Directive 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (4th AML Directive)
Among other entities specified in the Art. 2 of the 4th AML Directive, such as financial institutions, credit institutions or games of chance operators, the legal professionals are defined as one of the entities obliged to help with prevention of money laundering. However, this help consists of multiple different obligations.
The legal specialists, as the AML Directive names them, are considered as obliged entities only in cases where they participate, whether by acting on behalf of and for their client in any financial or real estate transaction, or by assisting in the planning or carrying out of transactions for their client concerning the:
buying and selling of real property or business entities;
managing of client money, securities or other assets;
opening or management of bank, savings or securities accounts;
organisation of contributions necessary for the creation, operation or management of companies;
creation, operation or management of trusts, companies, foundations, or similar structures.
Customer Due Diligence
The legal specialist is obliged to carry out the customer due diligence in case they deal with the client in the cases named above, and in cases of:
establishment of business relationship;
carrying out of an occasional transaction in the amount of EUR 15 000 and more or occasional transactions that constitute a transfer of funds, as defined in point (9) of Article 3 of Regulation (EU) 2015/847 of the European Parliament and of the Council, exceeding EUR 1 000;
when there is a suspicion of money laundering or terrorist financing; or
when there are doubts about the veracity or adequacy of previously obtained customer identification data.
As the name of this process suggests, the customer due diligence consists of identification of the client, identification of its beneficial owner, identification of the purpose of the business relationship and monitoring of the client during the business relationship considering his business and risk profile and if necessary, identification of his source of funds.
As ensuring of transparency of financial transactions is the main part of the customer due diligence and not all of the clients of the law firms are natural persons, specific rules for legal entities must be set out.
To be able to carry out all steps of the customer due diligence, the customer must dispose with an information of its beneficial owner. For this reason, the Chapter III of the AML Directive sets out an obligation of corporates and other legal entities to obtain and hold adequate, accurate and current information on their beneficial ownership. Above that, the information of the beneficial ownership must be published in central register with access to competent authorities, obliged persons and any other person or organisation with a legitimate interest.
The other provision of the AML Directive which shall ensure the transparency of the legal entities is set out in Art. 10 para. 2 which imposes an obligation of the member states to take measures to prevent misuse of bearer shares and bearer share warrants.
The reason for carrying out of the whole process of customer due diligence is to detect suspicious transactions (or in some cases already crimes). In case the obliged entity has suspicion that the funds which are being disposed in the business transaction or in the business relationship are the proceeds of criminal activity or are related to terrorist financing, they are obliged to notify the Financial Intelligence Unit of this.
As one of the main principles of providing of legal services is to ensure the confidentiality of the lawyer, the AML Directive naturally sets out some exceptions for the legal specialists regarding the reporting obligations, mainly in Art. 34 para. 2. According to this provision, the reporting obligation doesn`t apply to legal specialists in case of information obtained from their client in the course of ascertaining the legal position of their client or performing their task of defending or representing that client in, or concerning, judicial proceedings, including providing advice on instituting or avoiding such proceedings.
The customer due diligence and reporting obligation are the key obligations of the obliged entities according to the AML Directive, however, there are also other obligation that they must fulfil. Naturally, all of the obliged entities must maintain confidentiality and cannot inform their clients that report of suspicious transaction has been made. Further, the obliged entities shall take appropriate steps to identify and assess the risks of money laundering and terrorist financing. To ensure that the rules for identifying and assessing of the risks are followed within the obliged entity, the law firms shall organize regular training programs for their employees.
5th AML Directive
On April 19, 2018, a proposal for Fifth AML Directive was adopted by the European Parliament. Among others, this document proposes making of central registers of beneficial owners public and sets out new rules for virtual currencies.
Czech Act No. 253/2008 Sb., on certain measures against legalisation of proceeds from criminal activities and terrorist financing (Czech AML Act)
As in the case of the AML Directive, the legal specialists (Czech AML Act uses the word attorney) fall under the obliged entities only in some cases, whereas the enumeration in the Czech AML Act corresponds the AML Directive definition.
The customer due diligence is divided between two steps, including identification of the client and control of the client.
Identification of the client
The identification of the client is the first step of his due diligence and consists of recording of identification details of the client and their verifying in clients identity card. In case the client is a legal entity, the identification details of the natural person acting on behalf of the legal entity are recorded and verified.
The attorney shall carry out the identification of the client in cases of an occasional transaction in the amount of EUR 1 000. Unlike in the case of the AML Directive, this limit is set out for all occasional transactions and not only for cases of transferring of funds within the meaning of Regulation 2015/847.
Regardless the limit of EUR 1 000, the obliged person shall identify the client also in cases of establishment of a business relationship, suspicious transactions, entering into an agreement on renting of safety deposit or agreement on custody.
During the identification, the obliged entity shall also identify whether the client is a politically exposed person or a person, who is a subject to international sanctions.
The first identification of the client must be done face to face. For this reason, carrying out of distance transactions could get complicated, as the presence of the client is necessary. In case the client is a legal entity, physical presence of a person entitled to act on their behalf is necessary. However, in some cases specified in the AML Act, the attorney can use the institutes of identification takeover (in cases the identification has been carried out by other legal specialist operating in EU or other country with equivalent AML requirements) or simplified identification and control (in case of some low-risk clients enumerated in Czech AML Act).
Control of the client
The second and more intensive part of the customer due diligence consists of identification of the purpose of the business relationship, identifying of the ownership structure of the client and his beneficial owner, monitoring of the client during the business relationship and identification of the source of his funds.
Czech AML Act is stricter than the AML Directive also in this case, as the obligation to identify the source of funds of the clients is an integral part of each control of the client, not only of the cases where it’s necessary.
The attorney shall carry out the control of the client in case of an occasional transaction in the amount of EUR 15 000 and more, an occasional transaction concluded with politically exposed person or person residing in risk country, in cases of entering into an agreement on renting of safety deposit or agreement on custody or during the duration of the business relationship.
In Czech Republic, the register of beneficial owners has been established by amendment to Act No. 304/2013 Sb., on public registers of legal entities and natural person as to January 1, 2018. The Czech legal entities are obliged to keep information of their beneficial owner and to enter this information into the register of beneficial owners until January 1, 2019. Nevertheless, the current Czech legislation has one deficit – it doesn’t set out any direct sanctions for failing to enter the beneficial owner into the register.
Regarding the transparency of joint-stock companies, until recently, Czech legislation enabled the companies to issue registered shares, which enabled their owner to participate on business of the company. The significant element of these shares was their anonymity, whereas these shares were free transferable and their owners weren’t subject to the obligation of entrance into the list of shareholder. During the process of recodification of Czech civil law, this type of shares was abolished by Act No. 90/2012 Sb., on business corporation. Companies, who formerly issued registered share had to change their form to shares where the identity of its owner is known.
System of internal principles and procedures
Pursuant Sec. 21 of Czech AML Act, all of the obliged entities have to develop an internal guideline describing their strategies and procedures regarding prevention of money laundering and terrorism financing. The system of internal principles and procedures must be prepared in writing and must fulfil requirements set out in Czech AML Act, including enumeration of signs of suspicious transactions, individual procedures for identification and control of the client or setting out of the risk types of the clients, whereas the attorneys don’t have to elaborate it in writing. Integral part of the system of internal principles and procedures is assessment of risks which may occur within the activities of the obliged person.
Attorney as an Obliged Entity
Including of the attorneys into the enumeration of obliged persons’ mail seem as gross violation of one of the main principles of legal professions, i.e. the confidentiality of the attorney. However, in this case, the interest on money-laundering prevention surpasses the interests of the client or the attorney, and for this reason, the intervention into the relationship between the attorney and the client is legitimate.
Due to the position and task of the attorneys in the society, it wouldn’t be just to apply the same obligations to the attorneys as to the other obliged entities and for this reason, following exceptions have been adopted.
The attorney is not obliged to carry out the control of the client or to notify suspicious transactions in case of information about the client obtained in connection with providing legal advice, defending of clients in criminal proceedings or representing of the client in proceedings before court.
In case of fulfilment of notification obligations in other cases, the notifications are being made against Czech Bar Association and not directly to Financial Analytical Unit (Czech Financial Intelligence Unit). In case the Financial Analytical Unit intends to require the attorney to submit any details, documents or information, it must be also done through the Czech Bar Association.
The administrative supervision over fulfilment of obligations set out in the AML Act is being made through the Financial Analytical Unit. Also in this case, an exception for attorney is set out. In these cases, the Financial Analytical Unit is entitled to fill a complaint to the Czech Bar Association, whereas the Czech Bar Association is obliged to carry out a control of the attorney in the matter of fulfilment of obligations set out in the AML Act. The Czech Bar Association is also the competent authority in the matter of investigation of administrative offences pursuant to the AML Act.
Mgr. Anna Všetečková
Becker & Poliakoff, s.r.o., Law Office