By Valentina Savva
Over the last years, the need for high level compliance, transparency and good corporate governance in the corporate world, has been increased significantly. White collar crimes as well as money laundering, have lead governments, on a global level, to establish new laws and regulations, in an effort prevent and eliminate such events.
The EU’s 4th Anti-Money Laundering (AML) Directive was enacted on 25 June 2015, and fully implemented on the 26 June 2017, replacing the 3rd AML Directive.
The 4th Directive outlines new rules on accurate and current beneficial ownership identification and record keeping. This means that corporates and other legal entities must provide information to the government, which is made available by each member state in a central register. The new information requirement will cover full names, dates of birth, nationality, country of residence and the beneficial owners’ interest in the transaction.
On June 2018, the EU has recently released the 5th AML Directive. The 5th AML Directive aims to put in place certain guidelines for European member states with a set deadline to implement them by the end of 2019.
The main proposed principles of the 5th AML Directive aim to enhance the transparency within the beneficial owners of the legal entities operating in the European Union via the obligatory creation of public central registers for the Ultimate Beneficial Owners (UBOs) of the legal entities. As per the proposed EU provisions, the public will have access to data on the beneficial ownership register of each legal entity. According to the statement made by the European Commission on 19th of April 2018, each EU member state shall grant access on the beneficial owner of a trust arrangement to legal entities and individuals who manage to satisfy the ‘legitimate interest’ threshold as defined by the national legislative framework of each EU member state. The laws, regulations and policies, in relation to money laundering/terrorist financing, are increasing and revised on a constant basis, while monitoring of all professional service providers, from the regulators, is becoming stricter.
Audit firms, as professional service providers, need to comply and adapt all above. This need to be done mainly because would safeguard the quality of their services and the quality of the firms’ clientele.
Being in full compliance, is not an easy job. It’s a constant and on-going process, which demands time and money. All audit firms should realise the importance and significance of this and “invest” the time and resources needed.
Train our current and potential clients, over the increased compliance requirements, is the number one challenge, faced by the audit firms. Audit firms should communicate to their clients (existing and potential) the importance of compliance, with all laws and regulations. We need to “train” and convince our clients, that sharing of personal and confidential information, would only enhance the service provided. We should also outline the benefits to arise for the client and their companies. An organisation with well-structured and documented due diligence records, is more trustworthy, in all aspects and can achieve long-term sustainability.
Compliance and business development are not always in alignment. There are times where a promising potential client or project, in terms of fees, exposure and experience, comes in contrast with the compliance requirements, leaving no other option to the firms than to reject the proposed projects/client.
IT infrastructure is another challenge faced by the audit firms. In order for an audit firm, to maintain adequate AML/KYC records for all of its clients, as per the relevant AML laws and policies, the establishment of such a software is a must.
More specifically, firms are encouraged to invest on a risk evaluation software solution that would assist the firm to rate the risk of their clients and to comply with the AML law and regulations.
Growing cost of compliance, is something that concerns the audit firms and forms a challenge. In 2016, 69 per cent of organisations told Thomson Reuters that they expected an increase in their total compliance budget over the following 12 months. As compliance departments expand globally and take on more authority, staff, and responsibility, they also become more visible cost centers in the organisation. As a result, compliance programmes are not only expected to have minimal negative impact on the bottom line, more than ever there are pressures to demonstrate how they are contributing a positive impact.
Continued development and staff training, is also a challenge. Audit firms should develop their own anti-money laundering manual, which would outline the firm’s policies and regulations always in accordance with the most recent EU laws, regulations and directions. Staff should be trained over those policies and updated, on a regular basis (at least once a year). Well-trained and educated staff, would lead to better compliance results.
All things considered, we can conclude that challenges over the increased compliance requirements are not few or easy. However, since compliance is a must, audit firms have no other option than to adjust, adapt with those requirements and overcome the challenges faced.
Valentina Savva is assistant manager of audit and assurance services at Baker Tilly Klitou and Partners Ltd, Nicosia