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EU money laundering

13 Nov 2020 / Money laundering Print

Fighting fire with fire

The EU Commission is seeking reform to develop a comprehensive EU policy to combat money-laundering and terrorist-financing.

Given the constantly evolving nature of the use of the financial/asset transfer system for illicit purposes by criminals/terrorists, there is a need for regular revisions to the EU legal framework combating the laundering of the proceeds of crime or the financing of terrorist groups.

Such legislation is commonly referred to as anti-money-laundering/countering the financing of terrorism (AML/CFT) rules.

The fight against money-laundering/terrorist-financing has been a key part of the EU’s legislative agenda since the first AML Directive was adopted in the early ’90s.

Notwithstanding these efforts, which have, in the interim, triggered further reforms, the European Commission believes that the current AML/CFT framework requires a major overhaul, given the significant inconsistencies in the way these rules are applied and enforced by member states.

Money-laundering is the process by which the proceeds of crime are ‘washed’ through the financial system for the purposes of disguising their true origin. It involves an act to conceal, transfer, or convert the proceeds of a profit-making crime, such as theft, fraud or drug trafficking.

On the other hand, terrorist-financing is the collection of funds for the purposes of causing death or serious bodily injury to civilians, while also intimidating a population and/or seeking to compel a government/international organisation to alter or drop a particular policy.

Money-laundering and terrorist-financing are both outlawed by the Criminal Justice (Money Laundering and Terrorist Financing) Acts 2010-2018, which implement EU Directive 2015/849 on the prevention of the use of the financial system for the purposes of money-laundering or terrorist-financing (‘4AMLD’) into Irish law. 4AMLD was later amended by Directive 2018/843, dated 30 May 2018 (‘5AMLD’).

Significant reform

In light of the belief that significant reform is required, a European Commission action plan was published in early May 2020. The plan calls for an integrated EU AML/CFT system, including both the adoption of a harmonised set of rules and the establishment of an EU-level supervisory body.

Six pillars

The commission’s proposal contains six separate pillars or objectives – each of which gives rise to important considerations, as follows:

  1. Establishing a single EU rule book on AML/CFT,
  2. Creating an EU-level AML/CFT supervisory body,
  3. Improving support mechanisms for national financial intelligence units (FIUs),
  4. Enforcing European-level criminal laws and information exchange,
  5. Ensuring the effective implementation of existing EU AML/CFT rules, and
  6. Strengthening the international dimension of the EU’s AML/CFT framework.

A single EU rule book?

The action plan argues that EU AML/CFT rules should become more specific and less subject to diverging implementation by member states. The commission is concerned that inconsistent approaches across member states lead to loopholes that might be exploited by criminals/terrorists.

Separately, such divergence may also increase costs for businesses that operate on a cross-border basis and must, therefore, tailor their approach from jurisdiction to jurisdiction.

Accordingly, in order to address this incoherence while promoting legal certainty, the commission proposes that certain provisions of both 4AMLD and 5AMLD should be contained in an EU regulation that would be directly applicable in each member state. Direct applicability means that the relevant law is binding in its entirety, without the need for any national transposition measures.

At a minimum, the commission suggests that an EU AML/CFT regulation should address matters such as the list of designated/obliged persons (for example, banks, accountants and independent lawyers), customer/client due-diligence requirements, and the reporting of suspicious transactions.

The action plan also recommends that the scope of the EU’s AML/CFT framework be expanded to reflect technological innovation. For example, the providers of virtual-asset services might be added to the list of designated persons.

Main difficulties

However, there are two main difficulties with the commission’s proposal.

Firstly, EU directives, given that they leave the form of implementation up to an individual member state’s discretion, provide for greater flexibility than EU regulations.

Flexibility is crucial, since an increased regulatory burden lies on obliged persons across a range of different industries and sectors, such as financial services, gambling, audit/tax advisory, and company secretarial – all of which are also subject to their own bespoke regulation.

Secondly, while EU regulations theoretically do not require national implementation, they do sometimes allow for national measures aimed to ensure their effectiveness. For example, the action plan does implicitly contemplate allowing member states to adopt more detailed rules to adapt to changing circumstances.

Accordingly, an EU regulation might result in patchy harmonisation on the basis that certain member states would implement all necessary national measures, whereas others would not. Any potential EU AML/CFT regulation may, therefore, not be any more effective in combating money laundering/terrorist financing than the current directive-led approach.

EU-level supervision

Supervision of obliged persons is crucial to the effective enforcement of AML/CFT rules. Currently, AML/CFT supervision in the EU is delegated to each member state, resulting in uneven effectiveness. The commission is conscious that the failings of an FIU (or other AML/CFT regulator) in one member state is a significant risk for the EU’s financial system.

The action plan therefore recommends the establishment of an integrated AML/CFT supervisor at EU level. This, the commission believes, will address regulatory fragmentation, while encouraging the effective enforcement of AML/CFT rules.

The plan also proposes that the EU-level supervisor be entrusted with direct powers over certain designated entities for which it might have exclusive or shared responsibility. Such rights might include the ability to review internal AML/CFT policies.

The commission also recommends that the EU-level supervisor should cover all risk areas. In other words, this supervisor should have the ability to harmonise practices across the EU while ensuring high-level supervision across all sectors.

The action plan sets out the pros and cons of entrusting the European Banking Authority (EBA) with the task of overseeing designated persons outside the financial sector. (The EBA is already charged with strengthening AML/CFT compliance efforts in that industry.)

As an alternative, a new entity dedicated to AML/CFT supervision across all economic sectors might be established. While it would take longer for this body to become operational, it would be able to implement a more focused approach.

Whether the ambit of the EBA is extended, or a bespoke EU-wide AML/CFT supervisory body established, the commission’s proposal would give either body a right of supervision over the legal profession. This potential interference with the operation of lawyers poses a significant threat to the independence of the profession.

Clients need to be confident that their lawyers can give advice without interference from governments and other public authorities. If clients do not believe they can freely consult their lawyers, the rule of law is potentially threatened.

Support for FIUs

The action plan identifies several weaknesses in how FIUs exchange information and cooperate. (Under section 40A of the acts, An Garda Síochána is appointed as the Irish FIU – it is, among other things, responsible for receiving suspicious transaction reports from designated persons.)

The action plan expresses concern at the lack or limited nature of the feedback given to such entities to help them in the fight against money-laundering and terrorism.

The commission also refers to the obsolete nature of FIU.net– this website is supposed to facilitate information exchange between FIUs. The commission therefore wishes to replace Europol as the operator/host of FIU.net 2020 in the coming months.

The action plan also criticises the lack of joint analysis by FIUs of reported suspicious transactions that have a cross-border impact. The commission proposes that an EU-level coordination and support mechanism for FIUs would remedy these weaknesses by taking a lead role in identifying suspicious transactions and other trends/factors relevant to the assessment of the risks of money-laundering/terrorist-financing.

Enforcing provisions

The action plan notes the progress made in terms of facilitating judicial and police cooperation in the area of AML/CFT rules. Notably, the provisions giving law enforcement authorities direct access to certain account mechanisms will give FIUs certain key financial information, while promoting cross-border cooperation.

The commission also refers to the importance of public/private partnerships (PPPs) in the context of making better use of financial intelligence. PPPs can take various forms, and the commission proposes to encourage FIUs to facilitate PPPs by sharing details of relevant trends with the private sector.

Effective implementation

The commission also intends to ensure effective transposition and implementation of existing AML/CFT directives while committing to the launch of infringement proceedings against member states for failing to transpose 5AMLD, as it did for 4AMLD. (For example, Ireland was fined €2 million by the ECJ in July 2020 for failing to implement 4AMLD in time.)

The latter also proposes to monitor the establishment by member states of the public registers of beneficial ownership, while seeking to ensure that they are populated with high-quality data.

International dimension

In parallel with the action plan, the commission published a revised methodology on the assessment of high-risk third countries. The commission also plans to play a more prominent role in setting international standards in AML/CFT rules.

For example, Brussels will continue to take a ‘front-line’ role in addressing the challenges posed by opaque corporate structures. As part of its role as a global leader in AML/CFT, the commission wishes to represent the EU at the Financial Action Task Force (FATF).

The commission also stresses the need to protect the EU’s financial system and will identify high-risk countries by using a methodology that leans on the efforts of FATF. Finally, the commission is developing a facility to provide technical assistance to third countries to address weaknesses in their domestic AML/CFT framework.

Overall assessment

Given the regular investigations into, and uncovering of, money-laundering schemes at both international and national levels, the commission’s wish to ensure a comprehensive and rigorous approach to tackling such crimes should only be welcomed.

That said, there are certain elements of the action plan that deserve careful consideration. The commission’s intention to transform certain key AML/CFT provisions into an EU regulation may not achieve (given the disparate nature of national legal and regulatory systems) its intended aim of strengthening compliance.

Moreover, AML/CFT rules are constantly trailing the ever-evolving schemes put in place by criminals/terrorists to transfer funds. Accordingly, it is doubtful whether an EU regulation will be sufficiently flexible and dynamic to meet such challenges.

Finally, any reform of EU AML/CFT rules must fully respect the principles of independence and self-regulation of the legal profession. Maintaining the independence of lawyers from State interference is a necessary element of the rule of law.

Therefore, any plans by the commission to grant an EU AML/CFT body with a supervisory role over the legal profession are being – and will continue to be – met with strong opposition.

Cormac Little
Cormac Little is head of competition and regulation at William Fry