In a resolution published on Thursday, the European Parliament has urged the EU Commission to apply a ‘transparent process’ in formulating revised blacklist of third countries with strategic AML/CFT deficiencies, suggesting an additional ‘grey list’ of non-cooperative jurisdictions, and warning the Commission not to bow to lobbying and diplomatic pressure in tackling money laundering and terrorist financing. Zia Ullah and Ruth Paley of Eversheds Sutherland LLP take a look at the background to the resolution and what it might mean for UK businesses subject to the Money Laundering Regulations 2017.

Why does the EU publish a list of high-risk third countries?

Under the Fourth Anti-Money Laundering Directive (4MLD), the EU is required to establish a list of high-risk third countries with strategic deficiencies in their anti-money laundering (AML) and countering terrorist financing (CTF) regimes. The list is intended to make sure the EU financial system is equipped to prevent money laundering (ML) and terrorist financing (TF) risks from countries outside the EU (referred to as ‘third countries’).

The first list of this kind was issued in 2016 and updated regularly. However, since the inception of the Fifth Anti-Money Laundering Directive (5MLD), the applicable standards against which a third country will be measured have been substantially extended, leading to a new listing process. The first list using the new assessment criteria was published by the European Commission (the Commission) in February 2019 this year.

What happened to the February 2019 list of high-risk third countries?

The Commission named 23 countries on the February 2019 blacklist. These included: Afghanistan, Ethiopia, Iran, Iraq, North Korea, Pakistan, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, and Yemen, all already on the EU’s previous list. It proposed to add American Samoa, Bahamas, Botswana, Ghana, Guam, Libya, Nigeria, Panama, Puerto Rico, Samoa, Saudi Arabia, and the US Virgin Islands.

However, on 7 March 2019 the Council rejected this list, with 27 of 28 Member States voting against it. Key objections raised by the Council included the assertion that the process for updating the list lacked transparency and was potentially vulnerable to legal challenges. Commentators have suggested instead that political sensitivities were behind the list’s demise, and that acute diplomatic pressure, including robust lobbying from the US and Saudi Arabia, were to blame for the failure to obtain the Council’s approval.

Has the list gone away? Will it be back?

The blacklist is by no means dead: in fact future versions may come in colours other than black. Vera Jourova, the EU’s justice commissioner, told the Financial Times in August that the incoming Commission would, by October, unveil a revised methodology to identify the high-risk jurisdictions.

Ms Jourova has previously commented that she found the Member States’ criticisms – including a charge that the Commission had failed to involve Member States in the process - as ‘not easy to swallow’ but admitted that had been insufficient communication with territories likely to be listed in relation to the February 2019 version.

Her continued efforts to reinstate the list have just been given a firm boost by resolution of the European Parliament, in a resolution published last week on 19 September 2019 in which it made a number of statements of support, not least relating to the implementation of a new list.

In a pointed reference to concerns about lobbying, the resolution stated that in order to safeguard the integrity of the list of high-risk third countries, the screening and decision-making process should not be affected by considerations that go beyond the area of AML/CTF deficiencies. The resolution contained a bald statement that lobbying and diplomatic pressure should not undermine the EU institutions’ ability to tackle ML/TF in a way that is linked to the EU in an effective and autonomous manner.

The resolution also mooted the possibility of establishing an additional ‘grey list’ of potentially high-risk third countries on a basis analogous to the Union’s approach in listing non-cooperative jurisdictions for tax purposes, and criticised the length of the intended year-long process leading to the final assessment in identifying third countries with strategic deficiencies asking risking unnecessary delays for effective AML/CTF action.

To that end it called on the Commission to ensure a transparent process with clear and concrete benchmarks for countries which commit to undergo reforms in order to avoid being listed; and asked the Commission to publish its initial and final assessments of the listed countries, as well as the benchmarks applied, to allow for better public scrutiny of the process.

What should obliged entities do?

The fact that a country is included on the EU’s blacklist does not trigger economic or diplomatic sanctions, but will operate instead to require additional KYC measures to be taken by regulated businesses subject to the Money Laundering Regulations 2017 (MLR 2017) including banks, lawyers, estate agents and tax advisors. All businesses caught by MLR 2017 will have to apply enhanced due diligence measures on customers and transactions involving these countries. Regulated businesses, also known as ‘obliged entities’ under 4MLD, can continue working from the previous version of the blacklist, but will want to remain alert to the publication of a new list under the revised methodology.

Given Ms Jourova’s comments and the strong wording of the resolution, regulated businesses should expect to see a new methodology published imminently, followed by individual assessments of listed countries. Depending on the level of detail included in the methodology, there may be useful guidance within that document which will illuminate the considerations that regulated businesses themselves would be advised to take into account when assessing customer risk.

The publication of ‘initial’ as well as ‘final’ assessments of listed countries is nonetheless likely to cause some controversy. Whilst the right to reply and to make representations for the territory intended to be listed will no doubt offer an opportunity for engagement for those at risk of being named, the fact that the initial assessment will be offered up to a wider audience is likely to result in a fierce debate. It may well mean significant public challenge from interested parties such as the US, Saudi Arabia and even the UK (with its own crown dependencies at risk of censure for poor AML/CTF controls).

Brexit uncertainty makes it difficult to predict the stance the UK would take towards the list including whether it would be adopted at all outside membership of the EU. However, those regulated entities operating across the EU, which will include a great number of financial and credit institutions (as well as other regulated businesses) with a presence in the UK, will no doubt want to apply any new EU list across their customer base and perform the enhanced checks that will accompany any such publication.

What else does the European Parliament resolution cover?

In the same resolution, the Parliament expressed a number of concerns in respect of Member States’ AML/CTF arrangements more generally. These include:

  • serious concerns about failures by various member states in the implementation of 4MLD;
  • apprehension that the deadlines set for implementation of 5MLD will not be met by Member States, including the overall transposition deadline of 10 January 2020, and the respective deadlines of 10 January 2020 for the beneficial ownership registers for corporate and other legal entities and 10 March 2020 for trusts and similar legal arrangements. To that end, the resolution calls on Member States to take urgent action to speed up the transposition process;
  • general concern about regulatory and supervisory fragmentation in the AML/CTF arena, which it describes as ‘ill-suited to the ever increasing cross-border activity in the Union and centralised prudential supervision in the banking union and other nonbanking sectors’;
  • circumspection about the method by which AML legislation is revised in future, including a call to the Commission to assess, in the context of the required impact assessment for any future revision of the AML legislation, whether a regulation would be a more appropriate legal act than a directive; and
  • reference to the fact that cooperation could be improved between the administrative, judicial and law enforcement authorities within the EU, and in particular the Member States’ Financial Intelligence Units (FIUs). In particular the resolution reiterates a previous appeal to the Commission to carry out an impact assessment in the near future to evaluate the possibility and appropriateness of establishing a coordination and support mechanism and makes the general point that ‘further impetus should be given to initiatives that could enforce AML/ CTF actions at EU and national level’.

These are, of course, sensible statements which contain commendable suggestions. There is nonetheless a general lack of specificity as to the means by which the Commission ought to give practical effect to these ambitions. The question of what might constitute ‘further impetus’ in relation to further initiatives to enforcing AML/CTF actions is particularly vague, as is the reference to improving cooperation. It therefore remains to be seen how some of these objectives will be translated by the Commission and indeed what view the Council will take of any such proposed new measures.

Separately, regulated businesses will be rightly concerned by the comments regarding lack of progress towards the beneficial ownership register and will be left wondering whether the urgency around implementation will be passed on to industry if Member States, including the UK, fail to allow enough time to communicate how the register will work in practice. With the Government to publish the result of its consultation on 5MLD in the next few weeks, there is an expectation that this will provide a degree of much-needed clarity on this, and other topics of concern under the new directive. However, given the tight timescales between now and implementation date (not to mention Brexit, again), many questions remain as to how smoothly the transposition will progress in practice.