On 15 April 2019 the government launched a consultation on the implementation of the Fifth Money Laundering Directive (5MLD). The key impact of the proposed changes on the UK's existing "people with significant control" (PSC) regime will be the introduction of "mechanisms" to ensure that information on the central PSC register is "adequate, accurate and current". These mechanisms are proposed to include a requirement for regulated businesses contracting with companies to report any discrepancies that they find between beneficial ownership information available to them regarding the companies with which they deal, and the information available publicly at Companies House.
The Fourth Money Laundering Directive (4MLD) was implemented in the UK primarily through the Money Laundering Regulations 2017 and amendment of the Companies Act 2006. Following the European Commission's release in February 2016 of an Action Plan for strengthening the fight against terrorist financing, 5MLD was introduced to amend various aspects of 4MLD, in order to strengthen further that directive's transparency and terrorist financing provisions.
Beneficial ownership: reporting discrepancies to Companies House
The most significant beneficial ownership related change made by 5MLD to 4MLD is, for most EU member states, the requirement for member states to ensure that information on the beneficial ownership of corporates is accessible by the general public. In the UK, however, the PSC regime already takes the form of a public central register of the ultimate controllers of companies. The key change required by 5MLD from the UK's point of view therefore is the requirement to put in place "mechanisms" to ensure that the information held on the public register is "adequate, accurate and current".
5MLD requires that the "mechanisms" to achieve greater accuracy of information include a requirement that "obliged entities" (i.e. regulated businesses subject to the MLRs) and, where appropriate, competent authorities (such as law enforcement agencies) report any discrepancies between the beneficial ownership information available to them and the beneficial ownership information available in the central registers.
Obliged entities, as part of their customer due diligence requirements, must identify and take reasonable steps to verify the identity of the beneficial owner(s) of their customers. They can use Companies House information for this purpose but may not rely on it. Where an obliged entity notices a discrepancy between information they can see on the central register at Companies House and other information they may have regarding the relevant company, the government's proposal is that the obliged entity could be required to report this to Companies House through a bespoke reporting mechanism. Companies House would then be required to investigate and take further action to resolve the discrepancies: this would, in the government's words, allow "easy triaging of data" by Companies House.
Companies House has already been taking steps to deal with situations where companies have failed to provide PSC information or Companies House believes that companies have misunderstood the requirements. For some corporates, the threat of discrepancies in their information being reported to Companies House by businesses with whom they contract may focus their directing minds to make sure they have correctly analysed and reported details of their PSCs.
Beneficial ownership: checking PSC registers before entering into new business relationships
5MLD also requires that whenever an obliged entity enters into a new business relationship with a company or trust that is subject to beneficial ownership registration requirements, it must collect either (a) proof of registration on that register; or (b) an excerpt of the register. 4MLD currently requires obliged entities to verify the identity of the customer with whom they enter into a relationship, but they would now be required to collect proof.
The government proposes to put the onus on the company or trust to provide proof of registration to an obliged entity, upon the obliged entity's request. For companies, because the central PSC register is available publicly at Companies House, the obliged entity would be able to obtain the information direct from Companies House if it wishes, rather than through the company.
New obliged entities
5MLD also expands the scope of obliged entities that will be subject to the MLRs. As an example, auditors, accountants and tax advisors are already within scope. 5MLD will mean that the definition of "tax advisor" in the MLRs is expanded to include firms and sole practitioners who by way of business provide, directly or by way of arrangement with other persons, material aid, assistance or advice about the tax affairs of other persons.
5MLD also introduces requirements for cryptoasset exchanges (i.e. fiat-crypto exchanges) and custodian wallet providers. The government is seeking further evidence as to whether the UK may wish to go further than 5MLD, given the "growing risks from the use of cryptoassets for illicit activity", and also bring within the scope of the regulations, for example, crypto-to-crypto exchange and peer-to-peer exchange service providers.
Other 5MLD changes
From a corporate law perspective, the above beneficial ownership related changes are the most significant aspects, but other changes need to be implemented. These are not covered in this article, but include, for example: the introduction of a newly defined set of enhanced due diligence (EDD) measures; expansion of the scope of trusts required to be registered with the UK's Trust Registration Service; and the establishment of a centralised automated mechanism (such as a central register or electronic data retrieval mechanism) that allows identification of natural and legal persons who hold or control bank accounts within the UK.
Other transparency developments
As noted in the consultation document, alongside the UK's existing corporate transparency framework and the proposed changes discussed above, the government published in summer 2018 a draft Bill to establish a public register of beneficial owners of overseas entities that own or buy property in the UK in 2021: see our Transparency update July 2018: beneficial ownership of overseas entities holding UK property: details of proposed new register revealed.
Next steps and timing
The government intends that the new provisions will come into force in national law by 10 January 2020, in line with Article 4 of 5MLD. The closing date for responses to the consultation is 10 June 2019.