After members of the European Union identified Cyprus as a country that practiced money laundering, the country established a UBO registry in order to eventually meet the standards provided by the fifth Anti-Money Laundering (AML) Directive.
In February 2021, reports indicated that Cyprus was establishing an Ultimate Beneficial Owner (UBO) registry in order to identify registered company owners and compile that information within a database. The main goal of this database is to deter money laundering and financial terrorism practices, but the registry wasn’t entirely established on the country’s own volition.
After members of the European Union identified Cyprus as a country that practiced money laundering, the country established a UBO registry in order to eventually meet the standards provided by the fifth Anti-Money Laundering (AML) Directive, as laid out by the EU.
A brief history of AML directives
In 1991, the EU established the first AML Directive (1AMLD) in order to combat money laundering via organized crime in the represented states. The 1AMLD established 40 recommendations that primarily focused on the responsibilities of the banks and financial institutions in order to combat money laundering.
The directive stated that, while criminals may be the initiators of money laundering practices, “preventing the financial system from being used for money laundering is a task which cannot be carried out by the authorities responsible for combating this phenomenon without the cooperation of credit and financial institutions and their supervisory authorities.”
The EU cannot directly create laws for its member states, but they can establish and implement rules that the member states must follow in order to maintain a position within the union.
The 1AMLD required countries that are members of the EU to create legislation to ensure that financial institutions established new policies such as Customer Due Diligence (CDD) and Know Your Customer (KYC) procedures. This legislation had to ensure that these institutions followed these procedures with a client during their interactions and maintain records for up to five years thereafter.
The second AML directive wasn’t established until December 2001. The 2AMLD was established to fix some of the shortcomings of the previous directive including broadening the definition of financial institutions to include “Non-Banking Financial Institutions.” The most notable addition to this directive was lawyers and their rights to secrecy if it involved money laundering.
The 3AMLD took effect in 2005 and included casinos and accountants as entities obligated to follow CDD and KYC standards. However, the primary goal of the 3AMLD was to target terrorist organizations and to ensure that entities were doing their due diligence to ensure they were not providing funding to terrorists.
The latest AML directives
After 10 years of silence, the EU set into motion the fourth AML directive in 2015. The goal of the 4AMLD was to provide more clarity on the obligations of entities to ensure they were following CDD policies. The 4AMLD also followed the same path as previous directives by widening the scope to institutions that hadn’t previously been included, such as gambling-based firms.
The directive also included the requirement that participating member states establish UBOs. These UBOs would appear on national registries and include anyone who owned 25% or more of a legal entity.
The establishment of UBOs was to combat shadow companies that some financial criminals had established in order to hide their illegal activity.
Unlike previous directives, a majority of the countries in the EU found it challenging to meet the expectations of the 4AMLD by the deadline established by the EU. Cyprus was among these countries.
Within a year, the fifth directive had already been established. In the aftermath of the 2015 Paris terrorist attacks that killed more than 130 people, the EU established the 5AMLD in order to prevent terrorists from finding alternative methods of funding including prepaid credit cards.
Along with these implementations, the 5AMLD also required UBOs of member states to go public in order to provide more transparency. Countries within the EU were required to fulfill this obligation by March 2020.
Cyprus, Germany and AML directives
As March 2020 approached, the EU openly chastised eight countries for not only failing to implement a public UBO but also not notifying the EU about a plan to establish a public UBO.
“Anti-money laundering rules are instrumental in the fight against money laundering and terrorism financing,” the EU said in a statement. “Legislative gaps occurring in one Member State have an impact on the EU as a whole.”
While Cyprus has established its UBO as of February 2021, its current UBO does not meet the obligations of the 5AMLD due to not being public. Cyprus’ delayed implementation of the EU’s directives has offered chief executive officers the ability to maintain anonymity within their country.
As it stands, the current Cyprus UBO is only available to select authorities and there are currently no plans for Cyprus to implement the 5AMLD.
As opposed to Cyprus, Germany is currently working to implement legislation that requires all companies with a legal entity in the country to register their data in the country’s UBO. The government expects the number of companies registered in their database to nearly quintuple from 400,000 to 1.9 million. Furthermore, Germany’s UBO currently meets the obligations established by the 5AMLD by allowing the database to be made available to the public.
AML directives and their effect on businesses
As it stands, each AMLD has only served to protect businesses from getting involved in potentially illegal activities. The implementations of the 5AMLD, including the public registry, will hold the CEOs of companies operating within EU countries that meet the EU’s guidelines more accountable for the actions of their corporations.
As the EU continues to establish these directives, businesses may be required to fulfill more standards as countries within the EU establish more legislation to meet the obligations of the directives.
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