13 Money laundering
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| Draft Directive on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing ("The Third Money Laundering Directive")
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| Legal base | Articles 47(2) and 95 EC; co-decision; QMV
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| Department | HM Treasury
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| Basis of consideration | EM of 17 September 2004
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information requested
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Background
13.1 The first Money Laundering Directive, 91/308/EEC, imposed
anti-money-laundering obligations on the financial sector and
defined money laundering in terms of drugs offences. The second,
amending, Money Laundering Directive, 2001/97/EC, extended the
scope of the provisions to a number of new professions or activities
(for example lawyers, accountants, estate agents, casinos), as
well as the range of underlying crimes — so-called "predicate
offences" — to which money laundering relates. But
it left the precise definition of predicate offences open and
called on the Commission to table a further proposal in 2004 to
cover this.
13.2 The first Money Laundering Directive was based
on the global standard for these matters — the Forty Recommendations
of the Financial Action Task Force on combating money laundering
(FATF). In June 2003 these Forty Recommendations were amended
by FATF.
The document
13.3 This draft Directive is to repeal and replace
the existing legislation. (An official text has not yet been published;
the reason is said to be that it has not yet been translated into
all EU languages.) It takes account of the revised global standard
and specifically includes the financing of terrorism with either
criminally or legally acquired money. Customer due diligence requirements
are much more detailed than before, although tempered by a "risk-based
approach"[33] to
such procedures.
13.4 The main new or amended features to be introduced
by the draft Directive are:
- extension to cover the provision
or collection of funds to finance terrorism;
- extension of the regulated sector to include
those providing services who accept cash of €15,000 (about
£10,000) or more;
- inclusion of several new definitions, including
"beneficial ownership", "trust and company service
providers", "politically exposed persons" and "business
relationship";
- prohibition of accounts which are anonymous or
held in fictitious names;
- more detailed customer due diligence requirements
(including an obligation to identify the beneficial owner(s) of
any company, trust or similar arrangement);
- greater detail about possible reduction of due
diligence requirements, where the risks are lower;
- more specific obligations to apply enhanced due
diligence procedures in higher-risk situations (including non-face-to-face
transactions and dealings with correspondent banks or prominent
public figures);
- greater detail on relying on customer due diligence
procedures carried out by third parties, including provision for
the regulated sector automatically to accept due diligence done
elsewhere in the EU;
- obligation to apply EU standards of record keeping
and statistical data in branches or subsidiaries outside the EU;
- obligation on the regulated sector to respond
rapidly to information requests from the appropriate financial
intelligence unit (FIU — in the UK the National Criminal
Intelligence Service);
- obligation on the FlU to give feedback to the
regulated sector on suspicious activity reports;
- obligation to set up licensing or registration
systems for currency exchange offices, trust or company service
providers and casinos, with a "fit and proper" test
for persons running such businesses;
- obligation on competent authorities to monitor
the regulated sector's compliance with the Directive;
- requirement for effective proportionate and dissuasive
penalties for infringement of rules; and
- a comitology[34]
provision giving the Commission power to clarify technical aspects
of certain definitions and establish detailed rules on, for instance,
situations where reduced or enhanced due diligence are appropriate.
13.5 It is the Commission's intention to have an
implementation deadline of one year from adoption of the draft
Directive.
The Government's view
13.6 The Financial Secretary to the Treasury (Mr
Stephen Timms) says:
"The UK operates a 'risk-based approach' to
anti-money laundering legislation: i.e. enshrines high-level objectives
in law, with greater detail set out in the form of guidance. This
leaves flexibility so that industry can identify the risks relevant
to the particular sector, transaction or customer.
"In negotiating the directive the UK is:
(a) supporting the risk-based approach to customer
due diligence procedures, including for enhanced due diligence;
(b) seeking to ensure that key definitions (particularly
of "beneficial owner") and the supervision provisions
are workable;
(c) pressing for an assessment of the costs
and benefits of the proposal to extend the regulated sector to
those providing services who accept cash of €15,000 or more;
and
(d) seeking to ensure that the comitology provisions
are proportionate.
"The UK recognises the need to keep money laundering
legislation up-to-date and effective, although we would have preferred
a longer timetable for this directive. This would have allowed
more time to identify any shortcomings of the Second Money Laundering
Directive (only recently implemented in most Member States) and
would have permitted a proper impact assessment."
13.7 The Minster tells us there has been extensive
consultation of UK stakeholders during the evolution of this proposal.
A consultation document, which included an initial Regulatory
Impact Assessment (RIA) and which the Minister attached to his
Explanatory Memorandum, attracted around 50 responses. There has
been a series of meetings with affected sectors (for example banks,
other financial or credit institutions, the casino industry, estate
agents, small business representatives, lawyers and accountants).
The Treasury is holding regular round-table meetings on the proposal,
to which all stakeholders are invited.
13.8 The initial RIA does not quantify the costs
and benefits of the proposal. A revised RIA based on responses
to the consultations is being produced. The Minister says:
"Both we and our stakeholders find it difficult
to assess the cost of the proposed directive at this stage. It
is not yet clear exactly what the extra burden will be for the
regulated sector, nor has it been determined how we will eventually
implement the directive. The updated RIA should give a somewhat
clearer idea of the potential costs."
Conclusion
13.9 We readily acknowledge the need for up-to-date
legislation to prevent money laundering. But we, like the Government,
are concerned that this draft Directive is being put forward before
it is possible to evaluate any weaknesses in the existing amended
legislation. We should like to hear from the Government whether
it would think it right to seek to postpone further action on
this proposal until there is longer experience with the present
legislation. And we wish also to see the revised Regulatory Impact
Assessment before considering the matter further. We would expect
to see that revised Regulatory Impact Assessment making plain
the views of the UK financial services sector on whether the existing
and proposed requirements are proportionate and sufficiently related
to actual risks.
13.10 Meanwhile we do not clear the document.
33 Such an approach allows flexibility to those operating
under the legislation to identify, on the basis of detailed guidance,
the risks relevant to a particular sector, transaction or customer. Back
34
Comitology is a system of committees, consisting of representatives
of Members States, and chaired by the Commission, whereby Member
States exercise some control over implementing powers delegated
to the Commission by the Council. Back
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