By Samantha Sheen, AML Director Europe, ACAMS
14 July, 2016

EU Proposals to Bolster the Fight against Financial Crime

On July 5, the European Commission (EC) outlined new plans to further reinforce the European Union’s rules on anti-money laundering (AML), counterterrorist financing (CFT) and tax evasion, including proposals that would strengthen corporate transparency requirements on beneficial ownership.

The proposals consist of a number of key revisions to the bloc’s Fourth Anti-Money Laundering Directive (4AMLD), first introduced in May 2015, along with amendments to other directives and regulations. A number of additional measures are also currently being assessed for future action.

This post summarises the proposals concerning the listing of certain jurisdictions with deficient AML/CFT and/or taxation regimes.

The Money Laundering Deficiencies List

Under Article 9 of the 4AMLD, EU member-states must identify third-party jurisdictions with strategic deficiencies in their national AML/CFT regimes that pose significant threats to the bloc’s financial system. EU leaders have said they intend to publish a list of so-called “high-risk third countries” on 14 July, a move that would require financial institutions to apply enhanced due diligence (EDD) measures when dealing with individuals or legal entities in the named jurisdictions.

The contents of the list may come as a surprise for a number of member-states, especially those that maintain similar national lists and find discrepancies between the jurisdictions it includes and those cited by the EU. Some governments will need to consider how to quickly address any conflicts between their own assessments and that of the EU.

The European Union’s effort is also surprising given that the Financial Action Task Force’s own lists have been gradually shrinking. In addition to removing Myanmar and Papua New Guinea from its list of nations requiring ongoing monitoring by the intergovernmental group, FATF last month suspended its call for “countermeasures” against Iran, but left the country on its blacklist of jurisdictions requiring EDD measures.

The Tax Governance Deficiencies List

The EU proposals also introduce a second list, of non-cooperative tax jurisdictions. In a speech earlier this month, EC Commissioner Moscovici described the countries likely for inclusion as “tax havens.”

The objective of the EU Tax List is, like sanctions, to act as a disincentive for countries still facilitating or encouraging tax evasion and avoidance. Jurisdictions named on the list will be those that have been judged by the EU as not respecting tax good governance standards.  

The EC reports that only those countries that refuse to comply with tax good governance standards or that refuse to engage with the EU in order to address any concerns raised about its approach towards taxation will be added to the list. Special considerations will be given to challenges and needs of developing countries. There will also be criteria set for removing jurisdictions from the List.

The commission’s assessment of which nations to include is already underway, with the expectation of publishing the list by 2017. In contrast to the AML list, the EU has yet to identify any EDD countermeasures member-states must take when dealing with countries deemed to have weak tax-related compliance standards, although more details are expected to be forthcoming.

While the EC has acknowledged that the two lists may overlap, it has taken the position that they should be separately maintained.

Next Steps

AML/CFT

As a consequence of these plans, regulators in member-states may need to consider whether to continue maintaining their national lists along or to defer to the bloc’s designations. The proposals could also mean new know-your-customer requirements for clients of EU-based financial institutions that live or operate in named countries.

Officials have been silent on whether the AML list should have a retroactive effect that would require financial institutions to reassess their customer due diligence controls for existing client relationships linked to the cited countries. Nevertheless, financial institutions may need to ensure that they can accurately review their customer databases to identify clients with ties to a listed country and determine whether those relationships have appropriate risk ratings.

This may also impact upon the rating criteria applied by institutions in relation to jurisdictional risk, along with the need to adjust the scoring used in automatic screening tools.

Tax

The regulators of EU member-states will additionally need to carefully consider the types of countermeasures to mitigate the tax evasion/avoidance risks of business relationships linked to a named country. These countermeasures may also need to be different from those applied to mitigate other types of financial crime risk. Importantly, national regulators will need to carefully assess the possible impact these countermeasures could have from a cost and resource perspective, especially in relation to unintended consequences such de-risking.

Financial institutions may need to consider how this list will impact its customer risk-rating criteria and how this will be incorporated to its scoring methodology. Scenarios used with screening tools may need to be updated to include tax jurisdictional information.

Samantha Sheen is ACAMS’ AML Director for Europe. She has held a number of senior post in the AML world, including as the Director, Financial Crime Supervision & Policy Division, at the Guernsey Financial Services Commission.