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EXPERT VIEW: EU's Latest Money Laundering Rules - The Onset Of An Onerous Regime?
Chris Hamblin
4 July 2013
The European Union's proposal for a fourth directive to
govern money laundering controls is unlike any of its predecessors and promises
to be nothing like the directive which, according to its text, will supersede
it in a few years. It is expected to become EU law very late in the year or
early in the next. The main rule-changes Rather than contain many draconian suggestions for new
predicate offences, reporting obligations or regulatory powers, it suggests
instead that all EU-based multinationals should impose EU-style controls
wherever they have branches in the world and should also keep records of all
the substantial beneficial owners of their corporate and other
collectively-held customer-firms and counterparties. These provisions, if they
come into force, will be onerous. There is one new predicate offence whose proceeds are to be
outlawed everywhere in the EU: tax fraud. Countries such as the UK have long
criminalised the proceeds of tax evasion (and even, since about 1999, the
proceeds of foreign tax evasion) but the EU now wishes to make this universal
and many countries will be experiencing this for the first time if this version
of the draft becomes EU law. Article 3(4)(a) contains a proposal to expand the
existing operative phrase, “criminal activity,” to include “all offences,
including tax crimes related to direct taxes and indirect taxes, which are
punishable by deprivation of liberty or a detention order for a maximum of more
than one year or, as regards those states which have a minimum threshold for
offences in their legal system, all offences punishable by deprivation of
liberty or a detention order for a minimum of more than six months”. Article 12 seeks to oblige banks to verify the identity of
every customer and of every beneficial owner who owns 25 per cent or more of
the entity in question before the business relationship begins. No transaction
is to take place before this happens. There is also a drive to introduce new requirements for
domestic “politically exposed persons” and PEPs who work in international
organisations, subject for the first time to the dictates of a vague and
unspecified form of risk management. At present, Italian private banks need not
conduct “enhanced due diligence” on the accounts of Silvio Berlusconi, at least
on the pretext that he is a PEP. Under the proposals, this should change. EDD
is to apply for at least 18 months (rather than the current 12) after every
office-holding PEP (the definition of PEP also includes nuclear family members
– which bizarrely rules out uncles and nephews – and an undefined collection of
“close associates”) vacates his office. Record-keeping reform There are some record-keeping suggestions in Article 39 that
are unlikely to be new to most countries. The EU wants the new law to compel
financial firms to spend five years storing the “know your customer” data they
collect to prove that each new applicant for business is who he/she/it claims
to be. It wants the same for documents that prove the veracity of the business
relationships that underpin customers' wealth. The idea is to keep the
information ready for official scrutiny at any time; this is already happening
in most of the old (pre-2004) member-states, and should already be happening in
the rest according to national laws. Five years has long been the
almost-universal compliance record-keeping period throughout the civilised
world. What the people who claim to represent the bankers think The European Banking Federation is a typical EU construct
which purports to represent the interests of all EU states' banking sectors. It
has had privileged access to the inner workings of the EU legislative process
on this subject. Its response to the proposal is full of objections. To begin
with, it fears the costs associated with the identification of beneficial
owners – an expensive undertaking if applied to a private bank's entire
business. It also decries the fact that the proposal stops short of calling for
EU-wide standards for publicly registered information regarding shareholdings
and beneficial ownership in general as regards unlisted companies. Its concern here is ostensibly “legal certainty,” although
cost must surely be a larger worry. If such registers did exist, ordinary
taxpayers would be footing the bill and not banks. There is, however, an EU
plan to promote a “European business register” which merely copies information
from national registers such as the one at Companies House in London, but the EU's planners did not deign
to link this up to the money-laundering proposal. On the same theme, the EBF thinks that national governments
should provide its members with ready-made lists of PEPs. The EU's legislators,
however, are famously shy of agreeing to expenditures of governmental effort
and money on this scale. The EBF is on firmer ground in asking for a clear definition
of such terms as “international organisation.” Article 19 calls on compliance
officers and money-laundering reporting officers to treat “persons who are or
who have been entrusted with a prominent function by an international
organisation” as PEPs who require EDD. However, neither the proposal nor its
lengthy preamble define the term “international organisation”. The EBF also
wants watertight definitions for “supervisory bodies” and “state-owned enterprises”. Data protection and record-keeping The cross-over between a bank's duty to protect customers'
data and to “inform” on its clients is as blurred as ever and forms the subject
for another sore point. This time the bankers are complaining that the new rule
in Article 39 states that “the maximum retention period following either the
carrying-out of the transactions or the end of the business relationship,
whichever period ends first, shall not exceed ten years.” In this scenario the
private bank is being asked to destroy the data after ten years. The EBF argues
that this cannot be in the interests of the customer or his heirs, who may need
information on the account in question in inheritance proceedings which might
drag on for years. The same goes for insolvency proceedings. In going on to
argue that the data might be needed in criminal investigations, however, the
EBF gives off the distinct impression that customer service is not the real reason
for its objections to Article 39. Rogue's gallery “Reliance,” to give it its UK term, is a major issue in the
money-laundering world. It refers, of course, to the extent to which a bank can
rely on other banks outside its jurisdiction or the reach of its regulators for
the identification and verification of an applicant for business's identity and
other things. Article 25(1) limits extra-EU “third parties” who are allowed to
provide this information to entities from countries where “due diligence” is
“equivalent” to the EU's. Article 25(2) places the burden of deciding which
jurisdiction is “equivalent” squarely on the shoulders of each national
government, ringed around tightly with the need to obtain permission from a
battery of EU organs. This heralds the end of the EU's scandalous experiment with
anti-money-laundering “white-lists.” In 2008, to gasps of astonishment,
national regulators in many if not all EU countries announced that they were
going to tolerate “simplified due diligence” (a lower standard of
background-checking) for entities that belonged to about a dozen selected
countries. This list included Aruba, Curacao, Mexico, Russia and other
territories that have long been famous for their opacity (and, especially in
the case of Mexico, general lawlessness) rather than for good regulation and
due diligence. This embarrassment is likely to be over in the next year or two.
In the preamble to the proposal, the EU states: “Equivalence of third country
regimes: remove the "white list" process.” This terse reference is
the only mention it makes of the débâcle. In a sense, the EU need do nothing to
close the loophole; it originated from pressure that the EU exerted on
member-states behind the scenes and not from any EU law. A string of deadlines One of the stars of the new proposal is the European Banking
Authority, which the EU believes is destined to take the reigns of private bank
regulation out of the hands of national regulators one day. The document
contains a slew of deadlines by which the EBA must approve this-and-that.
Article 6 calls on it to club together with other centralised EU regulators
(the European Insurance and Occupational Pensions Authority or EIOPA and the
European Securities and Markets Authority or ESMA) to float an “opinion” about
money-laundering and terrorist-financing risks within two years of the fourth
directive coming into force. Article 15 calls on that body to evolve guidelines
within the same time-frame for the risk factors that should govern decisions about
when and where “simplified due diligence” should apply. Article 16 asks it to
issue other guidelines in the same time-frame, this time for EDD. Article 42
contains another crop of deadlines (which fall on the same date) for EU
standardisation in which the EBA is to participate. The EU's drive to
centralise financial regulation is only too obvious in this draft. The EBA, however, is nowhere near a state of readiness for
such lofty pre-eminence. The UK's
Financial Conduct Authority, according to its latest business plan, is going to
spend around £445 million ($674 million) in 2013-14, with fees payable of £391 million. Its
total headcount will be 2,848. The EBA's budget for this year is €30 million or
£25.7 million, of which €15 million has been pilfered from the “fees” that
national regulators charge their flock, and its headcount by Christmas is
expected to be 93. It will therefore be some time before the EBA is able to do
much more than broadcast patronising messages to the national regulators that
it hopes one day to supplant.