Business in Europe, EU – Baltic States, Financial Services, Legislation, Markets and Companies, Taxation

Following publication of a revised set of international standards in February 2012 (see IP/12/357), the Commission decided to rapidly update the EU legislative framework to incorporate the necessary changes. In parallel, the Commission also undertook a review of the Third Anti-Money Laundering Directive that showed the need to update the existing legislative framework in order to address all identified shortcomings.

The proposed update of the legal rules will have to be adopted by the European Parliament and the Council of Ministers under the ordinary legislative procedure.

Commission’s opinion

- Internal Market and Services Commissioner Michel Barnier said: "The Union is at the forefront of international efforts to combat the laundering of the proceeds of crime. Flows of dirty money can damage the stability and reputation of the financial sector, while terrorism shakes the very foundations of our society. In addition to the criminal law approach, a preventive effort via the financial system can help to stop money-laundering. Our aim is to propose clear rules that reinforce the vigilance by banks, lawyers, accountants and all other professional concerned."

- EU Home affairs Commissioner Cecilia Malmström said: "Dirty money has no place in our economy, whether it comes from drug deals, the illegal guns trade or trafficking in human beings. We must make sure that organised crime cannot launder its funds through the banking system or the gambling sector. To protect the legal economy, especially in times of crisis, there must be no legal loopholes for organised crime or terrorists to slip through. Our banks should never function as “Laundromats” for mafia money, or enable the funding of terrorism."

Source: European Commission, Press Release: Reference: IP/13/87 Brussels, 5 February 2013

New legislative package

The new package complements other actions taken or planned by the Commission in respect of fight against crime, corruption and tax evasion, includes:

• A directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing;
• A regulation on information accompanying transfers of funds to secure "due traceability" of these transfers.

Both proposals fully take into account the latest Recommendations of the Financial Action Task Force (FATF), the world anti-money laundering body, and go further in a number of fields to promote the highest standards for anti-money laundering and counter terrorism financing.

See: MEMO/12/246 and http://www.fatf-gafi.org/ 

More specifically, both proposals provide for a more targeted and focused risk-based approach.

The new Directive’s purpose:

• To improve clarity and consistency of the rules across the Member States;
• Provide a clear mechanism for identification of beneficial owners. In addition, companies will be required to maintain records as to the identity of those who stand behind the company in reality;
• Improve clarity and transparency of the rules on customer due diligence in order to have in place adequate controls and procedures, which ensure a better knowledge of customers and a better understanding of the nature of their business. In particular, it is important to make sure that simplified procedures are not wrongly perceived as full exemptions from customer due diligence;
• To expand the provisions dealing with politically exposed persons, (i.e. people who may represent higher risk by virtue of the political positions they hold) to now also include “domestic” (those residing in EU Member States in addition to 'foreign') politically exposed persons and those in international organisations. This includes among others head of states, members of government, members of parliaments, judges of supreme courts.
• To extend its scope to address new threats and vulnerabilities;  
• To ensure, e.g. a coverage of the gambling sector (the former directive covered only casinos) and by including an explicit reference to tax crimes;
• To promote high standards for anti-money laundering;
• To go beyond the FATF requirements in bringing within its scope all persons dealing in goods or providing services for cash payment of €7,500 or more, as there have been indications from certain stakeholders that the current €15,000 threshold was not sufficient. Such persons will now be covered by the provisions of the Directive including the need to carry out customer due diligence, maintain records, have internal controls and file suspicious transaction reports.  
• That said, the directive provides for minimum harmonisation and Member States may decide to go below this threshold.
• To strengthen cooperation between the different national Financial Intelligence Units (FIUs) whose tasks are to receive, analyse and disseminate to competent authorities reports about suspicions of money laundering or terrorist financing.

The two Commission proposals foresee a reinforcement of the sanctioning powers of the competent authorities by introducing for instance a set of minimum principle-based rules to strengthen administrative sanctions and a requirement for them to coordinate actions when dealing with cross-border cases.

Press Release: http://europa.eu/rapid/press-release_IP-13-87_en.htm

More information:

Commission Communication on anti-money laundering

In the European Commission Communication (MEMO/13/64, Brussels, 5 February 2013- Frequently asked questions: Anti-Money Laundering) some questions and answers are provided to clarify the essence of the above-mentioned proposals:  

1. The meaning of money laundering and terrorist financing

Money laundering is the conversion of the proceeds of criminal activity into apparently clean funds, usually via the financial system. This is done by disguising the sources of the money, changing its form, or moving the funds to a place where they are less likely to attract attention. "Criminal activity" includes fraud, corruption, drug dealing and other serious crimes. Terrorist financing is the provision or collection of funds, by any means, directly or indirectly, with the intention or in the knowledge that they would be used in order to carry out terrorist offences.

2. Current legal framework

The current EU legislation, the so-called Third Anti-Money Laundering Directive (hereinafter, the 3rd AMLD), has been in force since 2005. It provides a European framework built around the international Financial Action Task Force (FATF) standards (see IP/04/832).

The Directive applies to banks and the whole of the financial sector as well as to lawyers, notaries, accountants, real estate agents, casinos and company service providers. Its scope also encompasses all dealers in goods (such as dealers in precious metals and stones) , when payments are made in cash in excess of €15 000.

Those subject to the Directive need to:

- identify and verify the identity of their customers and of the beneficial owners of their customers (for example, by ascertaining the identity of the natural person who ultimately owns or controls a company), and to monitor the transactions of and the business relationship with the customers;

report suspicions of money laundering or terrorist financing to the public authorities - usually, the financial intelligence unit; and

- take supporting measures, such as ensuring the proper training of personnel and the establishment of appropriate internal preventive policies and procedures.

The Directive introduces additional requirements and safeguards (such as the requirement to conduct enhanced customer due diligence) for situations of higher risk (e.g. trading with correspondent banks situated outside the EU). Since the existing Directive is based on the international standards, it will need to be reviewed in order to reflect the new FATF standards issued in February 2012.

3. Other elements of the anti-money laundering framework

The 3rd AMLD is part of a broader set of legislative measures aimed at the prevention of money laundering and terrorist financing, including:

-Directive 2006/70 containing a number of implementing measures with respect to Politically Exposed Persons (e.g. high-ranking officials from third countries), simplified customer due diligence procedures and limited exemptions.

-Regulation 1781/2006, which ensures traceability of transfers of funds by requiring information on the payer to accompany transfers of funds for the purposes of the prevention, investigation and detection of money laundering and terrorist financing.

-Regulation 1889/2005 on controls of cash, which requires persons entering or leaving the EU to declare cash sums they are carrying if the value amounts to €10 000 or more.

-EU Council Decision 2000/642 concerning arrangements for cooperation between financial intelligence units of the Member States in respect of exchanging information,

A number of EU legal instruments imposing sanctions and restrictive measures on governments of third countries, or non-state entities and individuals.

4. Member states’ cooperation in this field

The 3rd AMLD requires Member States to provide appropriate assistance in order to facilitate coordination of AML matters. In practice, Member States take an active part in the EU Financial Intelligence Unit platform. Member States participate in regular meetings of the Committee for the Prevention of Money Laundering and Terrorist Financing (CPMLTF) and the Anti-Money Laundering Committee.

The “EU Financial Intelligence Units’ Platform” is an informal group set up in 2006 by the European Commission, which gathers financial intelligence units (FIUs) from the Member States. Its main purpose is to facilitate cooperation among the national FIUs, whose tasks are to receive, analyse and disseminate to competent authorities reports about suspicions of money laundering or terrorist financing. The European Commission participates in the Platform and provides support.

5. International efforts to strengthen the fight against money laundering

The FATF is the global standard-setter for measures to combat money laundering, terrorist financing, and (most recently) the financing of the proliferation of weapons of mass destruction (chemical, biological and nuclear). It is an intergovernmental body with 36 members, and with the participation of over 180 countries through a global network of FATF-style regional bodies.

The European Commission is one of the founding members of the FATF and plays an active role in the working groups and plenary meetings which are held three times a year. In addition, 15 EU Member States are FATF members in their own right: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, The Netherlands, Luxembourg, Portugal, Spain, Sweden and the UK. Other 12 EU states are members of MONEYVAL which is an associate member of the FATF.

5.1. Revision of the international standards

The original FATF standards on anti-money laundering were amended in the aftermath of the 9/11 attacks to include measures to counter terrorist financing. The Recommendations were fully revised in June 2003 to reflect an increased awareness of money laundering and terrorist financing issues; this was incorporated into the 3rd AMLD.

The latest revision of recommendations, adopted on 16 February 2012, marks a continuation of this process with an increased focus on the effectiveness of regimes to counter money laundering and terrorist financing.

6. The EU actions: main elements of the Commission's proposals

The Commission's proposals update and improve the EU’s existing 3rd AMLD and the Funds Transfers Regulation respectively with the aim of further strengthening the EU’s defenses against money laundering and terrorist financing and ensuring the soundness, integrity and stability of the financial system. They reflect the latest FATF Recommendations (see question 4.3.), and go further in a number of fields.

More specifically, both proposals provide for a more targeted and focused risk-based approach.

The new Directive clarifies and reinforces the rules on customer due diligence and introduces new provisions to deal with politically exposed persons. It goes beyond the FATF requirements by bringing within its scope all persons dealing in goods or providing services for cash payment of €7,500 or more, as there have been indications from certain stakeholders that the current €15,000 threshold leaves open a vulnerability that criminals have been able to exploit.

The Directive also ensures a more comprehensive coverage of the gambling sector (in the light of concerns that the wide sector is vulnerable to money laundering) and includes an explicit reference to tax crimes. The proposals foresee a reinforcement of the sanctioning powers of the competent authorities by introducing a set of minimum principle-based rules to strengthen administrative sanctions and a requirement for them to coordinate actions when dealing with cross-border cases.

6.1. European Commission’s decision to update the EU rules

Following the publication of a revised set of international standards on 16 February 2012, the Commission committed itself to rapidly updating the EU legislative framework to incorporate the necessary changes. Already in anticipation and in parallel with the adoption of these new standards, the Commission launched its own review in 2010. This process has included the publication of an application study conducted by external consultants, and targeted consultations with private stakeholders, civil society organisations and Member States. Further evidence has been provided by the European Supervisory Authorities' Anti-Money Laundering Committee.

See http://ec.europa.eu/internal_market/company/financial-crime/index_en.htm  

6.2. Revision of the Third Anti-Money Laundering Directive

The Commission prepared an application report (see IP/12/357) which made a broad examination of the Directive and concluded that, generally, the legal framework appeared to work well and no fundamental shortcomings have been identified which would require far-reaching changes. The Directive was revised in order to update it in line with the revised FATF Recommendations, and in particular to enhance the risk-based approach to AML compliance and supervision.

6.3. Other elements of the framework

Regulation 1781/2006 on information accompanying the transfers of funds has also been updated in light of the revised international standards. The results of an external study carried out on behalf of the Commission on the application of Regulation have been incorporated into the Commission's impact assessment.

The Commission has also incorporated the implementing measures in Directive 2006/70 into the new Anti-Money Laundering Directive, as well as introducing strengthened cooperation arrangements between FIUs, currently dealt with in EU Council Decision 2000/642.

6.4. Directive complies with FATF revised international standards

The following are the key changes introduced in EU legislation:

= Consolidating the risk-based approach: The new standards put more focus on the risk-based approach. This means that countries need to clearly understand the money laundering and terrorist financing risks which affect them, and adapt their Anti Money laundering/Counter Financing of Terrorism (AML/CFT) system to the nature of these risks – with enhanced measures where the risks are higher and the option of simplified measures where the risks are lower. Thus, countries will be able to target their resources more effectively and apply preventative measures that correspond to the risks of particular sectors or activities. A well-implemented risk-based approach means that the AML/CFT system will be more effective and less costly.

= Improving Transparency measures: There is a lack of transparency at the moment around the ownership of companies, making them potentially vulnerable to misuse by criminals and terrorists. The new Recommendations have strengthened transparency requirements. Reliable information available about the ownership and control of companies, trusts, and other legal persons or legal arrangements is required as well as more rigorous requirements on the information which must accompany electronic funds transfers. Measures to improve transparency, implemented on a global basis, will make it harder for criminals and terrorists to conceal their activities.

= Towards more effective International Cooperation: With the increasing globalisation of money laundering and terrorist financing threats, the FATF has also enhanced the scope of international cooperation between government agencies, and between financial groups (e.g. simplified extradition mechanisms). The revised Recommendations will allow more effective exchanges of information, tracing, freezing, confiscation and repatriation of illegal assets.

= Identification of clear Operational Standards: the FATF Recommendations concerned with law enforcement and FIUs have been expanded significantly. The revisions clarify the role and functions of the operational agencies responsible for combating money laundering and terrorist financing; and set out the range of investigative techniques and powers which should be available to them.

= New threats & new priorities to be covered: The FATF has also addressed new and aggravated threats and responded to the priorities set out by the international community, e.g. through the G20, in particular:

-  Corruption & Politically Exposed Persons - The FATF Recommendations tighten the requirements on "politically exposed persons"; i.e. people who may represent a higher risk of corruption by virtue of the positions they hold. The requirement to apply enhanced due diligence to foreign politically exposed persons has been expanded with the new Recommendations also applying to domestic politically exposed persons and international organisations, and to the family and close associates of all politically exposed persons – reflecting the methods used by corrupt officials and kleptocrats to launder the proceeds of corruption.

-  Tax Crimes - The list of predicate offences for money laundering has been expanded to include tax crimes which are brought within the scope of the powers and authorities used to combat money laundering. This will contribute to better coordination between AML and Tax authorities, and remove potential obstacles to international cooperation regarding tax crimes.

-  Terrorist Financing – The financing of terrorism remains a serious concern for the international community, and a major focus of the FATF. The Recommendations reflect both the fact that terrorist financing is a long-standing concern, and the close connections between anti-money laundering measures and measures to counter the financing of terrorism.

7. Next steps

The two proposals will have to be adopted by the European Parliament and the Council of Ministers under the ordinary legislative procedure.

The Commission is planning to organise a public hearing on 15 March 2013 which will be a forum where the main changes in the international framework as well as the new Directive will be debated among various groups of stakeholders.

More information on:

http://ec.europa.eu/internal_market/company/financial-crime/index_en.htm

General source: http://europa.eu/rapid/press-release_MEMO-13-64_en.htm?locale=en