National anti-money laundering law exceeds EU directive

Background
National implementation
Comment

Background

The third EU Anti-money Laundering Directive(1) has by now been implemented by EU member states. The European Commission is working on a report regarding the implementation of the directive, which will be submitted to the European Parliament and the EU Council. However, the Dutch legislature has implemented several parts of the directive in a manner that is too extensive, changing the character of the regulation from prevention to enforcement.

The term 'money laundering' has broad scope and includes:

• the conversion or transfer of property for the purpose of concealing or disguising its illicit origin, knowing that such property is derived from criminal activity;
• the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to or ownership of such property; and
• the acquisition, possession or use of such property.

Through such acts criminals invest their illicit money in a manner that conceals its illicit origin. Investing without using financial services is near impossible in society today. Therefore, financial institutions are now gatekeepers in the fight against money laundering.

Tracing the illicit proceeds of crimes is much harder if the money has been transferred several times through various – usually foreign – bank accounts to different entities. The use of cross-border structures is a common and legitimate way to optimise tax obligations or other legitimate company policies. However, these complicated structures can be abused to launder money. For this reason, other professional service providers (eg, tax advisers, auditors, external accountants, lawyers, notaries and trust offices) are often also considered to be gatekeepers, as they render services needed to establish those entities and structures.

As money laundering poses a threat to the integrity and stability of credit and financial institutions, and to confidence in the financial system as a whole, it was considered necessary to take measures to prevent financial institutions and professional service providers from becoming involved in money laundering. The measures were drafted in the 40 Recommendations of the Financial Action Task Force, an intergovernmental body which is active in the fight against money laundering. The directive implemented the revised recommendations (2003).

An institution subject to the directive must apply customer due diligence measures to identify its client and the client's beneficial owner. It should store the collected data and promptly inform its national financial intelligence unit when it knows, suspects or has reasonable grounds to suspect that money laundering is being or has been committed or attempted.

The measures set down in the directive are preventive. This follows from its name, the fact that gatekeepers should be subject to the directive and the text of the directive's considerations.(2)

National implementation

The Netherlands implemented the directive through the Dutch Act on the Prevention of Money Laundering and Financing Terrorism. However, the Dutch legislature has interpreted the directive in such a way that the institutions subject to the act are not only preventing their services from being misused, but are also required to report acts of money laundering that are unrelated to their services. Examples are described below.

Unusual transactions
While the directive requires institutions to report transactions that they consider to be suspicious with regard to (possible) money laundering, the Dutch act – and its predecessors implementing the EU First Anti-money Laundering Directive – requires "unusual transactions" to be reported. The Dutch Financial Intelligence Unit subsequently decides whether the transaction is suspicious. If so, it transfers the report to the public prosecutor, who can start a criminal investigation or use the report in an ongoing investigation. The reason for this change of criterion was that the institutions were not considered capable of deciding themselves whether a transaction is suspicious, due to a lack of knowledge. Considering that it is the institutions which advise and assist in establishing complicated structures, this argument does not seem very convincing.

Judicial advice not exempt
The directive provides an exemption for the reporting obligations of notaries, lawyers, auditors, external accountants and tax advisers, insofar as they receive the information "in the course of ascertaining the legal position of their client". With regard to this exemption, Consideration 20 of the directive states as follows:

"Thus, legal advice shall remain subject to the obligation of professional secrecy unless the legal counsellor is taking part in money laundering or terrorist financing, the legal advice is provided for money laundering or terrorist financing purposes or the lawyer knows that the client is seeking legal advice for money laundering or terrorist financing purposes."

However, the Dutch legislature has restricted the term "ascertaining the legal position of their client" to the first conversation with the client, in which the lawyer should have the opportunity to establish whether the client has asked him or her to render a service which should be reported in case it may be an unusual transaction. The Explanatory Memorandum(3) provides as follows:

"Against the background of the existing professional secrecy provisions for the lawyer the words 'ascertaining the legal position for a client' should, though restrictively, be interpreted as follows: opportunity should be offered to establish which kind of service is expected from the lawyer. To the lawyer this is important to establish whether or not the requested service is requested in relation to any judicial proceedings...

To be able to establish which kind of service is addressed, an exploratory conversation with the client is necessary, which conversation should be kept confidential in any circumstances. Thus it is safeguarded that each client can share all information that is important to establish whether or not the lawyer's services are requested in relation to judicial proceedings or in relation to services that fall within the scope of the identification (provision of services) act or the reporting unusual transactions act. This initial conversation will be sufficient to gain insight into the client's motives."

As a result of this restricted interpretation, under Dutch law judicial advice that is unrelated to any proceedings is not exempt from the reporting obligation, even when it is clear that such judicial advice does not refer to any involvement in money laundering by either the client or the lawyer.

The same problem occurred in Belgium. Following the European Court of Justice's decision in Case C-305/05, the Belgian Constitutional Court solved this problem in its judgment of January 23 2008,(4) stating that:

"Only when the lawyer performs an activity summed up in article 2ter, apart from his specific engagement to defend or represent the client in court or provide judicial advice, can he be submitted to the obligation to report information to the authorities."

The activities referred to comply with the activities mentioned in Consideration 20 of the directive. Consequently, judicial advice is exempt in Belgium, but falls within the reporting obligations in the Netherlands.

'Transaction'
Finally, the Dutch supervisor has broadened the scope of the transactions that should be reported. The preventive character of the directive confirms that the transactions to be reported should have a causal connection with the service rendered by the service provider. A transaction that has already been carried out in the past and about which the service provider has not been asked to advise has no connection with the service provided by the professional service provider and therefore does not fall under the reporting obligation. This has been confirmed by the College van Beroep voor het Bedrijfsleven,(5) the highest court for anti-money laundering matters in regard to tax advisers in the Netherlands. An entrepreneur had a dispute with the Dutch tax authorities because he had allegedly submitted an incorrect value added tax statement. He asked a tax adviser to assist him in reaching a settlement with the tax authorities. The Dutch supervisor takes the position that the tax adviser should have reported the incorrect tax statement as an unusual transaction. Likewise, the supervisor believes that an external accountant who is asked to audit annual accounts should report all transactions that he or she encounters during the auditing assignment. Finally, a forensic accountant who has been engaged to start investigations into possible irregularities within a company should report those irregularities.

The tax adviser concerned argued that he was engaged not to advise regarding the tax statement, but rather to assist in reaching the settlement. The College van Beroep voor het Bedrijfsleven agreed. Meanwhile, a legislative proposal to extend the term 'transaction' has been presented.

Comment

Extending the Anti-money Laundering Directive from being merely a preventive measure to acting as an enforcement measure turns financial institutions and professional service providers into assistants of the public prosecutor. This has never been the objective of the directive and jeopardises other important principles, such as professional secrecy.

For further information on this topic please contact Rob Van der Hoeven at NautaDutilh by telephone (+31 20 717 1903), fax (+31 20 717 1335) or email ([email protected]).

Endnotes

(1) Directive 2005/60/EC of the European Parliament and the Council of October 26 2005 on the Prevention of the Use of the Financial System for the Purpose of Money Laundering and Terrorist Financing (L 309/15).