Explanatory Memorandum to COM(2013)45 - Prevention of the use of the financial system for the purpose of money laundering and terrorist financing

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dossier COM(2013)45 - Prevention of the use of the financial system for the purpose of money laundering and terrorist financing.
source COM(2013)45 EN
date 05-02-2013
1. CONTEXT OF THE PROPOSAL

4.

Grounds for and objectives of the proposal


The main objectives of the measures proposed are to strengthen the Internal Market by reducing complexity across borders, to safeguard the interests of society from criminality and terrorist acts, to safeguard the economic prosperity of the European Union by ensuring an efficient business environment, to contribute to financial stability by protecting the soundness, proper functioning and integrity of the financial system.

These objectives will be achieved by ensuring consistency between the EU approach and the international one; ensuring consistency between national rules, as well as flexibility in their implementation; ensuring that the rules are risk-focused and adjusted to address new emerging threats.

In addition, this proposal incorporates and repeals Commission Directive 2006/70/EC of 1 August 2006 laying down implementing measures for Directive 2005/60/EC, thus improving the comprehensibility and accessibility of the anti-money laundering (AML) legislative framework for all stakeholders.

The Commission intends to complement the current proposal by strengthening the EU's repressive response to money laundering. Consequently it is planned to propose criminal law harmonisation for this offence based on Article 83 of the Treaty on the Functioning of the European Union (TFEU) in 2013 i.

5.

General context


The breaking down of barriers within the Internal Market facilitates not only the establishment or development of legitimate businesses across the EU, but may also provide increased opportunities for money laundering and terrorist financing. Criminals engaged in money laundering could therefore attempt to conceal or disguise the true nature, source or ownership of the assets in question and transform them into seemingly legitimate proceeds. Moreover, terrorist financing can be funded through both legitimate and criminal activities, as terrorist organisations engage in revenue-generating activities which in themselves may be, or at least appear to be, legitimate. Money laundering and terrorism financing create thus a high risk to the integrity, proper functioning, reputation and stability of the financial system, with potentially devastating consequences for the broader society.

European legislation has been adopted to protect the proper functioning of the financial system and of the Internal Market. However, the changing nature of money laundering and terrorist financing threats, facilitated by a constant evolution of technology and of the means at the disposal of criminals, requires a permanent adaptation of the legal framework to counter such threats.

At the EU level, Directive 2005/60/EC of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing i (hereinafter referred to as the Third AMLD) sets out the framework designed to protect the soundness, integrity and stability of credit and financial institutions and confidence in the financial system as a whole, against the risks of money laundering and terrorist financing. The EU rules are to a large extent based on international standards adopted by the Financial Action Task Force (FATF) and, as the Directive follows a minimum harmonisation approach, the framework is completed by rules adopted at national level.

At international level, the FATF has undertaken a fundamental review of the international standards and adopted a new set of Recommendations in February 2012.

In parallel to the international process, the European Commission has been undertaking its own review of the European framework. A revision of the Directive at this time is complementary to the revised FATF Recommendations, which in themselves represent a substantial strengthening of the anti-money laundering and combating terrorist financing framework. The Directive itself further strengthens elements of the revised Recommendations, in particular in relation to scope (by including providers of gambling services and dealers in goods with a threshold of EUR 7 500), beneficial ownership information (which is to be made available to obliged entities and competent authorities), and in the provisions on sanctions. It takes into account the necessity to increase effectiveness of AML measures by adapting the legal framework to ensure that risk assessments are carried out at the appropriate level and with the necessary degree of flexibility to allow adaptation to the different situations and actors. As a consequence of this, the Directive, while setting a high level of common standards, requires Member States, supervisory authorities and obliged entities to assess risk and take adequate mitigating measures commensurate to such risk. This results in the Directive being less detailed as regards concrete measures to be taken.

6.

Existing provisions in this area


Various legal instruments have been adopted to ensure an effective anti-money laundering and combating terrorist financing framework at EU level. The most important ones are:

– The Third AML Directive, which covers most of the 40 FATF Recommendations and some of the 9 FATF Special Recommendations;

– Regulation (EC) No 1781/2006 of 15 November 2006 on information on the payer accompanying transfers of funds, which implements FATF SR VII on wire transfers;

– Regulation (EC) No 1889/2005 of 26 October 2005 on controls of cash entering or leaving the Community[5], which implements FATF SR IX on cash couriers;

– Directive 2007/64/EC of 13 December 2007 on payment services in the internal market[6] (Payment Services Directive) which, in combination with the Third AMLD, implements FATF SR VI on alternative remittance;

– Regulation (EC) No 2580/2001 of 27 December 2001 on specific restrictive measures directed against certain persons and entities with a view to combating terrorism[7] which, together with Regulation (EC) No 881/2002 of 27 May 2002[8] implementing UN Al Qai'da and Taliban sanctions, implements part of FATF SR III on freezing terrorist assets.

7.

Consistency with other policies and objectives of the Union


The proposed adaptation of the anti-money laundering and combating terrorist financing framework is fully coherent with EU policies in other areas. In particular:

– the Stockholm Programme[9], which aims at achieving an open and secure Europe serving and protecting citizens, calls on Member States and the Commission to further develop information exchange between the FIUs, in the fight against money laundering;

– the EU's Internal Security Strategy[10] identifies the most urgent challenges to EU security in the years to come and proposes five strategic objectives and specific actions for 2011-2014 to help make the EU more secure. This includes tackling money laundering and preventing terrorism. The need to update the EU anti-money laundering and combating terrorist financing framework with a view to enhancing the transparency of legal persons and legal arrangements has been specifically recognised;

– the potential for misuse of new technologies to conceal transactions and hide identity makes it important for Member States to be aware of technological developments and simulate the use of electronic identification, electronic signature and trust services for electronic transactions, in line with Commission’s proposal for a Regulation on electronic identification and trust services for electronic transactions in the internal market[11];

– in March 2012, the European Commission adopted a proposal on the freezing and confiscation of proceeds of crime in the EU[12] which seeks to ensure that Member States have in place an efficient system to freeze, manage and confiscate criminal assets, backed by the necessary institutional setup, financial and human resources;

– with respect to data protection, the proposed clarifications to the Third AMLD are fully in line with the approach set out in the Commission's recent data protection proposals[13], whereby a specific provision[14] empowers EU or national legislation to restrict the scope of the obligations and rights provided for in the draft regulation on a number of specified grounds, including the prevention, investigation, detection and prosecution of criminal offences;

– with respect to sanctions, the proposal to introduce a set of minimum principles-based rules to strengthen administrative sanctions is fully in line with the Commission's policy as outlined in its Communication 'Reinforcing sanctioning regimes in the financial services sector'[15];

– with respect to financial inclusion, the fact that applying an overly cautious approach to anti-money laundering and combating terrorist financing safeguards might have the unintended consequence of excluding legitimate businesses and consumers from the financial system has been recognised. Work has been carried out on this issue at international level[16] to provide guidance to support countries and their financial institutions in designing anti-money laundering and combating terrorist financing measures that meet the national goal of financial inclusion, without compromising the measures that exist for the purpose of combating crime. At EU level, the issue of financial inclusion is currently under consideration as part of the work on a Bank Accounts package;

– with respect to the cooperation with persons or authorities (including courts and administrative bodies) concerned with the assessment of, collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to taxes and any other public levy, the proposal is consistent with the approach for fighting against tax fraud and tax evasion[17] followed at international level in including a specific reference to tax crimes within the serious crimes which can be considered as predicate offences to money laundering. The enhancement of the customer due diligence procedures for AML purposes will also assist the fight against tax fraud and tax evasion.

Contents

1.

RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS



8.

Consultation of interested parties


The Commission adopted in April 2012 a report on the application of the Third AMLD and solicited comments from all stakeholders. The report focused on a number of identified key themes (e.g. including application of a risk-based approach, extending the scope of the existing framework, adjusting the approach to customer due diligence, clarifying reporting obligations and supervisory powers, enhancing FIU co-operation etc.), which were essential for the review of the Third AMLD.

The Commission received 77 contributions from public authorities, civil society, business federations and companies in several fields (including financial services, gambling sector, liberal professions, real estate sector, trust and company service providers), representing a broad variety of stakeholders. An additional number of comments, position papers and contributions were received outside the consultation.

The overall results of the consultation[18] point to a general confirmation of the issues and problems highlighted by the Commission's Report, as well as broad support for the proposed alignment to the revised FATF standards and for greater clarification in certain areas (i.e. data protection and how to apply the rules in cross-border situations).

9.

Use of expertise


Substantial efforts have been made to obtain evidence in this field and to ensure full engagement of the different stakeholders.

In particular, over the course of 2010, a study by external consultants Deloitte[19] was carried out on behalf of the Commission to look into the application of the Third AML Directive.

10.

Impact assessment


The Commission has undertaken an Impact Assessment[20], where it analysed the potential consequences of money laundering and terrorism financing. In particular, the financial system failing to prevent money laundering and terrorist financing can lead to negative economic impacts (arising from disruptions to international capital flows, reduced investment and lower economic growth) and financial market instability (resulting from reluctance of other financial intermediaries to engage in business, loss of reputation, drop in confidence and prudential risks).

The following problem drivers were examined:

– the different application of existing EU rules across Member States, leading to reduced legal certainty;

– the inadequacies and loopholes with respect to the current EU rules;

– the inconsistency of the current rules with the recently revised international standards.

This requires the achievement of the following operational objectives:

– ensure consistency between national rules and, where appropriate, flexibility in their implementation by strengthening and clarifying current requirements;

– ensure that the rules are risk-focused and adjusted to address new emerging threats, by strengthening and clarifying current requirements;

– ensure that the EU approach is consistent with the approach followed at international level by extending the scope of application, strengthening and clarifying the current requirements.

The impact assessment concluded that the best options to improve the existing situation would be:

– Broadening scope to cover gambling: broaden the scope of the Directive beyond 'casinos' to cover the gambling sector;

– Thresholds for traders in goods: reduce the scope and customer due diligence thresholds for traders in high value goods from EUR 15 000 to EUR 7 500 for cash transactions;

– Sanctions regimes: introduce a set of minimum principles-based rules to strengthen administrative sanctions;

– Comparability of statistical data: reinforce and make more precise the requirement regarding the collecting and reporting of statistical data;

– Data protection: introduce provisions in the Directive to clarify the interaction between anti-money laundering/combating terrorist financing and data protection requirements;

– Inclusion of tax crimes in the scope: include an explicit reference to tax crimes as a predicate offence;

– Availability of beneficial owner information: require all companies to hold information on their beneficial owners;

– Identification of Beneficial Owner (BO): maintain the approach which requires identification of the BO as of a 25% ownership threshold, but clarify what the '25% threshold' refers to;

– Home and host supervisory responsibilities for AML: introduce new rules clarifying that branches and subsidiaries situated in other Member States than the head office apply host state AML rules and reinforce cooperation arrangements between home and host supervisors;

– Cross-border cooperation between Financial Intelligence Units (FIUs): introduce new requirements that would strengthen FIU powers and cooperation;

– National Risk Assessments: introduce a requirement for Member States to carry out a risk assessment at national level and take measures to mitigate risks;

– Customer Due Diligence: Member States to ensure that enhanced due diligence must be conducted in certain situations of high risk, while allowing them to permit simplified due diligence in lower risk situations;

– Equivalence of third country regimes: remove the 'white list' process;

– Risk-Sensitive Approach to supervision: specific recognition in the Directive that supervision can be carried out on a risk-sensitive basis;

– Treatment of Politically Exposed Persons (PEPs): introduce new requirements for domestic PEPs/PEPs working in international organisations, with risk-sensitive measures to be applied.

In addition, the impact assessment analysed the impact of the legislative proposals on Fundamental Rights. In line with the Charter of Fundamental rights, the proposals seek in particular to ensure protection of personal data (Article 8 of the Charter) by clarifying the conditions under which personal data can be stored and transferred. The proposals will bring no change and therefore have no impact on the right to an effective remedy and to a fair trial (Article 47 of the Charter) which are not infringed by the Directive as confirmed by the European Court of Justice (case C-305/05). The respect for private life (Article 7), the freedom to conduct a business (Article 16) and the prohibition of discrimination (Article 21) have been duly taken into account. Finally, the proposal will indirectly help to protect the right to life (Article 2 of the Charter).

2.

LEGAL ELEMENTS OF THE PROPOSAL



11.

Legal basis


The current proposal is based on Article 114 TFEU.

12.

Subsidiarity and proportionality


In accordance with the principles of subsidiarity and proportionality as set out in Article 5 of the Treaty on European Union, the objectives of the proposal cannot be sufficiently achieved by Member States and can therefore be better achieved at the Union level. The proposal does not go beyond what is necessary to achieve those objectives.

Recital 2 of the Third AMLD underlines the necessity of having measures at the EU level aiming at protecting the soundness, integrity and stability of credit and financial institutions and confidence in the financial system as a whole, 'in order to avoid Member States adopting measures to protect their financial systems which could be inconsistent with the functioning of the internal market and with the prescriptions of the rule of law and Community public policy, Community action in this area is necessary'.

As massive flows of dirty money and terrorist financing can damage the stability and reputation of the financial sector and threaten the internal market, any measures adopted solely at national level could have adverse effects on the EU Single Market: an absence of coordinated rules across Member States aimed at protecting their financial systems could be inconsistent with the functioning of the internal market and result in fragmentation. EU action is also justified in order to maintain a level playing field across the EU – with entities in all Member States subject to a consistent set of anti-money laundering and combating terrorist financing obligations.

The Commission considers that the proposed rule changes are proportionate to the objectives. By imposing thresholds on scope and customer due diligence, the Commission has taken proportionate steps to limit the applicability of the Directive, where appropriate. In addition, the Directive allows certain of the preventative measures to be taken by SMEs to be proportionate to the size and nature of the obliged entity. At the same time, by ensuring a tailored and flexible risk-based approach, Member States should not be constrained from adopting measures and taking actions as necessary to counter important threats they may confront at national level. These measures are better suited to a Directive than a fully harmonised Regulation, with the inclusion of processes at EU level to ensure greater coordination and the development of supranational approaches, together with further harmonisation in specific areas ensuring that EU objectives are also met. Although ensuring an effective AML/counter terrorism financing system entails some cost for obliged entities (these costs have been analysed in the Impact Assessment), the Commission considers that the benefits associated with preventing money laundering and terrorist financing will continue to outweigh the costs.

The evaluation of the new international standards will begin in the fourth quarter of 2013. Unless the Commission provides clear and early indications of the desired EU approach to their implementation, there is a risk that those EU Member States who will be evaluated first will opt for solutions which may not coincide with the proposed EU approach, thus rendering agreement of common EU rules more difficult.

Finally, with the adoption of revised international standards, commitments have been taken by the Commission as well as all EU Member States (either directly or via their membership of FATF or Moneyval) to ensure their implementation.

3.

BUDGETARY IMPLICATION



The proposal has no implication for the budget of the European Union.

13.

5. ADDITIONAL INFORMATION


Detailed explanation of the proposal

The main modifications to the Third AMLD are:

– Extension of the scope of the Directive: two main changes are proposed to the scope:

(a) the threshold for traders in high value goods dealing with cash payments be reduced from EUR 15 000 to EUR 7 500. Currently traders in goods are included in the scope of the Directive if they deal with cash payments of EUR 15 000 or more. After receiving information from Member States that this relatively high threshold was being exploited by criminals it is proposed to lower it to EUR 7 500. In addition, the new proposal requires traders to carry out customer due diligence when carrying out an occasional transaction of at least EUR 7 500, a reduction from the previous threshold of EUR 15 000. Both the definition and the threshold show a tightening of measures against the use of these traders for money laundering purposes across the EU;

(b) 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[21]). The current Third AMLD and the revised FATF Recommendations require that only casinos be included in the scope of anti-money laundering/combating terrorist financing legislation. Evidence in the EU suggests that this leaves other areas of gambling vulnerable to miss-use by criminals.

– Risk-based approach: The Directive recognises that the use of a risk-based approach is an effective way 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:

(a) 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;

(b) 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 thoroughly 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;

(c) 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 given. 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 provide enhanced clarity and accessibility of 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 AMLD 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.

– Administrative sanctions: 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 17 October 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 (ESA): the proposal contains several areas where work by the ESA is envisaged. In particular, EBA, EIOPA and ESMA 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.

– Data Protection: 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.

– Transposition measures: Due to the complexity and scope of the proposal, Member States are required to transmit a correlation table of the provisions of their national law and the Directive.

14.

European Economic Area


The proposal is relevant for the EEA countries.