8EU Action Plan to combat money laundering29
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This EU document is legally and politically important because:
Action
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Overview
8.1Since the early 1990s, EU countries have agreed to a joint set of rules governing financial transactions to tackle illicit transfers, principally by means of the Anti-Money Laundering Directive (AMLD).30 This Directive was completely revised in 2015 and last updated in 2018 (introducing, among other things, new rules around the ultimate beneficial ownership of shell companies and trusts).31 In recent years however, a number of weaknesses and flaws in the practical implementation and enforcement of the EU’s anti-money laundering and countering terrorist financing (AML/CTF) rules have become apparent, for example during the €200 billion Danske Bank scandal in 2018.
8.2Based on an initial evaluation published in summer 2019, the European Commission in May 2020 published an “Action Plan“ outlining—mostly without detail—significant planned reforms to the EU’s legal and supervisory framework for money laundering, including amendments to the AMLD to make it “more granular, more precise and less subject to diverging implementation”. It also contains plans to improve cooperation for cooperation between “Financial Intelligence Units” in different jurisdictions,32 and for the transfer of certain—undefined—responsibilities for enforcement of European AML/CTF rules from national regulators to an independent EU-level body.33 The Commission has also raised concerns about the use of free ports, now a central plank of the Government’s post-Brexit economic policy, warning they pose a risk of “counterfeiting, […] infringing intellectual property rights, […] VAT fraud, corruption and money laundering”.34 The European Commission is due to publish draft legislation to amend the Anti-Money Laundering Directive in line with these priorities in 2021.35
8.3Separately, the Commission also published a new methodology for listing jurisdictions considered to have “strategic deficiencies in their national AML/CFT regimes that pose significant threats to the financial system of the [EU]”, as the AMLD requires banks and other companies to apply “enhanced due diligence”—i.e. stricter checks—to transactions which involve a financial institution in such “high-risk countries”.36 At the same time, it also issued a new list of the 22 non-EU countries currently formally considered to pose such a risk, including the Bahamas, Jamaica, and Pakistan.
Relevance of the EU’s AML/CTF rules for the UK
8.4The UK, of course, is not immune to money laundering and its status as a global financial hub means that it also a major locus for illicit transactions. Having left the European Union on 31 January 2020, the UK—under the terms of its Withdrawal Agreement—only remains bound by EU law, including the Anti-Money Laundering Directive, until the end of the post-Brexit transition period37 on 31 January 2020.38 However, the EU’s approach to AML/CTF—including the possible reforms to the Directive outlined by the Commission in May 2020—are likely to remain relevant for the British financial services industry even beyond then.
8.5First, as part of its “level playing field” (LPF) demands with respect to the UK’s domestic regulatory, tax and “State aid” rules, the EU is seeking legal commitments39 from the Government to commit by means of a treaty to substantive anti-money laundering rules based on the AMLD with respect to customer due diligence by “obliged entities” like banks, accountants and art traders, as well as regards recording and exchange of information on beneficial ownership of both companies40 and trusts.41 The EU has also explicitly linked the UK’s commitments on AML/CTF issues to whether it will grant “equivalence” for financial services,42 the mechanism by which the Government is seeking preferential market access for the British firms exporting such services to the EU.43
8.6The Government, however, has to date consistently rejected the EU’s demands in this area, having resisted the proposed LPF arrangements proposed more generally44 (although we note the British financial services industry itself has already made a commitment to “demonstrate that [UK] anti money laundering processes […] are functionally equivalent to the [AMLD]” in return for continued use of the Single Euro Payments Area systems).45 On 19 May 2020, the UK Chief Negotiator (David Frost) told the EU that the EU’s “novel and unbalanced proposals […] would bind this country to EU law or standards” which the UK “cannot accept”.
8.7In an apparent bid to break this deadlock, the Government has signalled its acceptance of a free trade agreement with the EU that maintains tariffs imposed on certain goods if the latter’s current LPF demands are dropped.46 However, it has not clarified how this would impact on the UK’s—not insubstantial—asks of the EU in the field of cross-border trade in services. For example, the EU has the legal flexibility, and likely the political will, to reject or restrict “equivalence” for the UK in specific financial sectors if there is disagreement between the two sides about how to cooperate to tackle money-laundering.47 It is noteworthy in this respect that the European Commission on 14 May 2020 said the UK Government has to date yet to fully implement the 2018 Anti-Money Laundering Directive.48 Michel Barnier, the EU’s Chief Negotiator for relations with the UK, has also twice referred explicitly to the “lack of ambition” from the Government with respect to how anti-money laundering issues should be addressed under the new UK-EU partnership.49
8.8As trade negotiations between the Government and the EU are on-going, the precise treatment of AML/CTF issues under the new, post-Brexit relationship is not yet known. However, even without a UK-EU treaty that covers money-laundering, the EU’s AMLD will in any event continue to apply to financial transactions between the UK, and affect how British law enforcement can cooperate and exchange information with the EU’s 27 national Financial Intelligence Units on money-laundering issues. The legislative proposals to amend the AMLD announced by the European Commission could significantly affect the impact the Directive has on such transactions and exchanges between the EU and the UK, and will therefore deserve further scrutiny when they are published in 2021.
The Government’s position
8.9When the European Commission published its initial review of the EU’s AML/CTF legal framework in July 2019, the Economic Secretary to the Treasury (John Glen MP) provided an Explanatory Memorandum to Parliament which, with respect to the potential implications for the UK for the suggested changes to the Anti-Money Laundering Directive, stated simply that there were “none at this time”. The Minister submitted a new Memorandum on 3 June 2020, following the publication of the latest EU Action Plan. This repeats his earlier assessment that there are no policy implications arising from the Commission’s plans.
Action
8.10As we have demonstrated above, we disagree with the Minister that there necessarily are no policy implications for the UK arising from the European Commission’s Money-Laundering Action Plan.50 While it is true there are no formal legislative proposals to amend the AMLD at this stage, the Commission’s policy paper points to potentially significant reform of the substance of the Directive which, in due course, is likely to affect both UK-EU flows of financial services and cooperation between British law enforcement and their European counterparts.
8.11With respect to financial flows in particular, the EU’s internal legal framework to address AML/CTF issues is linked directly to the UK’s requests for “equivalence” in financial services, an arrangement that would make it easier for British firms to sell such services into the EU after the UK leaves the Single Market. Reliance on equivalence to secure such preferential market access means the Government is likely to have to demonstrate, on a continuous basis, that the UK’s own anti-money laundering framework still achieves the outcomes as the AMLD, as amended in the future. While the UK will of course be free to pursue a substantially different regulatory approach to the EU if it wanted to do so, for example with respect to an expansion of free ports while the European Parliament is calling for their abolition, this could risk the EU withdrawing, refusing or restricting market access for British financial services providers as a consequence.
8.12However, we accept that the latest Commission Action Plan only sets out an ambition for future legislative reform, and does not contain sufficient detail to necessitate further follow-up with the Economic Secretary at this stage. Any formal legislative proposals to amend the Anti-Money Laundering Directive should be assessed for their potential implications for the UK and its financial services industry in due course. We draw these developments to the attention of the Home Affairs Committee, the Treasury Committee and the Committee on the Future Relationship with the EU.
29 Documents: (a) Action Plan for a comprehensive Union policy on preventing money laundering and terrorist financing; (b) COMMISSION STAFF WORKING DOCUMENT: Methodology for identifying high-risk third countries under Directive (EU) 2015/849; (c) COMMISSION DELEGATED REGULATION (EU) …/... of 7.5.2020 amending Delegated Regulation (EU) 2016/1675 supplementing Directive (EU) 2015/849 of the European Parliament and of the Council, as regards adding the Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar/Burma, Nicaragua, Panama and Zimbabwe to the table in point I of the Annex and deleting Bosnia-Herzegovina, Ethiopia, Guyana, Lao People’s Democratic Republic, Sri Lanka and Tunisia from this table; EU reference numbers: (a) Council document 7870/20, C(2020) 2800; (b) Council document 7869/20, SWD(2020) 99; (c) Council document 7844/20, C(2020) 2801; Legal base: -; Department: HM Treasury; Devolved Administrations: Not consulted; ESC numbers: 41240, 41239, 41241.
30 Directive 2015/849/EU, as amended. Other relevant EU laws include the Cash Control Regulation, the Directive on Countering Money Laundering by Criminal Law, and the Regulation on the import of cultural goods.
31 In October 2018, the EU also agreed a new Directive on “combating money laundering by criminal law”, sometimes referred to as the “sixth AMLD”. This piece of EU legislation is due to be transposed into national law by 3 December 2020. The UK (alongside Ieland and Denmark) opted out of having to apply it.
32 At the core of the AMLD sits a “reporting obligation” for companies including banks, law firms, auditors and tax advisors, which means that they must alert their national “Financial Intelligence Unit” (FIU) of any transfers of which it is aware which may be “the proceeds of criminal activity or […] related to terrorist financing”. Using the information thus received, the FIUs in turn are required to produce analysis of these reports, which they then share with domestic law enforcement agencies, as well as with their counterparts in other Member States or further afield.
33 Concerns have been raised about the independence of the European Banking Authority (EBA), currently the lead EU body for AML/CTF issues, after the findings of a critical EBA probe into Danske Bank were shelved in April 2019. This highlighted the weaknesses of the Authority’s governance structures, where important decisions, even those censuring Member States, can only be taken with the agreement of the EU’s national banking regulators themselves.
34 EU free port operators have become “obliged entities” under the 2018 amendment to the AMLD, and therefore legally required to report suspicious transactions or trades to the relevant authorities. See for more information the European Commission’s Report on the “assessment of the risk of money laundering and terrorist financing affecting the internal market and relating to cross-border activities” (24 July 2019).
35 Any legislative proposals to amend EU law on money-laundering will be subject to the agreement of the European Parliament and the Council of Ministers, which can make changes to the European Commission’s proposals before they become EU law.
36 This new methodology is the product of a long-running tussle between the Commission and the European Parliament on the former’s approach to determining which countries should be classified as “high-risk”. Although the new methodology no longer simply relies on the “high-risk” AML/CTF listings made by the international Financial Action Task Force as was previously the case, it remains controversial because of the perceived politicisation of the EU’s list of countries with deficient anti-money laundering rules (allowing richer countries, including Saudi Arabia, to lobby for their exclusion from the list).
37 See Article 127 of the Withdrawal Agreement.
38 Article 132 of the Withdrawal Agreement foresees the possibility of an extension to the transition period until no later than 31 December 2022. Section 15A of the European Union (Withdrawal) Act 2018 expressly prohibits the Government from agreeing to any such extension as a matter of UK law.
39 See Part Three, Title I, Chapter 10 of the draft UK-EU Treaty produced by the European Commission in March 2020. This is the Commission’s translation into a draft treaty text of the negotiating directives it received from the EU’s 27 Member States on 25 February 2020.
40 Questions have been raised repeatedly about the accuracy of information on UK company ownership held by Companies House.
41 HM Revenue & Customs has established a Register of Trusts as a direct consequence of an legal obligation to do so under the AMLD. This Register is publicly accessible under certain conditions. It is unclear if the Government intends to maintain the Register in its current form after EU law ceases to apply in and to the UK.
42 In July 2019, the European Commission published a policy paper on equivalence—obliquely aimed at the UK—which states that “the Commission also needs to consider whether equivalence decisions would be compatible with EU policy priorities in areas such as […] the fight against money laundering and terrorist financing […].” The European Parliament, in its Resolution of 11 September 2018 on ”relationships between the EU and third countries concerning financial services regulation and supervision”, also said that “equivalence decisions should be made dependent on satisfactory third-country rules on fighting […] money laundering”.
43 See for more information our Reports of 26 March 2020 and 20 May 2020.
44 With respect to the potential inclusion of substantive anti-money laundering rules in a future UK-EU Treaty, the draft legal texts published by the UK Government on 19 May 2020 covers cooperation between law enforcement on matters including money-laundering, but—unlike the EU’s proposals—do not set out detailed rules on transparency of beneficial ownership of companies and trusts, or the specific obligations for those facilitating potentially illicit transactions like banks and law firms.
45 SEPA is an EU-wide initiative that facilitates rapid cross-border payments denominated in euro. Industry body UK Finance has successfully applied for continued UK access to SEPA beyond the end of the transition period, which requires certain commitments about “functional equivalence” with EU financial services rules, including the AMLD. This, however, does not constitute a legally binding obligation on the Government to continue applying the AMLD or accept the EU’s LPF demands. See for more information: “Criteria for Participation in the SEPA Schemes for communities of banks or financial institutions outside the European Economic Area (EEA)“, p. 3.
46 The imposition of tariffs on UK-EU trade in goods, of course, also the default outcome at the end of the post-Brexit transition period if no new Free Trade Agreement is in place at all. The EU has said that the detailed product-by-product negotiation required to establish an FTA with different applicable tariffs than under this World Trade Organization baseline is not possible by the scheduled end of the transition period on 31 December 2020.
47 While it will also theoretically possible for the EU to list the UK as a “high-risk” country for anti-money laundering purposes after the end of the transition period, there are no indications the European Commission is considering such an explosive step.
48 More concretely, the Commission sent the UK—and 8 EU Member States—a “letter of formal notice”, the first step in a potential infringement procedure before the EU Court of Justice for a failure to properly apply EU law. Under the terms of the Withdrawal Agreement, the European Commission can take the UK to the Court for any such infringements that occur before the end of the transition period.
49 On 15 May 2020, after the third round of UK-EU negotiations, Mr Barnier said that the EU “were also disappointed by the UK’s lack of ambition in a number of areas that may not be central to the negotiation, but which are nonetheless important and symbolic [including] for instance of the fight against money laundering”. On 5 June, following the fourth round of negotiations, he said the UK and EU were “very far from [the] objective” of the ambition in “paragraph 82 of the Political Declaration that our agreement should cover anti-money laundering and counter terrorism financing”.
50 We are also concerned more generally about the Government’s increasingly narrow interpretation of when announcements of future changes to EU law and policy can be said to have policy implications for the UK. See for example the chapter in this Report relating to the EU’s proposals for amendments to the Withdrawal Agreement.
Published: 24 June 2020