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Easier online identification, new obliged entities and higher sanctions. What changes does the amendment to the AML Act bring?

Digital technologies are growing in popularity, but they come hand in hand with new forms of crime, including crime in the area of money laundering. Fighting against this illegal practice is becoming more and more demanding, which is reflected in the increasing number of relevant legal regulations on both the Czech and European level. At the beginning of 2021, an amendment of the AML Act came into force, which regulates for example new obligations, technological possibilities with regard to the online customer on-boarding, changes certain conditions for customer due diligence and brings substantially higher sanctions for violations of the AML Act. What exactly do these changes mean and what else does the amendment to the AML Act bring? We talked about these matters with the representatives of the Financial Analytical Office during our panel discussion.

The amendment to Act No. 253/2008 Coll., the AML Act, as amended, brought a number of important changes. Some of them come as no surprise to obliged entities, since they are based on the already known trends. A case in point may be the scope of obliged entities, which the amendment expands: “Until now, the scope of obliged entities had been quite broad, covering all risks, so the newly included areas are not significantly riskier from our perspective. It is simply an addition to the portfolio,” elaborates Jiří Hylmar, Deputy Director of the Financial Analytical Office (“FAO”) and Director of the FAO analytical department.

New obliged entities according to the AML Act
include, for example:

  • Entities active in the field of real estate;
    • Real estate brokers pursuant to the Act on Real Estate Brokerage;
    • When mediating a lease, sublease or leasehold, the limit of EUR 10,000 must be exceeded;
  • Auctioneers organizing the auction of real estate properties;
  • Intermediator of trade with art etc. (the limit of EUR 10,000);
  • Providers of services connected with virtual assets (new definition).

You can read more information about the effects of the AML Act amendment on entities active in real estate in our article.

Online customer on-boarding and the digital age progress

Online customer on-boarding is another field that the AML Act addresses on the basis of the existing trends: “The amendment changed certain parameters of related processes and pushed online identification a bit further again. Nowadays, it is often the only feasible way considering the reality of the pandemic,” says Jan Procházka, Partner and Lawyer in the banking and finance team of Deloitte Legal.

Trends in the field of online identification

“Around the world, solutions to this matter are quite diverse, which leads to relatively significant differences in their implementation; it is perhaps one of the reasons why the reliance on online identification (its takeover) is limited by the regulators. However, the trends I see include, for instance, digital image and video processing, e.g. of ID documents, their security features and of persons themselves potentially comparing the two; various state sponsored and semi-commercial digital identity schemes as well as new information interfaces between entities exchanging identification and due diligence information..”
Vladimír Cupal, AML and compliance expert on the Deloitte Advisory forensic team

Specific changes in the AML Act relate mainly to the so-called penny transfer, i.e. the process of opening an account in which the customer submits a copy of two ID documents, proves the existence of a payment account held in his name and carries out a verification payment from the relevant account. In certain cases, it is no longer necessary to submit the copy of the second (supporting) ID document (i.e. the customer is then obliged to provide just one ID document). The amendment also clearly sets the direction of the penny transfer – the first (verification) payment will now have to be carried out by the customers themselves. The amendment also includes the possibility of using new payment services, AIS (account information service), and PIS (payment initiation service); at the same time, the amendment takes into account the implementation of BankID.

Financial institutions’ approach to the implementation of online solutions

“Regarding the implementation of online solutions, we have noticed that the risk-based approach is quite common in practice. With regard to certain segments, customers and products, some financial institutions are adopting this trend, which might be a reaction to group solutions coming from abroad.”
Alexander Nagy, Partner on the Deloitte Advisory forensic team

In addition to online identification, the amendment also addresses the issue of reliance on customer identification performed by other entities. In this regard, it mainly brings stricter rules in connection with initial identification, the method of its implementation, the context of its origin, etc. “Regarding the matter of reliance, I think the legislator captured the essence of the problems. This means that the initial identification must be carried out in connection with the establishment of a business relationship; (service provider) must already know the customer in some way and it is not possible to identify them at short notice,” explains Michaela Hladká, Deputy Director of the analytical department of the FAO.

Video identification: the future of online on-boarding?

Although the Czech AML Act does not recognise or permit video identification yet, customers are highly interested in it; however, the implementation of necessary tools may be challenging at present, especially from a technical and security perspective. Inspiration can be found abroad: in certain states, video identification can be already implemented using appropriate modern technologies and secure software solutions, so it is probably only a matter of time before a legal and technological environment enabling video identification of customers is created in the Czech Republic as well.

In relation to the extension of obligations, the so-called enhanced customer due diligence is also extended, which mainly concerns customers from high-risk third countries or politically exposed persons.

High sanctions as a driver of changes

There are significant changes in the reporting of suspicious transactions as well, since the amendment removed the mandatory period of 5 days to report suspicious activity to the Financial Analytical Office, introducing the obligation to act “without undue delay” in case of suspicion. However, this interpretation is rather vague and may bring a number of ambiguities and problems in the future. It will thus be particularly important that this principle is respected and strictly adhered to by all entities subject to the obligation to report suspicious transactions.

If the FAO finds malpractice in connection with one of the inspected entities, in addition to the actual correction of the problematic situation, financial sanctions will arise as well (especially in the event of fundamental systemic malpractice). According to Michaela Hladká, this reform of administrative punishment is one of the most important aspects of the whole amendment, as the amount of financial sanctions that can now be imposed is many times higher than before, when the upper limit of sanctions reached CZK 10 million: with the amendment, it is now possible to impose a fine of up to CZK 130 million or more, depending on the net annual turnover or the amount of the unjustifiably gained profit.

Development of sanctions in the field of AML

“The trend in fines and sanctions imposed by the regulator has been increasing worldwide since 2002 and 2003, when they reached relatively small amounts. In 2014, for the first time, imposed sanctions exceeded USD 10 billion worldwide; subsequently, the trend had continued to increase until 2019 and 2020, when there were about 50 such cases worldwide and the amounts reached USD 10 billion as well.” However, sanctions imposed on the basis of the amendment should only be imposed as a last resort.
Pavel Volhejn, AML and compliance expert on the Deloitte Advisory forensic team

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