approach to their customer identification. This means that the frequency and intensity of the review can vary: Customers with a higher risk profile, such as politically exposed persons or persons from countries with a high risk of money laundering, are subject to stricter controls. And conspicuous transactions also require a targeted review of the identity of the persons carrying them out.

WebID, as a German based pioneer in identification solutions, offers various products that companies can use to carry out AMLD-compliant identification of their customers, such as VideoID.