Comments on the New Regulation on the Prevention of Money Laundering and Financing of Terrorism

After several years delay, the reform, theoretically as a result of incorporating the GAFI’s recommendations into Spanish legislation on the Prevention of Money Laundering and the Financing of Terrorism, the Royal Decree enacting the Regulation governing the implementation of Act 10/2010 of 28 April on the Prevention of Money Laundering and the Financing of Terrorism was published in the Official State Gazette of 6 May 2014.

The Regulation establishes detailed arrangements for implementing the 2010 Act but, although it clarifies a number of its points, there are many others that it fails to elucidate as much as we would like. Many aspects have been clarified or explained in greater detail, and there is no doubt that this text was indispensable since the old Regulation of 1995 was completely out of date. Amongst some of the aspects that should be noted, it is worth mentioning first of all that, unlike most of the legislation published in the Official State Gazette, the additional and transitional provisions are set out at the beginning. A great deal of importance has been given to the transitional rules in order to clarify as far as possible the action that those affected will need to take when it becomes law. These include the following:

The 3rd additional provision expressly recognizes, for the first time, the Tax Agency’s right to demand and obtain information that regulated entities may possess or have access to as a consequence of the obligations of diligence derived from Act 10/2010.

The 2nd transitional provision states that those countries or territories that have signed a convention with Spain to avoid double international taxation that contains a clause on the exchange of information will no longer be deemed tax havens. Neither will those that have signed an agreement to exchange tax information in which it is expressly stated that they are not a tax haven.

The 3rd additional provision establishes a transitional period of 2 years for identifying the beneficial owners (or directors) of existing clients.

We draw attention to the points we consider to be most important, under the relevant headings.

Chapter I. General Provisions

Article 3 refers to excluded activities, that is, those not regulated by Act 10/2010. It should be pointed out that the exchange of foreign currency accessory to the holder’s principal activity is an excluded activity, provided that the requirements laid down in the regulations are complied with.

Chapter II. Due diligence

Art.4 refers to the formal identification of all the persons involved in transactions exceeding 1,000€ (except lotteries and games of chance, which are subject to a limit of 2,500€).In transfers of money and the management of transfers they will be identified in all cases.

A new feature introduced by Art. 6 is the designation of the National Identity Document as the only authorised document for the purposes of formally identifying Spanish nationals. In addition Spanish legal persons can now identify themselves by means of a certificate issued by the provincial Mercantile Register.

All members of entities without legal personality must be identified. For investment funds the Regulation refers to the regulations governing Collective Investment Institutions. In the case of Trusts, the Regulation is once again rather subjective; the certificate of incorporation must always be supplied and anyone acting on behalf of beneficial owners must state that they are acting in that capacity.

With regard to beneficial ownership, Art. 8 refers not only to persons who own or directly or indirectly control more than 25% of the capital or voting rights, but, in general, considers those that exercise control over the legal person in any way, directly or indirectly, to be the beneficial owner. It is important to emphasise that if there is no beneficial owner, it will be deemed that the company’s director or directors exercise said control. The intention is that one or more natural persons will always be answerable for legal persons.

The possibility of identifying the beneficial owner by means of a formal declaration made by the customer is introduced, although in the case of above average risks greater control is required in the form of additional documentation or reliable sources (Art.9).

In the case of on-going business relations, mandatory periodic reviews of the information and documentation obtained in compliance with due diligence have now been introduced. There will be annual reviews in the case of high risk clients.

Art.15 lists categories of customer to which simplified due diligence measures can be applied, always excluding payment institutions (because of the high risk of their involvement in money laundering).

Art.17 lists the simplified measures permitted, allowing the regulated entity to opt for one or more of them. The wording is confusing, but the Regulation seems to leave the choice to the regulated entity on the basis of risk.

Art.19 and 20 extend and describe the measures to reinforce due diligence. The first refers to the situations to which these stricter measures will apply (private banking services, money transfer transactions involving sums exceeding 3,000€) while the second describes them, once again leaving the choice of one or more to the regulated entity, always on the basis of risk.

Chapter III. Reporting obligations

Art.23 establishes the need to have an adequate system of alerts depending on the risk. In any case, regulated entities with more than 10,000 transactions per year must have an automated system of alerts in place.

Art.25 requires special investigations to be made in a structured way, documenting the phases, procedures and sources, and keeping a chronological register of the special investigation proceedings, which will be preserved for 10 years.

The documents obtained by the regulated entities shall be preserved for a period of 10 years on optical, magnetic or electronic media. Micro-businesses (fewer than 10 people with an annual turnover of less than 2 million euros) are exempted from this requirement, and can keep hard copies (Art. 28).

Chapter IV. Internal control measures

Finally, in Art. 31, it has been decided to partially excuse so-called micro-businesses from the PML and FT obligations. First of all it should be said that regulated entities are only exempted from certain obligations (articles 32, 33, 35, 38 and 39).

This exemption will only apply to regulated entities that employ fewer than 10 people and whose annual turnover is less than two million euros. In addition, they can only be exempted if the activities they pursue are those listed in letters i) to u) of Art. 2.1 of Act 10/2010.

Art.33 specifies the minimum content of Prevention Manuals and Art. 35 establishes the obligation for big companies to have a full-time specialist technical unit (Art. 35).In addition, controls have to be established at a group level (Art. 36).

As a result of the risk in the case of remittance and property agents, Art. 37 requires that agents be subject to control procedures, which should establish specific monitoring mechanisms to control their activities (these mechanisms must be more rigorous for new agents).

Art.39 extends the obligations of foundations and associations, in addition to those imposed by the Act. This is also the case of regulated entities that manage, operate or sell lotteries or other games of chance (Art. 43).

Chapters V and VI. Special Provisions and Other Provisions

A so-called financial ownership File is created (Arts. 50 to 57)and the bodies that will have access to it specified.

In conclusion, we would say that this Regulation aims to clarify certain aspects and expand on others, but we cannot say it is a truly exhaustive definition of the legislation. It has apparently been deliberately decided to keep some concepts vague, using expressions such as “adequate” or “reasonable measures” that can sometime result in a degree of legal uncertainty for the regulated entity. Nevertheless, it is clear that the Regulation has been drafted with the intention of stressing the concept of “common sense” in implementing the law. What we can be sure about is that this legislation reinforces the control of regulated entities and strengthens the supervisory powers of the Commission’s Executive Service.