At the end of February, European lawmakers voted overwhelmingly to include new provisions in the European Union’s anti-money laundering rules in an attempt to improve transparency, prevent tax evasion and avoidance, and reduce the kinds of corporate vehicles that businesses—and terrorists—can use to disguise and hide dirty money.
The update aims to streamline coordination among member states in fighting terrorism financing and money laundering. Measures include introducing centralised bank and payment account registers in member states, harmonising the checks that banks and financial institutions make across the European Union, and easing the flow of information between member states’ financial intelligence units.
Under the latest proposals, EU member states would be required to create centralised registers of information about bank and payment-account holders, which national tax authorities could access in case of suspicious activities. Tax authorities would also gain access to national anti-money laundering information, including the true “beneficial” owners of companies.
EU citizens could also access registers of beneficial owners of companies without having to demonstrate a “legitimate interest”—a requirement that currently restricts access to government and regulatory authorities and professionals such as journalists and lobbyists.
Meanwhile, trusts—and “other types of legal arrangements having a structure or functions similar to trusts”—would have to meet the same transparency requirements as firms as part of measures to prevent tax evasion by hiding funds offshore. These were previously excluded from the directive on “privacy grounds,” but as one MEP stated: “Arguments about privacy cannot be used to defend the laundering of money by criminals."
The amendments, agreed on by the European Parliament’s Economic and Monetary Affairs and Civil Liberties committees, would plug gaps in the EU’s framework legislation against money laundering and terrorism financing, and would also introduce stricter transparency rules to prevent tax evasion. The amended report, which follows a proposal by the Commission last July to introduce tighter requirements, was passed by 89 votes to 1, with 4 abstentions.
“Complex company structures and shelf companies make it easy for people to hide money. Through a public register for companies and trusts, the European Parliament wants to shed light on these structures and thereby combat them,” said Judith Sargentini, a Dutch Green MEP and a co-rapporteur on the file.
Sargentini says that the public registers would include details of all the main participants in a trust: the settlor, trustees, the beneficiary, and any other persons exercising control. The new standard will mean that “those [who] hide something would be traceable,” says Sargentini, adding that “we want to make it impossible for anyone to use these illegal entities—where nobody knows who owns or runs them—to launder money.”
“Complex company structures and shelf companies make it easy for people to hide money. Through a public register for companies and trusts, the European Parliament wants to shed light on these structures and thereby combat them.”
Judith Sargentini, Member, Parliament
Pre-paid credit cards, as well as other anonymous pre-paid instruments, are also in line for more effective scrutiny to prevent their use as a low-cost, convenient way to transport the proceeds of crime. MEPs want to lower the threshold at which identification requirements kick in from €250 (U.S.$272) to €150 (U.S.$163).
MEPs also want to expand the scope of the directive to include virtual currency platforms and custodian wallet providers, such as Bitcoin and altcoin companies—even though the European Central Bank says that there are only around 70,000 virtual currency transactions per day. Under the amendments, virtual currency platforms would have the same obligation as banks and other payment institutions to scrutinise their customers. This includes verifying identity details (“know your customer” obligations), monitoring customer financial transactions, and reporting suspicious activity to reduce the risk of virtual currencies being used to launder criminal proceeds
Brussels has spent years trying to improve the EU’s anti-money laundering rules, culminating in the Fourth Anti-Money Laundering Directive being officially adopted by the European Parliament in June 2015 and due to come into force on 26 June this year (some suggest that not all EU member states are expected to have fully implemented the requirements of the Directive by that date—though they are legally bound to do so).
But a series of unforeseen events has meant that the legislation has needed a review before it even comes into effect.
Firstly, the fact that terrorists involved in some of the attacks in Brussels and Paris used financial mechanisms that have until now avoided anti-money laundering rules (such as pre-paid credit cards) means that revisions are necessary. Secondly, the release of the so-called “Panama Papers”—which allegedly showed how easily the clients of Panama City-based law firm Mossack Fonseca & Co. were able to dodge sanctions and avoid taxes—has shown how wide-spread avoidance is and how embarrassingly easy it can still be for firms to launder money.
Key aspects of the EU Fourth Anti-Money Laundering Directive
The Directive has introduced a number of important changes that compliance professionals should be aware of:
All EU countries (including the United Kingdom, despite Brexit) will need to introduce an Ultimate Beneficial Owner register;
Greater responsibilities will be placed on senior managers, and there will be implementation of a risk assessment and Senior Management regime. Obliged entities will need to obtain approval from their senior management for the “policies, controls and procedures that they put in place and to monitor and enhance the measures taken, where appropriate;
Sanctions for non-compliance will increase significantly for both individuals and firms. In relation to financial institutions, for example, the penalties may include public reprimands, withdrawal of authorisation, fines of up to 10 percent of the total annual turnover in the preceding business year, fines for individuals of up to €5m (US$5.4m), or fines of up to twice the amount of the benefit derived from the breach, where that benefit can be determined.
Simplified Due Diligence (SDD) will be made more complex (the Directive has removed the automatic entitlement to apply SDD when obliged entities deal with specified customers and products); and
Enhanced Due Diligence (EDD) will also apply to domestic (as well as foreign) Politically Exposed Persons (PEPs) for 18 months, rather than the current 12-month requirement.
—Neil Hodge
More recently, last week’s revelations by Eastern European investigative journalist network the Organized Crime and Corruption Reporting Project (OCCRP) and Russia’s Novaya Gazeta newspaper has again highlighted the poor compliance—and blatant connivance—of several major banks in laundering money.
Documents obtained by the OCCRP show details of about 70,000 banking transactions, including 1,920 (worth an estimated U.S.$740m) that went through U.K. banks and 373 via U.S. banks. At least U.S.$20bn in suspicious transactions appears to have been moved out of Russia during a four-year period between 2010 and 2014, though the true figure could be U.S.$80bn, in an operation known as “the Global Laundromat.”
HSBC, Royal Bank of Scotland, Lloyds, Barclays, and Coutts are among 17 banks based in the United Kingdom (or with branches there) that are facing questions over what they knew about the international scheme and why they did not turn away suspicious money transfers.
British-registered companies also played a prominent role in this extensive money-laundering network. The real owners of most of the firms used in the scheme remain secret, however, because of the anonymity provided by controversial offshore laws. It is therefore unsurprising that the European Parliament wants to clamp down on such abuses.
“The European Parliament has been clear in its proposal to change the rules governing financial transactions and crack down on such blatant money laundering,” says Green MEP Dr. Molly Scott Cato. “We must ensure that Parliament’s proposal to create a public register of beneficial ownership in each member state is not watered down by national governments in the Council.”
“We see again just how important binding rules are for all sectors. This kind of corrupt activity is only made possible by the existence of shell companies and phantom firms. The public register we are proposing would make it impossible for the clients of these companies to stay anonymous. They are the ultimate beneficial owner and their identity must be made public,” says Scott Cato.
Rachpal Thind, London-based partner in the financial services and regulatory group of international law firm Sidley, says that the latest version directive, as well as the proposed amendments, “goes a long way to tackling many of the abuses associated with money laundering, and this has to be welcomed.”
She adds, however, that the level of investigation and enforcement across the European Union can be uneven. “Take the United Kingdom as an example: The average fine levied by HMRC for companies that broke money laundering rules in 2014 to 2015 was just £1,134 [(U.S.$1,412)], compared to millions of pounds in fines handed down by the Financial Conduct Authority against banks for AML violations,” she says.
There’s no doubt that the European Union takes tackling money laundering seriously. But given that this is the fourth directive that the European Union has put into effect in 25 years, it shows both how easily crooks and terrorists can circumvent rules and compliance checks and how many types of organisations (and professions) are still exempt from scrutiny. Furthermore, the fact that the European Parliament has voted to amend the Directive even before EU states have fully implemented the rules agreed on in 2015 shows how quickly crime and terrorism outpace the legislative process.
Following the vote on 28 February, MEPs are now in three-way informal negotiations—known as “trilogues” in EU parlance—with the Council of the European Union (made up of government ministers from each of the EU member states) and the European Commission to try to fast-track the legislation, although national governments will also have a strong say.
Sargentini says that there will have already been two trilogues as this article goes to press, but she warns that “the process is not necessarily a quick one,” adding that “I would rather have a good anti-money laundering law than one that is rushed through.”
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