Zia Ullah, Partner and Victoria Callaghan, Solicitor, of Pannone LLP talk through the expected major revisions to the Third EU Money Laundering Directive.
Readers will recall that on 15 December 2007, the UK brought into effect the requirements of the third EU Money Laundering Directive ('the Third AMLD') through the Money Laundering Regulations 2007. But as with most risks in life, AML and terrorist financing typologies evolve and as such the underlying regulatory landscape also then needs to be adapted. As a result of recommendations made by the Financial Action Task Force ('FATF'), which considered these evolving risks, the EC engaged Deloittes to assess the implementation and application of the Third AMLD across the EU and on 11 April 2012 the European Commission adopted a report1 making recommendations for further development of the legislation.
The report and recommendations
As a general observation both the Deloitte report2 and the Commission's report, highlight that the Third AMLD works well - there are no specific shortcomings which require immediate legislative action. However, there are AML areas which require further clarification, definition and/or guidance in order to ensure that the European framework remains robust and targeted.
In general terms the Commission's report determines that further guidance/clarification is required in a number of areas, including
- the application of a risk based approach to AML
- the application of simplified customer due diligence ('SCDD')
- the definition of and approach to Politically Exposed Persons ('PEPs') and beneficial ownership
- the application of the AMLD to legal professionals
A summary of the Commission's report on these points is set out below:
Risk Based approach ('RBA')
The Commission's report highlights the importance of a RBA to AML. A RBA enables Member States, supervisory authorities and institutions affected by AML legislation to target their assessments of risk and the resources available to tackle such risks. Countries are permitted to develop their own individual RBA and measures which institutions operating within that country implement. This allows for flexibility; systems can be targeted to the threats which individual States and institutions are concerned with. It would appear that the general view is that the adoption of the RBA has been successful and its continuation is encouraged.
However, the Deloitte and Commission reports note the following areas of concern:
- lack of guidance;
- the multiformity of measures implemented at national level creating complications in cross border compliance
- the reluctance of some institutions to make use of SCDD due to a lack of acceptance of measures adopted by supervisory authorities.
The proposed Fourth AMLD is likely to require Member States to comply with FATF recommendations when carrying out risk assessments in the hope that a more uniform and consistent approach will be achieved. It is also expected that some form of obligation will be imposed on supervisory bodies to provide sector specific guidance – a particular area of concern for those operating in the non-financial sectors. However, it is unclear from the Commission's report how far such guidance would go. It would appear that practical guidance on the application of the RBA to AML and CDD is needed/welcomed, however, one could argue that too much guidance could limit the flexibility which Member States are currently afforded. The provision for this in the Fourth AMLD will have to be carefully considered.
It is likely that the scope of the proposed Fourth AMLD will extend in terms of the entities which are obliged to comply with it. In particular the Commission is likely to broaden the scope in the application to the gambling sector, financial agents, Central Banks, letting agents and dealers in precious stones and metals. It is not expected that the proposed Fourth AMLD will be applicable to completely new sets of institutions.
Customer Due Diligence ('CDD')
One of the key points which the Commission will look to clarify within the proposed Fourth AMLD is that SCDD does not mean no CDD. It is not an exemption, as some Member States appear to have interpreted it to be.
The Commission will also consider providing further guidance to Member States as to when SCDD is appropriate – whether this is to be in the form of examples or whether a list of risk factors will be provided is yet unknown. It is also not yet known whether the proposed Fourth AMLD will provide a set of minimum measures which must be complied with when SCDD is deemed appropriate.
In terms of regular CDD consideration will be given to harmonising the approach across jurisdictions. It has been suggested that a list of customer identification documents, recognised EU-wide, could be published to assist institutions in complying with CDD obligations. The Fourth AMLD may also see a reduction to the thresholds in respect of occasional transactions and electronic fund transfers.
The Deloitte report concluded that the current definition of a PEP within the Third AMLD is too broad and has led to differing applications across Member States. It was also noted that no Member State has extended enhanced CDD to domestic PEPs. By contrast the new FATF recommendations define "Foreign PEPS" and "Domestic PEPS"3 and suggest that a RBA should be adopted by institutions in applying enhanced CDD. It is likely that any revision to the Third AMLD4 will adopt the FATF approach to foreign and domestic PEPs - an approach that many financial institutions have already adopted through their internal AML policies and procedures.
The Commission report fails to make clear how concerns in respect of the availability, cost and reliability of public information regarding PEPs will be addressed. The Commission report simply states that the feasibility and appropriateness of supporting measures will have to be carefully assessed – we are, therefore, left to wait and see exactly how these concerns will be addressed; concerns which are significant, particularly to smaller institutions whose resources are limited.
The current 25% threshold test for ultimate beneficial ownership ('UBO') under the Third AMLD5 will most likely remain unchanged and the Commission's report acknowledges that there is general opposition to any reduction in the threshold, on the basis that this would unnecessarily increase financial and administrative burdens on stakeholders, which would outweigh any potential benefits
The Deloitte report found that the application of the UBO definition and the calculation of the 25% threshold varies across Member States. It is expected that any revision to UBO requirements will provide for further guidance in an attempt to create uniformity across jurisdictions. This will be of benefit particularly to those institutions who operate across the EU and who implement group wide AML policies and procedures.
In relation to our esteemed brethren in the legal profession, the Commission has concluded that national legislation does not provide precise enough description as to when reporting obligations outweigh client confidentiality. This has lead to a low level of suspicious activity reporting by legal professionals, a matter which will be considered when the AMLD is revised. The Commissions report makes it clear that legal professionals will be obliged to continue to comply with the requirements of the AMLD in appropriate situations. Further consultation will be carried out in this area; however, the Commission report concludes that the proposed Fourth Directive does not need to fundamentally revise the application to legal profession.
The message from the Commission's report is that the AML framework currently in place is working, something that perhaps from a political perspective would be worth shouting about, given the current debate about the effectiveness of EU legislation.
The implementation of the Third AMLD across Member States took a considerable amount of time, but any concerns which may have been raised when the Commission undertook to carry out it's review appear to have been somewhat allayed. Yes, there are difficulties with the AML framework as it currently stands; there is a lack of uniformity and application of certain provisions. There is perhaps, even today, a lack of clarity over the interpretation of the Directive adopted by particular jurisdictions. However, generally the Third AMLD has been successful in formulating an EU wide strategy against the continuing risks posed by AML/CTF. The time and effort expended in implementing it and the cost incurred in doing so, has not been in vain. What the Commission's report suggests is not a complete overhaul of the European AML framework but instead to provide greater assistance, definition and guidance, through the development of the Fourth AMLD, which is likely to be widely welcomed.
This article was originally published by Complinet on 1st May 2012.
3 Page 118 FATF recommendations
4 And the Implementing Directive 2006/70/EC
5 Article 3(6)
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