The Fourth Money Laundering Directive brought us many delights, including Article 9: “Third-country jurisdictions which have strategic deficiencies in their national AML/CFT regimes that pose significant threats to the financial system of the Union (‘high-risk third countries’) shall be identified in order to protect the proper functioning of the internal market.” The requirement is retained unchanged in the Fifth Money Laundering Directive. Now I can see arguments on both sides. Regulated businesses – particularly when it comes to dodgy jurisdictions – do like certainty, and an approved list of “high-risk third countries” might seem attractive. But there are, it seems, more problems than benefits. It’s looking outwards only, for a start: assessing only “third countries” (i.e. non-EU Member States) brings to mind planks and specks. And as the European Commission – which adopts the list – is a political body, it is vulnerable to political pressure.
And so it has proved. The first list was adopted by the European Commission on the advent of MLD4, and that first list was basically a carbon copy of the FATF’s list of jurisdictions with “strategic AML/CFT deficiencies”. But then the Commission started to wonder whether it could do better than the FATF – yes, better than the agency that has devoted itself entirely to matters money laundering and AML for three decades. Obviously that wondering should have led to the answer “no”, but it did not. And in June 2018 the Commission published its own “Methodology for identifying high risk third countries”, which involves looking at the FATF list and then “taking into account strategic deficiencies… in relation to: (a) the legal and institutional AML/CFT framework of the third country, in particular: (i) the criminalisation of money laundering and terrorist financing; (ii) measures relating to customer due diligence; (iii) requirements relating to record-keeping; (iv) requirements to report suspicious transactions; (v) the availability of accurate and timely information of the beneficial ownership of legal persons and arrangements to competent authorities; (b) the powers and procedures of the third country’s competent authorities for the purposes of combating money laundering and terrorist financing including appropriately dissuasive, proportionate and effective sanctions, as well as the third country’s practice in cooperation and exchange of information with Member States’ competent authorities; (c) the effectiveness of the AML/CFT system in addressing money laundering or terrorist financing risks of the third country.” If all of that sounds familiar, good: it’s because it covers the same ground as the FATF’s own modern methodology (compliance and effectiveness). So far, so pointless.
But although the methodologies seem similar, the outcomes certainly are not. And on 13 February 2019 the EC announced that it was adopting a new list of “high-risk third countries” – twenty-three in total. Two in particular were rather annoyed at their inclusion: the US huffed that their four territories on the list (American Samoa, Guam, Puerto Rico and the US Virgin Islands) should not be there because “the same AML/CFT legal framework that applies to the continental United States also generally applies to US territories” [I’m saying nothing], while Saudi Arabia was quietly furious. And quietly effective: King Salman sent letters to all EU leaders urging them to reconsider their decision, saying that his country’s inclusion “will damage its reputation on the one hand and will create difficulties in trade and investment flows between the Kingdom and the EU on the other”. That did the trick: on 8 March 2019 the new list was unanimously rejected by the EU Member States and tossed back to the EC for them to have another think.
We now hear, courtesy of Reuters, that the commissioner in charge of the issue, Vera Jourova, has come up with a cunning plan: a revised process to list countries. Instead of directly blacklisting those with shortfalls, the new process would be based on a “staged approach” under which risk countries would need to commit to changing their rules and practices by set deadlines, effectively producing a grey list of jurisdictions that would be blacklisted only if they failed to apply required reforms. Again, if that sounds familiar, it should: IT’S HOW THE FATF DOES IT. *throws hands in air in despair*
There will now be a two-week pause in blog posts while I hide away at the top of a mountain to finish my sixth Sam Plank novel. You can keep track of my fiction-based progress on my writing blog, and indeed you can even have your say on what you think the title of the book should be. And if you fancy having a look at the books, you can now download a free guide to the series, with the first chapter from each book and a glossary of Regency terms – you’d be bird-witted not to! I’ll be posting here again from 7 August onward.
I hate money laundering 
Remembering that you mentioned being a “remainer” (?) I am inclined to say that your post is a perfect example as to why people want out of the EU!!
Aha! I am indeed a remainer – to my bootstraps. And perhaps people might see this list as an example of how the EU gets it wrong and should be abandoned. But I see it differently. This list is indeed a nonsensical initiative. But if we – the UK – go it alone, it won’t mean that we can ignore the lists coming out of the EU; we’ll still have to abide by them if we want to be seen as equivalent by EU Member States (which we do). The difference is that we will have no input whatsoever in assembling the list or indeed (as I hope) deciding to drop it entirely. So we’ll be worse off – yet again. Far better to be in the EU working to improve it rather than outside it, with no influence, while still having to follow its lead. *climbs down from soap box*
A very valid point provided that after all the fuss we have caused thus far we will be allowed to have our say or any say at any level of engagement! Do find it interesting and quite fun to see if you pull out the “soapbox” in response to comments!
Hope the Plank 6 writing sojourn (holiday?!) is successful.
“But then the Commission started to wonder whether it could do better than the FATF – yes, better than the agency that has devoted itself entirely to matters money laundering and AML for three decades”
In fairness it is also the same agency that recently inspected the UK and gave us a good pass mark for our efforts, this despite the large sus of dirty money that pass through the city, that half of West London is owned by some fairly “colourful” people whose money came for where and has a company registration system that makes no efforts to check its own data (and so is the perfect Money Launderer’s tool).
Can’t say I fully blame them for thinking they might be able to do better…
Good point, Robert – the FATF is not perfect by any means. But I’d rather listen to the views of an agency that has concentrated on the subject for three decades than those of a group of parliamentarians who (a) have a thousand other responsibilities outside AML, and (b) have their own political drums to beat.
And I do agree that the FATF’s recent evaluation of the UK was rather optimistic… For a much more measured, reasoned and balanced take on the situation, I turn to RUSI: https://rusi.org/sites/default/files/20190219_fatf_uk_evaluation_web.pdf