Know What You Don’t Know: New EU AML Directive Requires Stringent Third Party & Customer Due Diligence


Over the past couple of years, the European Commission has been working on updating its nine-year-old Third EU Anti-Money Laundering (AML) Directive to accommodate new international standards and to address previous shortcomings.

Earlier this year, the EU Parliament approved new draft legislation, bringing the Fourth AML Directive one step closer to implementation. Though implementation is unlikely to take effect before 2015, employers doing business across the EU should start buttoning down their compliance programmes now—particularly around third-parties.

Shining the Light on Third Party Due Diligence

One of the major outputs of the Fourth AML Directive is that organisations across the EU are expected to know and document the “beneficial owner” of any third-party doing business on its behalf and, in some cases, its customers.

Beneficial owners refer to any single person that has 25 per cent or more ownership of an entity. Organisations are expected to know who these owners are and take steps to mitigate risk posed by working with third-parties associated with persons on a PEP or sanctions list, or that otherwise elicit any corruption “red flags.” This kind of due diligence is extended to customers in some industries, like banking, where customers can present an inherent risk of money laundering.

Know What You Don’t Know: Four Step Due Diligence Process

We see a lot of organisations struggle to manage their third party risk—how can you really know what you don’t know about your third parties? The AML Directive takes a risk-based approach, which is one that we promote to our clients across the globe. We recommend a standard four-step process to manage third-party due diligence:

  1.        Identify/Prioritise: Identify your universe of third party relationships (don’t forget customers!) and prioritise by risk level.
  2.        Assess: Conduct due diligence on a risk-adjusted basis. Uncover and assess possible risks.
  3.        Mitigate: Take steps to mitigate risk that was uncovered.
  4.        Monitor: Continuous monitoring and periodic re-screening to identify new risk events to keep information current and ensure policy compliance is in force.

Third party risk management software helps automate these processes to make sure organisations have a holistic view of their third party risk, while prioritising that risk and focusing resources on the relationships that pose the highest risk. A good third party risk management software should also help to provide continuous monitoring and to create a permanent audit trail of due diligence.

Beyond the New AML Directive

Third party risk management is a hot topic in regulations across the globe—including the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act. Despite the increased risk, compliance leaders often don’t know where to start when it comes designing their due diligence processes.  To get ahead of your own risk, download our Prescriptive Guide to Third Party Risk Management


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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