Government Proposal to implement EU’s Fifth Anti-Money Laundering Directive in Finland

D&I Finance and Corporate Advisory Alert

Posted on

4 Oct

2018

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Dittmar & Indrenius > Insight > Government Proposal to implement EU’s Fifth Anti-Money Laundering Directive in Finland

The Finnish Government proposal implementing the provisions of EU’s Fifth Anti-Money Laundering Directive (the “Fifth AML Directive”) was submitted to the Parliament on 4 October 2018. The proposal includes, inter alia, amendments to the Anti-Money Laundering Act (the “AML Act”) and enactment of two new acts. The objective is that the proposed legislation would enter into force on 1 January 2019.

Only approximately one year after the AML Act entered into force in Finland, it will be amended due to the latest amendments to European anti-money laundering legislation. The amendments form part of the EU Commission’s action plan on strengthening the fight against terrorist financing and must be implemented by the Member States by 10 January 2020.

Our observations of the proposed key amendments to the current legislation are set out below. In summary, the Fifth AML Directive significantly limits anonymity in the financial sector and tackles money laundering and terrorist financing in new ways. Continuous compliance efforts are therefore needed from both current and new reporting entities under the AML Act.

Key Observations

1. Extension of the Scope of the AML Act to Crypto Market

Crypto currencies or virtual currencies are currently not explicitly regulated by Finnish law and they are not considered to be payment instruments under the payment service legislation. The proposed amendments will both define virtual currencies for the first time under Finnish law and also set specific requirements for those providing services related them.

The scope of the AML Act would be extended to cover custodian wallet providers and providers engaged in exchange services between virtual currencies and fiat currencies.

This means that, in the future, all crypto exchanges and all providers of electronic wallets for virtual currencies such as bitcoin would be covered by the AML Act. These platforms and providers would be required to register with the Finnish Financial Supervisory Authority and they would have to meet the requirements of the AML Act including the same responsibilities as other reporting entities, such as monitoring transactions and implementing customer due diligence.

Additionally, a new Act on the Providers of Virtual Currencies (FI: Laki virtuaalivaluuttojen tarjoajista) is being proposed. The scope of the Act would cover also issuers of virtual currencies, although in many occasions the identity of such is not known.

The scope of the AML Act would further be extended to cover e.g. art dealers (with respect to transactions where the value amounts to 10,000 euros or more) and all forms of tax advisory services.

2. Beneficial Ownership Information

Registers of beneficial ownership information required under the current AML Act will come into effect as planned. Accordingly, all legal persons, excluding listed companies, are required to keep information on their beneficial owners as of 1 January 2019 and enter beneficial owners to the registers maintained by the Finnish Patent and Registration Office by 1 July 2020.

In addition, reporting entities and competent authorities would have to notify the holder of the registers of discrepancies found between the beneficial ownership information on the registers and the beneficial ownership information they hold otherwise.

Furthermore, beneficial owners would have an obligation to provide the respective companies with their beneficial ownership information required for the registers.

3. Politically Exposed Persons

Politically exposed persons (PEPs) continue to be high risk for the purposes of the Know Your Customer (KYC) procedures and require enhanced due diligence.

In order to enable reporting entities to better identify PEPs, offices and functions that qualify as politically exposed on national level including also nationally registered international organizations would be specified in a separate Government Decree.

4. High-Risk Third Countries

According to the proposed amendments to the AML Act, reporting entities would be required to implement enhanced due diligence measures to monitor suspicious transactions involving high-risk countries more strictly.

This includes, inter alia, obtaining information on details regarding the nature of the relationship, the origin of the transferred funds and the business partner’s motivation to liaise. Additionally, the reporting entity’s higher management would be required to give consent to the business relationship. Also existing business relationships would be strictly monitored.

According to the proposal, the Finnish Financial Supervisory Authority would be given further authority in the subject matter, after which it may for example refuse reporting entities from high-risk third countries to establish themselves in Finland or prevent reporting entities from Finland to establish themselves in high-risk third countries.

5. Monitoring of Bank and Payment Accounts

According to the Fifth AML Directive, Member States shall establish centralized automated mechanisms, such as central national registries or central electronic data retrieval systems, for bank and payment accounts to ensure the quick identification of all accounts of any individual by the financial intelligence units and competent authorities.

In Finland, a new Act on the Bank and Payment Accounts Monitoring System (Fi: Laki pankki- ja maksutilien valvontajärjestelmästä) is being proposed to enable direct access to relevant account information by competent authorities. The centralized monitoring system would include both automated interfaces for information searches and a register maintained by the Finnish Customs.

Credit institutions and their Finnish branches must establish an electronic data retrieval system that enables providing the information to the competent authorities without delay. Payment institutions, electronic money issuers, custodian wallet providers, providers engaged in exchange services between virtual currencies and fiat currencies and issuers of virtual currencies as well as their Finnish branches must provide information to the bank and payment accounts register.

6. Electronic Money Products

Under the current AML Act, reporting entities may apply simplified due diligence measures with respect to e-money which meets certain conditions, including threshold amounts. The threshold for identifying holders of non-rechargeable prepaid cards would now be lowered from EUR 250 to EUR 150 per month. E-money online transactions with prepaid cards would be limited to EUR 50.

7. Going Forward

As a main rule, the proposed amendments are intended to enter into force on 1 January 2019. The Government’s proposal (HE 167/2018 vp) is available here (only in Finnish).

Developments on the European Union stage continue: the lawmaking procedure concerning proposal for a directive which would facilitate the use of financial and other information for the prevention, detection, investigation or prosecution of money laundering, associate predicate offences and terrorist financing is under way. Also further regulations relating to anti-money laundering are projected in the future.

We are happy to discuss the implications of the proposed legislation as well as keep you updated on the legislative process. For more information and guidance, please contact the Head of our Corporate Advisory, Compliance & CSR practice group, Hanna-Mari Manninen.

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Government Proposal Regarding the Implementation of EU's Second Shareholders' Rights Directive Published
13 Dec 2018 On 13 December 2018, the Finnish Government submitted its proposal regarding the implementation of EU's Second Shareholders' Rights Directive ((EU) 2017/828, "SHRD II" or the "Directive") to the Parliament. New provisions amending, among others, the Securities Markets Act, the Companies Act and the Act on Investment Services are scheduled to take effect on 1 April 2019. SHRD II amends the contents of EU's First Shareholders' Rights Directive 36/2007/EC. The changes are meant to address certain systemic risks identified in the aftermath of the financial crisis, such as excessive short-term risk taking by corporate managers and inadequate level of monitoring by institutional investors and asset managers. To this end, new compliance requirements related to director remuneration, related party transactions as well as identification of shareholders and transmission of information will be introduced. Moreover, institutional investors, asset managers and proxy advisors will be required to comply with new transparency requirements. The following summarizes the key changes brought by the national implementation of the Directive into Finnish legislation. Contents of the Proposal 1. Director Remuneration New provisions governing decision-making on director remuneration and related reporting will be included in the Companies Act and the Securities Markets Act. The requirements will apply to publicly listed companies only, and their contents will be later specified in more detail by a governmental decree. Listed companies will need to establish a remuneration policy as regards the members of the board of directors, managing director and the supervisory board (if applicable). The policy will need to be submitted to an advisory vote of the shareholders' meeting at every material change and in any case at least every four years. Temporary derogation from the approved policy will be possible only under limited circumstances. Listed companies will also need to draw up a remuneration report that provides a comprehensive overview of realized remuneration. The report will need to describe all benefits awarded or due to individual directors during the previous financial year, and must be submitted to an advisory vote at the shareholders' meeting. Both documents will need to be publicly disclosed no later than three weeks before submitted to the shareholders' meeting for approval. If the remuneration policy is not approved, the company may continue to pay remuneration to its directors in accordance with its existing practices or approved existing policy, whichever is applicable. However, in this case, the company must submit a revised policy for approval at the following shareholders' meeting. 2. Related Party Transactions Current provisions of the Companies Act on disqualification will be supplemented by new provisions that regulate decision-making on related party transactions. The new rules will affect the decision-making of the board of directors, managing director, supervisory board and the shareholders' meeting of publicly listed companies. A related party transaction will be defined as a transaction between a company and a related party, which is concluded either outside the company's ordinary course of business or on other than normal market terms. If a related party transaction is material, it must always be subjected to heightened scrutiny in the form of a special decision-making process as well as published. With regard to publicly listed companies, the definition of a related party will be the same as in international accounting standards (IAS 24). Generally, a related party means a contracting party, in which the company or its director has a financial, intrafamilial or other interest. A majority or qualified majority of the votes of disinterested directors or shareholders will be required to approve related party transactions, depending on the matter in question. In most matters, the board of directors will continue to be the competent organ that approves such transactions. Interested directors will not be able to participate in decision-making. 3. Identification of Shareholders and Transmission of Information The new rules will enable publicly listed companies to identify their shareholders through intermediaries, such as investment firms and nominee registration custodians, as well as facilitate the transmission of information between market participants. Relevant provisions will be included in the Securities Markets Act and the Act on Investment Services. A listed company will have a right to know the identity of its shareholders by requesting information regarding shareholder identity from such investment firms and nominee registration custodians that provide safekeeping of shares in the EEA. Expenses arising from such requests would be borne by the requesting company and should reflect actual costs. This right is likely to be exercised sparingly and only with regard to nominee-registered shares because up-to-date information regarding the direct ownership of listed companies is publicly available through Euroclear Finland. Intermediaries will have corresponding obligations to communicate information regarding shareholder identity to listed companies. The communication must take place without delay and notwithstanding confidentiality provisions. The proposal introduces time limitations to the storage of the acquired or communicated information. According to the proposal, companies and intermediaries may not store information regarding shareholder identity for longer than 12 months. 4. Transparency Requirements for Institutional Investors, Asset Managers and Proxy Advisors Institutional investors and asset managers will be required to develop and publicly disclose an engagement policy which describes how shareholder engagement is integrated with investment strategy. The requirement will concern Finnish life insurance companies as well as most pension and insurance funds. The engagement policy shall describe how institutional investors and asset managers monitor investee companies on relevant matters, including strategy, financial and non-financial performance and risk, capital structure, social and environmental impact and corporate governance; conduct dialogues with investee companies; exercise voting rights and other rights attached to shares; cooperate with other shareholders; communicate with relevant stakeholders of the investee companies; and manage actual and potential conflicts of interests in relation to their engagement. Proxy advisors (e.g. ISS and Glass, Lewis & Co) will be regulated correspondingly under the Securities Markets Act. Proxy advisors will be required to develop and publicly disclose a code of conduct. The code of conduct shall describe how proxy advisors prepare their research, advice, and voting recommendations. Further, proxy advisors will be required to prevent and manage conflicts of interests and disclose them to clients without delay. Non-compliance with the requirements is permitted only for good cause and the reasons for non-compliance must be publicly disclosed (comply or explain -principle). Key Insights In consideration of the proposed changes, Finnish publicly listed companies should: Justify the chosen form and level of director remuneration better than earlier at AGMs held from 1 January 2020 onwards; Ensure that all related party transactions are always well-documented and approved in compliance with the new decision-making rules; and Comply with disclosure requirements on director remuneration and time limitations regarding the storage of information on shareholder identity. Moreover, institutional investors, asset managers and proxy advisors operating in Finland should from 24 September 2020 onwards: Disclose an engagement policy and/or code of conduct; and Comply with related disclosure requirements. We are happy to discuss the proposed changes with you. For more information and guidance, please contact the Co-Heads of our Corporate Advisory & CSR practice group, Hanna-Mari Manninen and Kari Lautjärvi.   Special thanks to the co-author of this insight Oskari Paasikivi, D&I Trainee 2018.

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