The A, B, C of Anti-Money Laundering

A summary of what you need to know about money laundering and what the EU is doing to combat it.

What is money laundering?                                                                                            learn-528391_640

It is the conversion of the proceeds of criminal activity like fraud, corruption, drug dealing and other serious crimes into apparently clean funds, usually via the financial system. This is done 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 usually associated with money laundering because both activities are carried out with the clear objective of committing (or disguising) a criminal act.

When did the fight against money laundering and terrorist financing, as we know it, commence?

It started in Paris in 1989 during the G-7 Summit where, in response to mounting concern over money laundering and the threat posed to the banking system and to financial institutions, the Financial Action Task Force on Money Laundering (FATF[1]) was established. The G-7 Heads of State or Government and President of the European Commission convened the Task Force from the G-7 Member States, the European Commission and eight other countries.

The FATF was given the responsibility of examining money laundering techniques and trends, reviewing the action which had already been taken at a national or international level, and setting out the measures needed to combat money laundering.  In 1990 the FATF issued a set of Forty Recommendations intended to provide a comprehensive plan of action to fight against money laundering. The Recommendations have been updated a few times, the last version dates from February 2012[2].

How does the EU Anti-Money Laundering (AML) framework relate to the FATF?

Since the European Commission took part in the creation of the FATF and many FATF members are also EU Member States (MS) it was only natural to expect that the EU would embrace the FATF framework and, where possible, enhance it.

Having said that, the First AML Directive[3] 91/308 made no reference to FATF but was drafted following other international standards and conventions (United Nations, Council of Europe). The Second AML Directive[4] 2001/97 made express reference to the FATF’s recommendations but it was the Third AML Directive[5] 2005/60 that clearly aligned the EU system with the 2003 FATF revised recommendations.

The Third AML Directive – soon to be repealed – is the core of the current system. The system as such will be amended by the Fourth AML Directive (and the new Funds Transfers Regulation) adopted by the EU on 20 May 2015. Please note that even though the new legislation will enter into force 20 days after the official publication the new framework will not be operational until the transposition period elapses (2 years after adoption according to the draft). As regards the Regulation its applicability has been linked to the transposition deadline of the Directive.

Which are the key elements of the Third AML Directive?

It applies to banks and the whole financial sector but also to lawyers, notaries, accountants, real estate agents, casinos and company service providers. Its scope also covers all dealers in goods (e.g. dealers in precious metals and stones, etc.)  whenever cash payments of at least EUR 15 000 are made.

The obliged entities/persons need to:

  • identify and verify the identity of their customers and of the beneficial owners of their customers (e.g. by ascertaining the identity of the natural person who ultimately owns or controls a company)
  • monitor the transactions of and the business relationship with the customers
  • report suspicious activities to the competent authorities (CAs), usually the Financial Intelligence Unit (FIU)
  • and take supporting measures, such as ensuring proper staff training and the establishment of appropriate internal preventive policies and procedures.

The Directive introduced additional requirements and safeguards (e.g. enhanced customer due diligence) for high risk situations (e.g. trading with correspondent banks outside the EU). It required MS to provide appropriate assistance in order to facilitate coordination of AML matters. In practice, MS take an active part in the EU Financial Intelligence Unit platform[6]. They participate in regular meetings of the Committee for the Prevention of Money Laundering and Terrorist Financing and the Anti-Money Laundering Committee.

Even though according to the Commission the Directive (as implemented in MS) is working well and no important deficiencies have been identified the sole existence of the 2012 FATF Recommendations created an obligation to update the EU framework. As such the Fourth AML Directive will enhance the risk-based approach to AML compliance and supervision.

What, in a nutshell, will the Fourth AML Directive bring?

It will bring clarity and reinforce the rules on customer due diligence and introduce new provisions to deal with politically exposed persons (domestic and international). It will go beyond the FATF requirements by bringing within its scope all persons dealing in goods when they receive cash payments of EUR 7 500 or more (current threshold of EUR 15 000 has been found to be exploited by criminals).

The Directive will also ensure a more comprehensive coverage of the gambling sector and include an explicit reference to tax crimes (most likely renamed tax offences as per the latest draft). CAs will have their sanctioning powers reinforced by a set of minimum principle-based rules which will strengthen administrative sanctions. In addition, CAs will also be  required to coordinate actions when dealing with cross-border cases.

What does the EU AML framework comprise in addition to the Third AML Directive?

  • Directive 2006/70/EC on politically exposed persons (e.g. high-ranking officials), simplified customer due diligence procedures and limited exemptions-> to be repealed by the Fourth AML Directive
  • Regulation 1781/2006 on traceability of transfers of funds by requiring information on the payer to accompany transfers of funds for the purposes of the prevention, investigation and detection of money laundering and terrorist financing -> to be repealed by the new Regulation
  • Regulation 1889/2005 on controls of cash, which requires persons entering or leaving the EU to declare cash sums they are carrying if the value amounts to EUR 10 000 or more
  • Council Decision 2000/642 concerning arrangements for cooperation between MS’ FIUs in respect of exchanging information -> not yet repealed but content embedded and strengthened in the Directive
  • A number of EU legal instruments imposing sanctions and restrictive measures on governments of third countries, or non-state entities and individuals (e.g. freezing assets).

[1] http://www.fatf-gafi.org/pages/aboutus/membersandobservers/

[2] http://www.fatf-gafi.org/topics/fatfrecommendations/documents/fatf-recommendations.html

[3] http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31991L0308:EN:HTML

[4] http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32001L0097&from=EN

[5] http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32005L0060

[6] Informal group set up in 2006 by the Commission, which gathers the MS’ financial intelligence units. Its main purpose is to facilitate cooperation among the national units, whose tasks are to receive, analyse and disseminate to competent authorities reports about suspicions of money laundering or terrorist financing. The Commission participates in the Platform and provides support.

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