By Samantha Sheen, AML Director Europe, ACAMS
15 December, 2016

“He’s making at list,
He’s checking it twice,
He’s going find out who’s naughty or nice….”

Santa Claus Is Comin’ to Town written by John Frederick Coots and Haven Gillespie

For those of you who are familiar with Santa Claus, you might know that the 4th of December is known as Santa’s List Day. Apparently, this is the day when all of Santa’s elves come back and report on which children have been naughty and which ones have been nice. They then consolidate two lists. Supposedly, the short list contains the names of a few children who have been naughty. A much longer list is filled with the names of children who have been good all year long.

Recently, the European Commission amended its list of high risk third countries (“High Risk Country List”). These are the countries identified as having strategic deficiencies in their AML frameworks. The List was amended to remove Guyana, based on the FATF’s latest plenary decision that Guyana was taking the necessary steps to address the weaknesses in its AML regulatory framework.

The High Risk Country List is starting to look at bit like Santa’s list of naughty versus nice children. The number of the countries named on it (the “naughty ones”) is relatively short.

In one of my previous blogs, I mentioned a European committee, the European Economic and Social Committee (“EESC”), who issued a written opinion in which it proposed certain revisions to the 4th Anti-Money Laundering Directive (4AMLD) text. The EESC is a consultative body made up of employer and employee organisations, and representatives of various other interests. This Committee is essentially the voice of the privates sector and has traditionally played an important role in the shaping of EU policy. 

In July of this year, the European Commission adopted Delegated Regulation 2016/675, which essentially introduced the first version of the High Risk Country List. The countries named on the List were those already named by the FATF as having strategic deficiencies in their AML frameworks.

Now, as the proposed amendments to the 4AMLD currently stand, the enhanced due diligence (EDD) measures described under Article 18a will need to be applied to the countries named on the High Risk Country List. The idea behind this is to ensure that EU members apply the same EDD measures to the countries on the list so as to “… avoid or at the least limit the risk of forum-shopping based on how jurisdiction apply more stringent or less stringent regulations towards high-risk third countries. Therefore, the regulatory gaps that could be exploited for ML/TF activities are addressed”. For more information about the July 2016 proposal, see: http://ec.europa.eu/justice/criminal/document/files/aml-directive_en.pdf

In its written opinion, the EESC had some rather pointed things to say about the High Risk Country List. In short, they don’t like it. Why? Because the List doesn’t include many of the countries believed to be acting as tax havens for money laundering, nor names any of the 21 territories mentioned in the Panama Papers.

The EESC has proposed that either a new list of high-risk third countries be drawn up, or the scope of EDD required under Article 18a be broadened so that it must be applied to additional countries and not limited to those named on the High Risk Countries List. The EESC also proposes that a single list of countries that fail to cooperate in pursuing economic crime be drawn up.

I can see where the EESC are going with these proposals. Criticism has been levelled at financial institutions for failing to ensure that they have complete information about the beneficial owners of structures located offshore. Gatekeepers such a lawyers and accountants have been accused of advising clients on the creation of structures in countries where the identity of beneficial owners can be easily concealed.

And there have been rumblings from within the private sector about the risk that financial institutions, whether based on national risk assessments or group-level risk management decisions, may end with internal lists rating additional countries as high risk while other financial institutions rate those same countries as low risk. This in turn will impact upon the level of CDD undertaken on beneficial owners.

And this is to say nothing of the other lists such as the “bad tax list” currently being drawn up by the European Commission and the OECD’s plan for its own list of non-compliant countries in relation to tax transparency. These will also influence the level of CDD undertaken.

Put simply: There are going to be a lot of high risk country lists monitored or maintained by financial institutions and those lists won’t necessarily have the same countries named on them.

With all of these things needing to be factored into existing AML compliance controls, the unintended consequences of all of this may be that financial institutions end up adopting varying approaches to which countries they treat as high risk. If this happens, the possible outcome may very well be more discrete “forum shopping” by those seeking to conceal their identity, to locate financial institutions more tolerant of countries where it is thought to be easier to hide a beneficial owner’s true identity.

While I see the benefits of keeping lists short and succinct, I can’t help but wonder if maybe Santa’s got the right idea. Get all the elves together and compile a single consolidated list of countries that EU members agree and that takes account of other lists issued by international bodies. Name the countries considered to have weak financial crime controls or who are known to be used to facilitate the concealment of beneficial owners and their activities. Keep the list short but relevant. And before it’s rolled out, take a moment to consider whether the aim of Article 18a’s EDD measures, as described in July 2016, will have the desired effect. That seems to me to be a far better way of ensuring that those who are “naughty” do not end up on the “nice” list.

Happy Holidays Everyone.