The 4th Money Laundering Directive, abbreviated as MLD4, is a progressive change in measures undertaken in the EU to fight money laundering and terrorist financing. This body of EU directives raises the bar in financial scrutiny, amongst other things.
That is why MLD4 is intended to fill the gaps created by previous regulations and correlate with the international standards provided by the FATF. Until 2024, this directive is very essential as financial crimes continue to evolve to a higher level.
Due to this dynamic financial environment and enhancement in the techniques used in financial crimes, MLD4 is desired to enhance control measures. It provides strong protection against any illegal financial operations.
The following are some of the ways through which MLD4 is poised to strengthen AML controls.
What is MLD4?
The Fourth Money Laundering Directive replaced the Third Money Laundering Directive (MLD3) on the 26th day of June in the year 2017.
This new directive aims to harmonize EU policies with the norms issued by the Financial Action Task Force (FATF).
MLD4 is expected to increase the EU’s defense capabilities against financial and other crimes by increasing the level of transparency.
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Enhanced Customer Due Diligence (CDD)
One of the main alterations that were incorporated into MLD4 is the demands towards Customer Due Diligence that became more strict.
CDD is one of the SOPs that organizations employ in an effort to identify their clientele and closely evaluate them for risks.
Under the MLD4, CDD needs to be conducted for cash transactions greater than € 10,000. In 2024, more transactions will have to be examined, increasing the focus on large cash transfers.
For the gambling sector, MLD4 requires CDD in any casino where such transaction is above € 2000. This was made in 2017 to identify the high-risk locations where high cash amounts are transacted.
Expanded Scope for Politically Exposed Persons (PEPs)
The definition of Politically Exposed Persons is expanded further by the MLD4. Earlier, it was possible to touch on some aspects of PEP regulations. The rules mainly concerned people from countries that are not members of the European Union.
The recent version of MLD4 has expanded its list of targets to include both domestic and foreign PEPs. This is a change that requires firms to perform the same due diligence on local PEP as they do on foreign PEP.
From 2024, the scope of the expanded PEPs has led to the improvement of due diligence for all PEPs.
Central Register of Beneficial Ownership
Another major reform implemented under MLD4 is the creation of the central register for beneficial ownership.
Accordingly, to implement this directive, firms and other legal entities have to have current lists of their beneficial owners and provide them to the national bodies.
Every EU member state has to set up a central register that will be available to banks, law firms, and any other person who has a reason to do so.
This move is intended in different ways, and one of the aims is to increase the level of transparency and ease of use of Ownership information.
By 2024, these registers will be useful to determine who really stands behind the company, which is very important to avoid money laundering.
No Automatic Exemptions from Enhanced CDD
According to the Fourth Money Laundering Directive, automatic exemptions for the higher CDD have been taken away.
In particular, taking identifiable documents was regulated more strictly before when listed companies or public authorities were released to apply simplified CDD procedures.
The use of simplified CDD requires firms to be able to substantiate why they are adopting the approach based on risk analysis.
This implies that businesses have to make more thorough records of risk evaluations than before.
This change in 2024 will also assist in making sure that there are sound reasons for using simplified procedures so that there is little chance of inadequate checks.
Emphasis on a Risk-Based Approach
MLD4 focuses on the risk of money laundering to a greater extent than previous directives. According to the requirements for risk assessment, companies have to take into account customer information and types of transactions as well.
They also have to establish and enforce internal controls according to the results of such assessments.
Such a policy has been in place since 2017 so that more firms are inclined towards acting more proactively in cases involving money laundering risks.
Expansion Beyond the EU
MLD4 also broadens the guidelines and covers countries beyond the European Union. Companies having subsidiaries outside the EU, more than 50%, must ensure that those subsidiaries abide by the EU norms on anti-money laundering.
This extension is useful to remind the company of the standards to adhere to during their operations in different countries.
By 2024, no matter how lenient or permissive the AML laws are in the subsidiary’s country of operation, it has to stick to what MLD4 requires.