The draft proposal for the 2019 Financial Markets (Amendment) Decree was published for consultation on 25 February 2019 (in Dutch). One of the proposed amendments concerns removing the objective indicator regarding high-risk third countries in the Implementing Decree for the 2018 Money Laundering and Terrorist Financing (Prevention) Act (the “Wwft”). Based on that objective indicator, institutions that are subject to the Wwft must report transactions by or for a natural person or legal entity having its registered office or residing in a high-risk third country. These are countries designated by the European Commission as having strategic shortcomings in their national regulations to prevent money laundering and the financing of terrorism. The indicator concerns both the client and the paying/receiving party; in short, it involves all payments made by or to a natural person or legal entity having its registered office or residing in such a country.
The explanatory memorandum accompanying the proposal states that the objective indicator has led to a sharp increase (up to 96%) in reports to the Dutch Financial Intelligence Unit (the “FIU”). The FIU is the body that assesses unusual transactions and, where necessary, forwards them to the competent authorities. The enormous number of reports has been at the expense of the FIU’s capacity to investigate other reports and has reduced its effectiveness. This objective indicator should therefore be removed from the 2018 Wwft Implementing Decree.
Removing it does not mean that the list of high-risk third countries is no longer relevant. Unusual transactions still have to be reported based on the subjective indicator. The latter concerns transactions which the Wwft-institution assumes may be related to money laundering or the financing of terrorism. The involvement of a high-risk third country in a transaction may indicate possible money laundering or terrorism financing. In this connection, we recently wrote a blog about the proposal to extend the list to include amongst others Saudi Arabia. The proposal is not uncontroversial.
As stated in the explanatory memorandum accompanying the draft proposal for the 2019 Financial Markets (Amendment) Decree, an institution subject to the Wwft must make a risk assessment for every transaction by or to a high-risk third country. Based on that assessment, the institution must then decide whether the transaction must be reported to the FIU as being unusual. The explanatory memorandum announces that the FIU will issue guidelines on when an institution subject to the Wwft must report a transaction relating to a high-risk third country on the basis of the subjective indicator.
It is expected that removing the objective indicator regarding high-risk third countries in the Implementing Decree for the 2018 Wwft for transactions by or to a natural person or legal entity having its registered office or residing in a high-risk third country will reduce the number of reports to the FIU. At the same time, the regulators expect institutions subject to the Wwft to continue to properly record their reasons for not reporting transactions. In the case of transactions with, from, or to a high-risk third country, the institution will therefore always have to ascertain whether it is necessary to carry out further assessment and recording of any reasons for not reporting. This may lead to an increase in the administrative burden to which such institutions are subject. After all, they must then carry out a risk assessment, and record it properly, with regard to transactions that are currently still reported by default without any further consideration being necessary.
It is to be hoped that the FIU will (soon) provide clear guidelines as to how institutions subject to the Wwft should deal with this issue so that they can prepare for when the objective indicator is removed. Given that no such guidelines have yet been issued, it is difficult to predict the impact of the proposed amendment on the number of future reports to the FIU. It is conceivable, after all, that institutions that are already set up to report this type of transaction by default will in future be inclined to consider such transactions as unusual more quickly – but then on the basis of the subjective indicator – with the thinking being “better safe than sorry” (which we note may lead to other liabilities). A lot will therefore depend on the detailed guidelines that the FIU is expected to issue.
The consultation period for the proposal runs until 25 March 2019.