By Dalila DELORENZI (Free Group trainee)
Broadly speaking Money laundering means the conversion of the proceeds of criminal activity into apparently clean funds, usually via the financial system 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. Terrorist financing is the provision or collection of funds, by any means, directly or indirectly, with the intention that they should be used or in the knowledge that they are to be used in order to carry out terrorist offences. At EU level since 1991 at EU level legislation has been introduced to limit these activities and to protect the integrity and stability of the financial sector and, more in general, of the Internal Market. The EU rules are to a large extent based on Recommendations adopted by the Financial Action Task Force (FATF) which is an intergovernmental body with 36 members, and with the participation of over 180 countries in the world.
The directive currently into force is the Third Anti-Money Laundering (AML) Directive which applies to the financial sector (credit institutions, financial institutions) as well as to professionals such as lawyers, notaries, accountants, real estate agents, casinos and company service providers. Its scope also encompasses all providers of goods, when payments are made in cash in excess of EUR 15.000. All these addressees are considered “obliged entities”. The Directive requires these obliged entities to identify and verify the identity of customers (so-called customer due diligence, hereinafter ‘CDD’) and beneficial owners, and to monitor the financial transactions of the customers. It then includes obligations to report suspicions of money laundering or terrorist financing to the relevant Financial Intelligence Units (FIUs), as well as other accompanying obligations. The Directive also introduces additional requirements and safeguards (such as the requirement to conduct enhanced customer due diligence) for situations of higher risk.
In force since 2005 the third Money Laundering Directive required a revision against the backdrop of the constantly changing nature of money laundering and terrorist financing threats, facilitated by a constant evolution of technology and of the means at the disposal of criminals. In particular, the recent terrorist attacks in Paris have increased the necessity of decisive actions against terrorist financing and further efforts need to be made in adapting the current framework to a different reality. Therefore in accordance with this purpose, at the international level measures have been taken by the Financial Action Task Force (FATF): a fundamental review of the international standards has been undertaken and a new set of Recommendations have been adopted in February 2012.
In parallel to the international process, the European Commission with a view to complying with the international standards has undertaken its own review of the European Anti-Money Laundering framework. This revision consisted in an external study (the so called Deloitte study) on the application of the Third AMLD (Directive 2005/60/EC) and in extensive contacts and consultations with private stakeholders and civil society organisations, as well as with representatives of EU Member State regulatory and supervisory authorities and Financial Intelligence Units (FIUs).
The results of the Commission’s review were set out in a Report , addressed to EU Parliament and Council, where it was analysed how the different elements of the existing framework have been applied and how it may need to be changed, highlighting the necessity to introduce clarifications or refinements in a number of areas.
More specifically, the main problems in the current EU anti-money laundering/combating terrorist financing legislative framework are: (i) inconsistency with the recently revised international standards; (ii) different interpretation and application of rules across EU Member States; and (iii) inadequacies and loopholes with respect to the new money laundering and terrorist financing risks.
2. The EU Commission’s proposals
Two proposals have been submitted in February 2013 with the view to strengthen the EU’s existing rules on anti-money laundering and fund transfers. The package includes:
– a draft Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, incorporating and repealing the Third AMLD, along with
– a draft Regulation on information accompanying transfers of funds to improve traceability of payments and repealing the Regulation EC 1781/2006.
The Regulation as part of the Anti-Money Laundering strategy represents an important step in that direction.
These two legislative proposals pursue the common objective of revising the existing anti-money laundering and counter terrorist financing EU framework in order to improve its effectiveness while ensuring its compliance with international standards.
Fully taking into account the latest Recommendations of the FATF, both proposals go even further in a number of fields to promote the highest standards for anti-money laundering and counter terrorism financing.
2.1 The draft 4th AML Directive
Considering the content of the draft Directive, main modifications to the Third AMLD are as follows:
– the extension of the scope of the existing third AML Directive in order to face new emerging threats. It notably include providers of gambling services (the former directive covered only casinos) and also bringing within its scope all persons dealing in goods or providing services for cash payment of EUR 7 500 or more (the current EUR 15 000 threshold has been considered not sufficient). Such persons will now be covered by the provisions of the Directive including the need to carry out the Customer Due Diligence (CDD), maintain records, have internal controls and file suspicious transaction reports.
– the introduction of a risk-based approach: countries, competent authorities and reporting entities are expected to identify, assess and understand the money laundering as well as terrorist financing risks they are exposed to, so that they can develop the appropriate measures to mitigate and better target these risks. This activity may be supported at international level by EU supervisory authorities (as ESMA, EBA) and the results be shared at EU Member States level.
– the strengthening of the information relating to the beneficial owner: the lack of information collected and published on those who ultimately own and control companies, trusts and other legal structures still represents a key loophole for money launderers. Despite the importance of transparency, only few EU jurisdictions require structures to share such information with their national authorities as currently no country makes this information freely available to the public.
Therefore the EU Commission – by introducing a new Chapter titled Beneficial Ownership Information – has proposed to make the beneficial owner information available to competent authorities and obliged entities by a clear mechanism of identification. In addition, companies will be required to maintain records as to the identity of those who stand behind the company in reality.
– the simplification of an enhanced Customer Due Diligence (CDD): the Directive recognises that measures should be adjusted according to the level of risk presented in specific jurisdiction and sectors therefore obliged entities, such as banks, are required to take enhanced measures if the risks are greater and simplified where smaller.
– the strengthening of personal data protection: a compromise is needed between allowing robust systems, controls and preventative measures on the one hand, and protecting the rights of data subjects on the other.
– Third country equivalence: as the Customer Due Diligence regime is becoming more strongly risk-based, the provisions related to positive equivalence should be removed and, as consequence, the use of exemptions on the grounds of purely geographical factors should be considered less relevant.
– the new framework for Politically exposed persons (PEPs): since the enhanced due diligence is considered appropriate when transactions involve people politically exposed, in addition to foreign the Directive enlarges the definition of PEP including also domestic individuals holding prominent positions in their home country and those in international organisations. As with foreign PEPs, the provisions will apply to family members and known close associates.
2.2 The draft Regulation
As regard to the Funds Transfers draft Regulation, its aim is to address areas where gaps in transparency still remain. The Commission proposes a regime for the transfers of funds in any currency, which are sent or received by a payment service provider established in the Union. In particular, one of the main new requirements on payment service providers is the provision to record the information on the payer as well as the payee when executing the transfer.
The draft Regulation complements the draft Directive’s measures by ensuring that basic information on the payer of transfers of funds is immediately available to appropriate law enforcement and/or prosecutorial authorities to assist them in detecting, investigating, prosecuting terrorists or other criminals and tracing the assets of terrorists.
3. The EU Parliament’s first reading
Under the ordinary legislative procedure foreseen in article 289 TFEU, the European Parliament adopted its position at first reading at the plenary session of 11th March 2014.
The EP position on the draft Directive has been approved by 643 votes to 30 with 12 abstentions. The Committee on Economic and Monetary Affairs (ECON) and the Committee on Civil Liberties, Justice and Home Affairs (LIBE) have proposed and approved the following main amendments.
– Regarding to the scope of the draft Directive, EU Parliament has envisaged exemptions in full or in part of certain gambling services – with the exception of casinos – on the basis of the low risk posed by the nature of the services. In particular, it’s been argued that “small-scale slot-machine gambling should not fall within the scope of the proposed legislation. A proportionate risk-based approach is needed”.
– Concerning the Politically exposed Persons (PEPs’) regime, Parliament has added that the Commission, in cooperation with Member States and international organisations, shall draw a list of domestic politically exposed persons and persons who are residents of the Member States, who are or have been entrusted with a prominent function by an international organisation. The list shall be accessible by competent authorities and by obliged entities.
– An important amendment concerns the adoption of public registers to locate the information on beneficial owner. In particular, companies – and other entities having legal personality established or incorporated within their territory, or governed under their law – obtain, hold and transmit to a public central register (or commercial register or companies register within their territory) adequate, accurate, current and up-to-date information, at the moment of their establishment as well as any changes. Parliament has envisaged a list of minimum information that must be kept in the register to clearly identify the company and its beneficial owner. The information shall be available online to all persons in an open and secure data format, in line with data protection rules. The company registers shall be interconnected by means of the European platform, the portal and optional access points established by Member States. The Commission shall seek cooperation with third countries to encourage that equivalent central registers containing beneficial ownership information are established and information on beneficial owners is made publically accessible in their countries.
– Regarding to third countries, EU Parliament states that instead of a “white list”, the Commission should coordinate preparatory work at the European level on drawing up a “black list” concerning third countries with grave strategic deficiencies in their money laundering systems that pose significant risks to the financial system of the Union.
– At last, the EP has foreseen in its first reading that Member States could adopt stricter provisions in the field covered by this Directive to prevent money laundering and terrorist financing, on condition that such provisions are in full compliance with Union law, especially as regards Union data protection rules and the protection of fundamental rights as enshrined in the Charter of Fundamental Rights of the European Union. Such provisions should not unduly prevent consumers from accessing financial services and shall not constitute an obstacle to the functioning of the Single Market.
4. The Council’s “general approach” and the formal “position”
On the Council side several compromises have come in succession, before delegations have reached an agreement on 13th June 2014 on a first general approach.
The first of these compromises, supported by almost all Member States, is the modification of the threshold for cash payments from EUR 7 500 to EUR 10 000. Then, it has been foreseen that in proven low-risk circumstances Member States should be allowed to exempt certain gambling services from some or all of the Directive’s requirements. It is worth noting that on this point Malta maintains its reservations on such exemption, as there should not be any difference between online and offline gambling.
In relation to storage of beneficial ownership information, especially UK, along with France and Italy, proposed to the ECOFIN Council a common amendment. They strongly supported the Commission’s proposals to require companies to obtain and hold information on their beneficial ownership, but moreover they consider that central registries would be the most effective way to tackle misuse of companies for illicit purposes and UK has also gone further in the interests of greater transparency by proposing that central registries should be made publicly accessible.
However, despite of these declarations, a qualified majority in the Council has been met on the Member States’ flexibility in selecting and/or establishing appropriate mechanisms which ensure unrestricted access for competent authorities, Financial Intelligence Units (FIUs) and, if allowed by the Member State concerned, for obliged entities. Therefore this compromise mirrors the status quo and does not really go beyond what is already in place in the EU.
For instance, Estonia believes that measures for combating money laundering and terrorism financing should be effective, but also proportionate in respect of administrative burden on legal entities and governments. Therefore it is important to maintain a certain degree of flexibility in the implementation at national level.
Austria instead argued that in order to avoid the abuse of companies and trusts for the purpose of money laundering and terrorist financing, there is a clear need to establish mandatory central and public beneficial owner registries both for legal persons (Art. 29) and trusts (Art. 30).
5. From the “general approach” to the “early second reading”
On the basis of a general approach reached in the Council, negotiations with the EU Parliament started with a view to reaching an agreement at “early second reading”.
In compliance with the interinstitutional practice of “early second reading” the relevant Parliamentary Committees in charge of these two legislative texts (the Committee on Economic and Monetary Affairs (ECON) and the Committee on Civil Liberties, Justice and Home Affairs (LIBE)) have already approved in principle the outcome of the trilogue negotiations and have addressed to the Council Presidency a letter indicating that the Committee Chairs would recommend to the Plenary to approve the Council’s position as soon as it will be notified without submitting further amendments.
To trigger the EP second reading the Council has notified this week the two texts to the Plenary and the vote of the European Parliament has already been planned for the May session so that if the Plenary follow the Committee Chairs recommendation the texts will be approuved without amendments, the Council will acknowledge it and the texts will be published on the Official Journal (maybe already this summer) by soon becoming the new EU AML framework.
As we are approaching the final stage it could be useful to summarize the main points of discussions between the EU co-legislators.
6. On the content of the texts submitted for “early second agreements”
Regarding to the content, the main changes to the original Commission’s proposal are the following.
Information on beneficial ownership will be stored in a central register, accessible to competent authorities, financial intelligence units and obliged entities such as banks. The agreed text also enables persons who can demonstrate a legitimate interest to access at least the following stored information: name, month and year of birth, nationality, country of residence, nature and approximate extent of the beneficial interest held. Member states that so wish may use a public register.
As for trusts, the central registration of beneficial ownership information will be used where the trust generates consequences as regards taxation. As such, Austria is strongly concerned that the current text does not avoid the abuse of trusts for the purpose of money laundering and terrorist financing. In particular, regarding to legal persons, the current text (Article 29) states that the location of the beneficial owner registry shall be the country by whose laws the legal person is governed, but it’s not the same for trusts (Article 30) for whom the location of registries is not clear. Austria argues that trust registries need to be located in the countries by whose laws the trust is governed. Indeed any other location would not serve the purpose of enforcing transparency, particularly because trusts are not recognized in the majority of Member States! Above all, there is also the risk for an extensive and different interpretation of Article 30 when it comes to national implementation, opening the floodgates to abuse.
Furthermore, Article 30 paragraph 4 determines the registration of beneficial owners of trusts only when a trust “generates tax consequences”: this wording is too broad and highly prone to circumvention and evasion.
For gambling services posing higher risks, the adopted legislation requires service providers to conduct due diligence for transactions of €2000 or more. In proven low-risk circumstances, member states may exempt certain gambling services from some or all requirements, in strictly limited and justified conditions. Such exemptions will be subject to a specific risk assessment. Casinos will not benefit from exemptions.
The full traceability of fund transfers can be of particular importance in the prevention, detection and investigation of money laundering and terrorist financing. While existing legislation already requires Payment Service Providers to accompany transfers of funds with information on the payer, the new rules will also require information on the payee to be included.
Moreover, under the new rules, the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority will be asked to issue guidelines addressed to competent authorities and payment service providers on measures to be taken when they receive transfers of funds with missing or incomplete information on the payer or the payee.
Certainly the current review of the EU’s 3rd Anti-Money Laundering directive is a legislative improvement and presents the opportunity to tighten anti-money laundering frameworks and to close the loopholes in the current regime.
Regarding to the implementation of beneficial ownership transparency doubts still remain. Public lists of shareholder information including beneficial owners are without a doubt great tools to detect suspicious financial activity. Nevertheless, it remains to be seen how open this data will be: it is not clear whether Member States will interpret the obligation widely (as an obligation to hold the information publicly) or more narrowly (as an obligation to provide the information on a transactional basis only).
 See Mr Nils TORVALDS (ALDE – FI) and Mr Sampo TERHO (EFD – FI) on 11 March 2014 debate.