John Binns and Ami Amin discuss the EU's approach to mitigating external risks to its financial system.
Since 2016, the European Commission ("the Commission") has published a list of countries it considers as having weak anti-money laundering ("AML") and counter-terrorist financing ("CTF") regimes, known as the EU list of high-risk third countries. The Commission produces the list taking into consideration any deficiencies it has identified in the national AML and CTF regimes for the listed countries where those deficiencies pose a threat to the European Union's financial system.
This list is intended to complement a separate list of non-cooperative tax jurisdictions, more commonly known as tax havens. The first list of non-cooperative tax jurisdictions was published in December 2017. The list was conceived with a view to regulating good governance standards in tax, and any countries that failed to make a high-level commitment to comply with agreed good governance standards were ultimately blacklisted. Once a country has been listed, various sanctions apply. As a result, listed countries face potential restrictions on funding from various EU funding instruments (e.g. the European Fund for Sustainable Development). Practically speaking, EU financial services firms are required to assess any risks associated with customers coming from or having association with blacklisted countries by applying enhanced due diligence and undertaking better transaction monitoring. Member States are also encouraged to employ coordinated sanctions against listed countries including increased monitoring and audit, withholding taxes and special documentation requirements. However, whether Member States are unified in their approach is unclear. Luxembourg and Malta, for example, have been reported as opposing stricter sanctions.
The Commission claims that together, the lists function to ensure double protection for the Single Market from external risks. However, on closer inspection of the lists, there are concerns about the consistency between them and the extent to which the blacklisting of one country is meaningful where another that ought to be listed is not.
The criteria for examining a country's AML/CTF regime are set out in the Fourth Anti-Money Laundering Directive and have since been broadened by the Fifth Anti-Money Laundering Directive ("MLD5"), published in June last year. The new criteria are intended to impose greater scrutiny over the institutional AML and CTF frameworks within those countries. Consideration is now given to the existence of appropriate sanctions, levels of international cooperation, and the availability of information on the beneficial ownership of companies and legal arrangements, within a country. The motivation behind such change is to address risks that arise from setting up shell companies and impenetrable structures used to conceal the real beneficiaries of a transaction. As part of the assessment process, the Commission must check the efficacy of any AML and CTF protections that are implemented in those jurisdictions.
Whilst the high-risk countries list does not impose sanctions or any other restrictions on trade, once a country has been listed as high-risk, it does require banks and others in the regulated sector to apply enhanced due diligence measures on any transactions with individuals and entities based in such countries. MLD5 provides further guidance as to the type of enhanced due diligence required, which includes obtaining supplementary information on customers and beneficial owners or seeking approval from senior management to ascertain a business relationship. These developments represent a more ambitious approach to identifying countries that pose a potential threat to the EU's financial system.
According to a European Commission Fact Sheet ('Anti-money laundering Q&A on the EU list of high-risk third countries'), the Commission developed its own methodology to identify highrisk countries and relies on criteria from EU AML legislation and, amongst other sources, the Commission's own expertise. The Commission's methodology involves three phases. Phase one is the scoping phase where the countries to be assessed and the priority levels of those countries are identified with reference to objective criteria. Phase two is the listing phase, where priority countries are narrowed down to "priority 1", on the basis that they meet certain criteria (i.e. are considered a risk by Europol or the inter-governmental Financial Action Task Force or are on the European Council's list of noncooperative tax jurisdictions). Phase three is the assessment phase, when consideration is given to which countries exhibit deficiencies in their AML/CTF regimes as per the criteria defined by the anti-money laundering legislation.
In February 2019, the Commission sought to include a number of new countries on the EU list of high-risk third countries, including Nigeria, Panama, Saudi Arabia and the US Virgin Islands, which would have increased the number of listed countries from 16 to 23. However, the stricter approach to AML and CTF, as set out in MLD5, has not been well received by the Council. In March 2019 the European Council ("the Council") unanimously voted against the inclusion of all 23 countries on the list on the basis that the draft list "was not established in a sufficiently transparent way" and was potentially vulnerable to legal challenges.
The third EU entity, the European Parliament has been disapproving of the Council's rejection of the new list, recognising that many listed countries applied diplomatic pressure on members of the Council to influence their position. The Council's approach in this regard raises concerns about the whole process. Questions have also been raised about the Commission's attitude towards countries that have not been listed but are well known for weaknesses in their AML/CTF frameworks, for example Russia.
Meanwhile, there has been a clear decision not to include countries that are known for being problematic tax jurisdictions on the list of high-risk jurisdictions, for example, the United Arab Emirates. This is somewhat paradoxical in respect of the availability of information on beneficial owners requirement, as set out in MLD5. Questions must therefore be asked about the effectiveness of the attempts to regulate the financial system if certain countries are able to circumvent the legislative changes.
Companies and individuals wishing to conduct business with individuals and entities based in listed countries are obliged to undertake the customer due diligence prescribed under EU AML legislation. In addition, it may be appropriate to undertake more tailored risk assessments depending on the risk exposure of a particular country or type of business.
Conversely, where an individual or a business from a listed country is seeking to deal with a regulated sector individual or business within the EU, it should be alert to the enhanced due diligence measures that will be applied. Even where an individual or business is based in a non-listed country, consideration may also be given to money laundering and terrorist financing risks thought to arise from that particular jurisdiction. For example, a non-listed country that has a reputation for high levels of acquisitive crime or corruption or known to be an offshore financial centre or tax haven will be subjected to similar levels of due diligence, whether included on the EU lists or not.
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