EU expands controversial AML country blacklist

“The aim of this list is to protect the EU financial system by better preventing money laundering and terrorist financing risks,” the Commission said. The EU list of high-risk third countries was first published in 2016, under a mandate by the Fourth Anti-Money Laundering Directive (AMLD 4).

When the Fifth Anti-Money Laundering Directive (AMLD 5) came into force in July 2018, it broadened the criteria for identifying high-risk third countries, most notably including the availability and exchange of information on the beneficial owners of legal persons and legal arrangements. “This will help better address risks stemming from the setting up of shell companies and opaque structures which may be used by criminals and terrorists to hide the real beneficiaries of a transaction, including for tax evasion purposes,” the Commission said. Other criteria established under AMLD 5 for identifying high-risk third countries include:

• Criminalisation of money laundering and terrorist financing;
• Customer due diligence and recordkeeping requirements;
• The reporting of suspicious transactions;
• The powers and procedures of competent authorities;
• Their practice in international cooperation; and
• The existence of dissuasive, proportionate and effective sanctions.

The new list, published on 13 February, is the first to use the stricter criteria of AMLD 5 and a new methodology developed by the Commission to identify high-risk countries. The Commission said its new methodology complements the efforts of the Financial Action Task Force—the global standard-setting body for combating money laundering, terrorist financing—by addressing risks that are specific to the European Union. “The result is a more ambitious approach for identifying countries with deficiencies posing risks to the EU financial system,” the Commission said.

“Coupled with the recent updates implemented in the 5th EU Money Laundering Directive, the extended list is likely to lead to enhanced checks and control over transactions with these countries.”

Chris Laws, Global Head of Product Development, Compliance and Supply Solutions, Dun and Bradstreet

The list has been established based on an analysis of 54 “priority” jurisdictions. The countries assessed meet at least one of the following criteria specific to the European Union: They have systemic impact on the integrity of the EU financial system; they are reviewed by the International Monetary Fund as international offshore financial centres; or they have economic relevance and strong economic ties with the European Union.

The new list now includes 23 countries, including 12 countries listed by the FATF. An additional 11 jurisdictions have been identified by the Commission, including the U.S. territories of Puerto Rico, Guam, American Samoa, and the U.S. Virgin Islands, as well as Afghanistan, Iraq, Libya, Nigeria, Panama, Puerto Rico, Samoa, and Saudi Arabia.

Sixteen listed countries are already on the original EU list. The Commission also de-listed several countries previously included on the EU list: Bosnia-Herzegovina, Guyana, Lao PDR, Uganda, and Vanuatu.

Treasury response

Many have pushed back on the EU’s controversial blacklist. In a statement, the U.S. Department of the Treasury said it has “significant concerns about the substance of the list and the flawed process by which it was developed.”

The FATF already develops a list of high-risk jurisdictions with AML deficiencies as part of a careful and comprehensive process. “Because of the FATF’s work, virtually all countries around the world are subject to a rigorous peer-review methodology that examines the legal frameworks to counter illicit finance as well as how effectively jurisdictions implement them,” Treasury said. “These reviews are an intensive process involving careful review of the legal framework, extensive fact-gathering, and onsite visits in which assessors engage in robust, iterative dialogues with assessed jurisdictions.”

The European Commission’s process for developing its list contrasts starkly with FATF’s thorough methodology, Treasury said. “Beyond our concerns with the listing methodology, the Treasury Department rejects the inclusion of American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands on the list.”

“The commitments and actions of the United States in implementing the FATF standards extend to all U.S. territories,” the Treasury added. “Moreover, the Treasury Department was not provided any meaningful opportunity to discuss with the European Commission its basis for including the listed U.S. territories.

The Treasury Department added that it does not expect U.S. financial institutions to take the European Commission’s list into account in their AML and counter-terrorist financing policies and procedures.

Compliance measures

European financial institutions, however, must apply enhanced due diligence on financial operations involving customers and financial institutions from high-risk third countries on the list. Customer due diligence corresponds to a series of checks and balances that financial institutions must use where there’s a high risk of money laundering or terrorist financing. Enhanced due diligence measures include extra checks and monitoring of those transactions by banks to prevent, detect, and stop suspicious transactions.

AMLD 5 clarifies the type of enhanced due diligence measures that European financial institutions must conduct, including:

• Obtaining additional information on the customer and on the beneficial owner(s);
• Obtaining additional information on the intended nature of the business relationship;
• Obtaining information on the source of funds and source of wealth of the customer and of the beneficial owner(s);
• Obtaining information on the reasons for the intended or performed transactions;
• Obtaining the approval of senior management for establishing or continuing the business relationship; and
• Conducting enhanced monitoring of the business relationship by increasing the number and timing of controls applied and selecting patterns of transactions that need further examination.

“Coupled with the recent updates implemented in the 5th EU Money Laundering Directive, the extended list is likely to lead to enhanced checks and control over transactions with these countries,” says Chris Laws, global head of product development, compliance and supply solutions at Dun and Bradstreet. “With such a rapidly changing landscape and increasingly sophisticated financial crime, it’s essential to have increased transparency to deter and identifies illegal activity.”

“It’s more important than ever for businesses to have robust compliance processes in place both for Know-Your-Customer and Know-Your-Vendor activities,” Laws says. “Access to detailed information, such as beneficial ownership and people with significant control, is vital to tackling money laundering and an enhanced level of scrutiny of all business relationships is essential to identify and mitigate any potential risks.”

Next steps

The Commission adopted the list in the form of a Delegated Regulation, which will now be submitted to the European Parliament and Council for approval within one month (with a possible one-month extension). Once approved, the Delegated Regulation will be published in the Official Journal and will enter into force 20 days after its publication.

The Commission said it will continue to engage with the countries identified as having strategic deficiencies in the present Delegated Regulation and will further engage with them, especially on the delisting criteria. This list enables the countries concerned to better identify the areas for improvement to pave the way for a possible delisting once strategic deficiencies are addressed. “I invite the countries listed to remedy their deficiencies swiftly,” said Vera Jourová, Commissioner for Justice, Consumers and Gender Equality. “The Commission stands ready to work closely with them to address these issues in our mutual interest.”

The Commission said it will follow up on progress made by the listed countries, continue monitoring those reviewed, and start assessing additional countries, in line with its published methodology. The Commission will update this list accordingly. It will also reflect on further strengthening its methodology where needed considering experience gained, with a view to ensuring effective identification of high-risk third countries and the necessary follow-up.