The Fourth European Union Anti-Money Laundering Directive
29 May, 2014
In March 2014, the European Parliament approved draft legislation for a Fourth European Union Anti-Money Laundering Directive. The proposals represent the EU’s response to changes made to the Financial Action Task Force (FATF) Recommendations in 2012 and a review by the European Commission of the existing Third Money Laundering Directive, 2005. The key features of the proposed new directive are summarised here.
Background: Review of the Third Money Laundering Directive
The Third EU Anti-Money Laundering Directive sets out a framework which is designed to protect the financial system against the risks of money laundering and terrorist financing and is to a large extent based on international standards adopted by the FATF. Further to the publication of a revised set of international standards on February 16, 2012, the European Commission committed itself to rapidly updating the EU legislative framework to incorporate the necessary changes. Parallel to this process, the Commission has also undertaken a review of the Third Anti Money Laundering Directive, with a view to addressing any identified shortcomings.
On April 11, 2012, the Commission published its report on the application of the 3rd AML Directive, which considered the following issues:
- Accommodating changes to the international standards in order to incorporate more risk-based elements which should allow a more targeted and focussed approach to assessing risks and applying resources to where they are most needed;
- Possible extensions of the scope of the rules, for example to ensure a more comprehensive coverage of the gambling sector, as well as the incorporation of tax crimes as a new predicate offence for money laundering;
- Possible clarification of the rules on customer due diligence – which require that banks and other obliged entities have in place adequate controls and procedures so that they know the customers with whom they are dealing and understand the nature of their business. In particular, revised rules will need to ensure that simplified procedures are not wrongly perceived as full exemptions from customer due diligence;
- Incorporating new provisions to deal with politically exposed persons – at a domestic level and those working for international organisations;
- Strengthening powers and cooperation between the different national Financial Intelligence Units whose tasks are to receive, analyse and disseminate to competent authorities reports about suspicions of money laundering or terrorist financing in order to facilitate their cooperation;
- Clarifying how AML supervisory powers apply in cross-border situations;
- Incorporating new provisions on data protection.
Internal Market and Services Commissioner Michel Barnier said: "Today, we are taking an important step towards updating and enhancing the European rules designed to safeguard the soundness, integrity and stability of the financial system. We are committed to rapidly incorporating the new international standards and to ensuring that the European system responds appropriately to evolving threats of money laundering and terrorist financing. The ingenuity of criminals to exploit gaps in the framework knows no bounds. Our aim is to propose clear and proportionate rules which both protect the Single Market and avoid overburdening market participants."
The Fourth Anti-Money Laundering Directive Proposals
On February 5, 2013, the Commission adopted two proposals to update the EU’s AML legislation. These included a new directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing; and a regulation on information accompanying transfers of funds to secure "due traceability" of these transfers. Both proposals take into account the latest FATF Recommendations.
The main modifications to the Third AML Directive are as follows:
Extension of the scope of the Directive
The threshold for traders in high value goods dealing with cash payments to be reduced from EUR15,000 to EUR7,500. Currently traders in goods are included in the scope of the Directive if they deal with cash payments of EUR15,000 or more. After receiving information from Member States that this relatively high threshold was being exploited by criminals the Commission has proposed to lower it to EUR7,500. In addition, the new proposal requires traders to carry out customer due diligence when carrying out an occasional transaction of at least EUR7,500, a reduction from the previous threshold of EUR15,000. Both the definition and the threshold show a tightening of measures against the use of these traders for money laundering purposes across the EU.
The scope of the Directive includes "providers of gambling services" (in accordance with Directive 2000/31/EC of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market). The current Third AML Directive and the revised FATF Recommendations require that only casinos be included in the scope of anti-money laundering/combatting terrorist financing legislation. According to the Commission, evidence in the EU suggests that this leaves other areas of gambling vulnerable to misuse by criminals.
The Directive uses a risk-based approach to identify and mitigate risks to the financial system and wider economic stability in the internal market area. The new measures proposed would require evidence-based measures to be implemented in three main areas, each of which would be supplemented with a minimum list of factors to be taken into consideration or guidance to be developed by the European Supervisory Authorities:
- Member States will be required to identify, understand and mitigate the risks facing them. This can be supplemented by risk assessment work carried out at a supra-national level (e.g. by the European Supervisory Authorities or Europol) and the results should be shared with other Member States and obliged entities. This would be the starting point for the risk-based approach, and would recognise that an EU-wide response can be informed by Member States' national experience;
- Obliged entities operating within the scope of the Directive would be required to identify, understand and mitigate their risks, and to document and update the assessments of risk that they undertake. This is a key element of the risk-based approach, allowing competent authorities (such as supervisors) within Member States to review and understand the decisions made by obliged entities under their supervision. Ultimately, those adopting a risk-based approach would be fully accountable for the decisions they make;
- The proposal would recognise that the resources of supervisors can be used to concentrate on areas where the risks of money laundering and terrorist financing are greater. The use of a risk-based approach would mean that evidence is used to better target the risks.
Simplified and enhanced customer due diligence
In the proposal, obliged entities would be required to take enhanced measures where risks are greater and may be permitted to take simplified measures where risks are demonstrated to be less. With regard to the current (Third) AMLD, the provisions on simplified due diligence were found to be overly permissive, with certain categories of client or transaction being given outright exemptions from due diligence requirements. The revised Directive would therefore tighten the rules on simplified due diligence and would not permit situations where exemptions apply. Instead, decisions on when and how to undertake simplified due diligence would have to be justified on the basis of risk, while minimum requirements of the factors to be taken into consideration would be set.
In one of the situations where enhanced due diligence should always be conducted, namely for politically exposed persons, the Directive has been strengthened to include politically exposed persons who are entrusted with prominent public functions domestically, as well as those who work for international organisations.
Information on the beneficial owner
The revised Directive proposes new measures in order to improve access to beneficial ownership information. It requires legal persons to hold information on their own beneficial ownership. This information should be made available to both competent authorities and obliged entities. For legal arrangements, trustees are required to declare their status when becoming a customer and information on beneficial ownership is similarly required to be made available to competent authorities and obliged entities.
Third country equivalence
The revised Directive will remove the provisions relating to positive "equivalence", as the customer due diligence regime is becoming more strongly risk-based and the use of exemptions on the grounds of purely geographical factors is less relevant. The current provisions of the Third AML Directive require decisions to be made on whether third countries have anti-money laundering/combating terrorist financing systems that are "equivalent" to those in the EU. This information was then used to allow exemptions for certain aspects of customer due diligence.
In line with Commission policy to align administrative sanctions, the revised Directive contains a range of sanctions that Member States should ensure are available for systematic breaches of key requirements of the Directive, namely customer due diligence, record keeping, suspicious transaction reporting and internal controls.
Financial Intelligence Units
The proposal would bring in the provisions of Council Decision 2000/642/JHA of October 17, 2000 concerning arrangements for cooperation between financial intelligence units of the Member States in respect of exchanging information and further extend and strengthen cooperation.
European Supervisory Authorities (ESAs)
The proposal contains several areas where work by the ESAs is envisaged. In particular, the European Banking Authority, European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority are asked to carry out an assessment and provide an opinion on the money laundering and terrorist financing risks facing the EU. In addition, the greater emphasis on the risk-based approach requires an enhanced degree of guidance for Member States and financial institutions on what factors should be taken into account when applying simplified customer due diligence and enhanced customer due diligence and when applying a risk-based approach to supervision. In addition, the ESAs have been tasked with providing regulatory technical standards for certain issues where financial institutions have to adapt their internal controls to deal with specific situations.
The need to strike a balance between allowing robust systems and controls and preventative measures against money laundering and terrorist financing on the one hand and protecting the rights of data subjects on the other is reflected in the proposal.
The Finance Industry Response
Welcoming the outcome of the European Parliament’s vote on the draft Fourth AML Directive, the European Banking Federation said: “We are pleased to see that the Parliament has given us several of the tools we have been calling for to help our sector fight money laundering.”
In particular, the EBF supports the proposals for a central register containing accurate and up-to-date information on beneficial owners. “This register will be a useful tool that can help European banks identify companies and beneficial owners,” observed Guido Ravoet, Chief Executive of EBF. “It will usefully complement the work and resources banks have been investing for years in AML,” explained Ravoet.
Additionally, the EBF considers the proposed list of jurisdictions which have anti-money laundering measures equivalent to the EU AML framework, to be provided by the Commission, as “another useful tool” for banks while the list of politically exposed persons was also welcomed by the federation.
However, while supporting the new risk-based approach in principle, the EBF cautioned that it remains concerned on the issue of risk assessment and urges caution on the introduction of new regulatory initiatives that would overlap effective existing ones. “The new task of EU level risk assessment, which has been conferred on the European Commission in consultation with other relevant authorities should not lead to any regulatory overlap and the unnecessary duplication of successful standard setting exercises,” said Ravoet.
Eurofins, the European Federation of Finance House Associations, also identified a number of weaknesses in the proposed Fourth AML law, including the lack of a clear definition of a tax crime, which falls within the scope of “criminal activity”; the failure to classify consumer credit as a low risk financial activity; the potential for contradictions in the yet-to-be-developed ESA guidelines and the annexes provided in the proposal; a lack of clarity with regard to the definition of a politically exposed person; and continued legal uncertainty over data protection obligations.
The Next Steps
There is also some uncertainty over the implementation timetable of the new directive. The approval of the draft directive by the European Parliament in its first reading last March consolidates the work done so far, and ensures that the new Parliament, which commences in June 2014, cannot decide to start the process from scratch. However, at present, it is unclear when the new Parliament will take up the proposals, although it is thought that it will not be before September 2014 at the earliest. The proposals also need to be approved by the European Council before being implemented separately across the 28 Member States. This is unlikely to happen before 2015.
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