EU Anti-Money Laundering Directive (AMLD) guide

The Anti-Money Laundering Directive (AMLD) (which is in fact a series of directives) establishes a number of customer due diligence (CDD) and KYC requirements to prevent money laundering and counter terrorist financing (CTF), including measures to establish ultimate beneficial ownership, politically exposed persons (PEPs), and to mitigate against risks from 3rd countries deemed by the EU to have inadequate AML/CTF regimes in place. 

Unlike AML regulations, a directive is not directly binding on an EU member state, but rather obliges them to transpose the directive into domestic legislation – and therefore we have the European Banking Association (EBA) guidelines for remote customer onboarding. 

The guidelines include internal policies and procedures that financial institutions should maintain for remote customer onboarding processes to ensure that the correct information is gathered; to clearly distinguish human and automated processes; and protections to ensure that CDD measures have been completed before executing any transaction with a newly onboarded customer. 

The directive also places requirements on regulated entities to ensure monitoring of the remote onboarding solution, and that ongoing governance is in place to ensure that the overarching structure of policies are implemented effectively and reviewed regularly to ensure ongoing CTF/AML compliance.

It sets out expectations for document authenticity and integrity, matching customer identity, and the acquisition of information to facilitate identity verification procedures.

Where a third party provider supports customer onboarding, the guidelines provide a framework for the regulated entity to be an intelligent customer of that provider, to ensure confidentiality, authenticity and integrity of data exchanged during the customer onboarding process. 

But, within each of these harmonizing instruments, there are loopholes that empower member states to implement the regulation against existing frameworks, or to override it in favor of domestic regulation. It is important that businesses seek AML compliant solutions which take into account not only the supranational EU requirements, but consider the member state regimes in which they are operating too.

History of European Union (EU) anti-money laundering regulations

1st AMLD

The European Commission initiated its anti-money laundering efforts with the introduction of the first AML Directive (1AMLD) in 1991, laying down fundamental AML principles and measures to thwart terrorist financing. These measures included the necessity for customer identification, maintaining records, reporting suspicious activities, and implementing other customer due diligence (CDD) procedures mandatory for all EU countries to integrate into their domestic laws.

Subsequent directives, the second (2AMLD) in 2001 and the third (3AMLD) in 2006, expanded AML and CFT mandates to include a broader range of professionals like lawyers, notaries, accountants, and those involved in real estate, casinos, trusts, and company service transactions. 

4th AMLD

The fourth directive (4AMLD), enacted in 2017, further extended CDD obligations to encompass all gambling services, financial institutions, and certain non-financial entities and professions.

5th AMLD

The evolution continued with the fifth directive (5AMLD) in 2020, marking a significant step by legally defining cryptocurrencies, thereby bringing digital currencies and their exchanges under the umbrella of AML and CFT regulations. This directive also introduced new rules for pre-paid cards, transactions involving high-value goods, and enhanced due diligence for transactions involving high-risk countries and politically exposed persons (PEPs).

6th AMLD

In July 2021, efforts to fortify the EU's AML and CFT framework advanced with proposals for the sixth Directive (6AMLD) and the Anti-Money Laundering Regulation (AMLR). These proposals aim to harmonize the definition of money laundering across the EU, address gaps in national laws, include 'aiding and abetting' in the scope of money laundering offenses, extend criminal liability to entities for failing to prevent such crimes, and propose a minimum four-year imprisonment for money laundering offenses.

Additionally, the establishment of the EU Anti-Money Laundering Authority (AMLA) was proposed in the July 2021 package to address remaining vulnerabilities exploited for money laundering. With legislative processes underway, the anticipated implementation of these new rules is by 2026, with AMLA expected to go live in 2024 and begin direct supervision of high-risk entities in 2026-2027. 

The importance of identity verification and AMLD

The importance of identity verification in today's financial ecosystem cannot be overstated. At its core, it serves as a fundamental defense mechanism against financial fraud, money laundering, and terrorism financing. By implementing robust identity verification measures, financial institutions and businesses can accurately establish the identity of their clients, ensuring that they are engaging with legitimate individuals and entities. 

This process is essential for complying with global regulatory requirements, including AMLD, which mandate thorough customer due diligence (CDD) and know your customer (KYC) procedures. Effective identity verification not only helps in detecting fraud and preventing illicit activities but also in maintaining the integrity of the financial system. It builds trust among consumers and between institutions by guaranteeing that financial services are used by authenticated and verified users. Consequently, identity verification is a critical component in fostering a secure, transparent, and reliable financial marketplace, protecting both the institutions and their clients from potential financial harm and legal repercussions.