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Frequently asked questions: Anti-Money Laundering

European Commission - MEMO/13/64   05/02/2013

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European Commission

MEMO

Brussels, 5 February 2013

Frequently asked questions: Anti-Money Laundering

1. What are money laundering and terrorist financing?

1.1 What is money laundering?

Money laundering is the conversion of the proceeds of criminal activity into apparently clean funds, usually via the financial system. This is done by disguising the sources of the money, changing its form, or moving the funds to a place where they are less likely to attract attention.

"Criminal activity" includes fraud, corruption, drug dealing and other serious crimes.

1.2 What is terrorist financing?

Terrorist financing is the provision or collection of funds, by any means, directly or indirectly, with the intention or in the knowledge that they would be used in order to carry out terrorist offences.

2. What is the EU already doing to fight money-laundering and terrorist financing?

2.1 What is the current legal framework and to whom it applies?

The current EU legislation, the so-called Third Anti-Money Laundering Directive (hereinafter, the 3rd AMLD), has been in force since 2005. It provides a European framework built around the international Financial Action Task Force (FATF) standards (see IP/04/832).

The Directive applies to banks and the whole of the financial sector as well as to lawyers, notaries, accountants, real estate agents, casinos and company service providers. Its scope also encompasses all dealers in goods (such as dealers in precious metals and stones) , when payments are made in cash in excess of €15 000.

Those subject to the Directive need to:

  1. identify and verify the identity of their customers and of the beneficial owners of their customers (for example, by ascertaining the identity of the natural person who ultimately owns or controls a company), and to monitor the transactions of and the business relationship with the customers;

  2. report suspicions of money laundering or terrorist financing to the public authorities - usually, the financial intelligence unit; and

  3. take supporting measures, such as ensuring the proper training of personnel and the establishment of appropriate internal preventive policies and procedures.

The Directive introduces additional requirements and safeguards (such as the requirement to conduct enhanced customer due diligence) for situations of higher risk (e.g. trading with correspondent banks situated outside the EU). Since the existing Directive is based on the international standards, it will need to be reviewed in order to reflect the new FATF standards issued in February 2012. (see question 3.3.).

2.2. What are the other elements of the anti-money laundering framework?

The 3rd AMLD is part of a broader set of legislative measures aimed at the prevention of money laundering and terrorist financing, including:

  1. Directive 2006/70 containing a number of implementing measures with respect to Politically Exposed Persons (e.g. high-ranking officials from third countries), simplified customer due diligence procedures and limited exemptions.

  2. Regulation 1781/2006, which ensures traceability of transfers of funds by requiring information on the payer to accompany transfers of funds for the purposes of the prevention, investigation and detection of money laundering and terrorist financing.

  3. Regulation 1889/2005 on controls of cash, which requires persons entering or leaving the EU to declare cash sums they are carrying if the value amounts to €10 000 or more.

  4. EU Council Decision 2000/642 concerning arrangements for cooperation between financial intelligence units of the Member States in respect of exchanging information,

  5. A number of EU legal instruments imposing sanctions and restrictive measures on governments of third countries, or non-state entities and individuals.

2.3 How do Member States cooperate in this field?

The 3rd AMLD requires Member States to provide appropriate assistance in order to facilitate coordination of AML matters. In practice, Member States take an active part in the EU Financial Intelligence Unit platform. Member States participate in regular meetings of the Committee for the Prevention of Money Laundering and Terrorist Financing (CPMLTF) and the Anti-Money Laundering Committee.

The “EU Financial Intelligence Units’ Platform” is an informal group set up in 2006 by the European Commission, which gathers financial intelligence units (FIUs) from the Member States. Its main purpose is to facilitate cooperation among the national FIUs, whose tasks are to receive, analyse and disseminate to competent authorities reports about suspicions of money laundering or terrorist financing. The European Commission participates in the Platform and provides support.

3. What is being done at global level to strengthen the fight against money laundering?

3.1 Who is responsible for the international standards?

The FATF is the global standard-setter for measures to combat money laundering, terrorist financing, and (most recently) the financing of the proliferation of weapons of mass destruction (chemical, biological and nuclear). It is an intergovernmental body with 36 members, and with the participation of over 180 countries through a global network of FATF-style regional bodies.

The European Commission is one of the founding members of the FATF and plays an active role in the working groups and plenary meetings which are held three times a year. In addition, 15 EU Member States1 are FATF members in their own right.

3.2 Why a revision of the international standards?

The original FATF standards on anti-money laundering were amended in the aftermath of the 9/11 attacks to include measures to counter terrorist financing. The Recommendations were fully revised in June 2003 to reflect an increased awareness of money laundering and terrorist financing issues; this was incorporated into the 3rd AMLD.

The latest revision of recommendations, adopted on 16 February 2012, marks a continuation of this process with an increased focus on the effectiveness of regimes to counter money laundering and terrorist financing.

4. Our action

4.1 What are the main elements of the Commission's proposals?

The Commission's proposals update and improve the EU’s existing 3rd AMLD and the Funds Transfers Regulation respectively with the aim of further strengthening the EU’s defences against money laundering and terrorist financing and ensuring the soundness, integrity and stability of the financial system. They reflect the latest FATF Recommendations (see question 4.3.), and go further in a number of fields.

More specifically, both proposals provide for a more targeted and focussed risk-based approach.

The new Directive clarifies and reinforces the rules on customer due diligence and introduces new provisions to deal with politically exposed persons. It goes beyond the FATF requirements by bringing within its scope all persons dealing in goods for cash payment of €7,500 or more, as there have been indications from certain stakeholders that the current €15,000 threshold leaves open a vulnerability that criminals have been able to exploit.

The Directive also ensures a more comprehensive coverage of the gambling sector (in the light of concerns that the wide sector is vulnerable to money laundering) and includes an explicit reference to tax crimes. The proposals foresee a reinforcement of the sanctioning powers of the competent authorities by introducing a set of minimum principle-based rules to strengthen administrative sanctions and a requirement for them to coordinate actions when dealing with cross-border cases.

4.2. How did the European Commission decide to update the EU rules?

Further to the publication of a revised set of international standards on 16 February 2012, the Commission committed itself to rapidly updating the EU legislative framework to incorporate the necessary changes. Already in anticipation and in parallel with the adoption of these new standards, the Commission launched its own review in 2010. This process has included the publication of an application study conducted by external consultants, and targeted consultations with private stakeholders, civil society organisations and Member States2. Further evidence has been provided by the European Supervisory Authorities' Anti-Money Laundering Committee.

Why a revision of the Third Anti-Money Laundering Directive?

The Commission prepared an application report (IP/12/357) which made a broad examination of the Directive and concluded that, generally, the legal framework appeared to work well and no fundamental shortcomings have been identified which would require far-reaching changes. The Directive was revised in order to update it in line with the revised FATF Recommendations, and in particular to enhance the risk-based approach to AML compliance and supervision.

What about the other elements of the framework?

Regulation 1781/2006 on information accompanying the transfers of funds has also been updated in light of the revised international standards. The results of an external study carried out on behalf of the Commission on the application of Regulation have been incorporated into the Commission's impact assessment.

The Commission has also incorporated the implementing measures in Directive 2006/70 into the new Anti-Money Laundering Directive, as well as introducing strengthened cooperation arrangements between FIUs, currently dealt with in EU Council Decision 2000/642.

4.3 How the directive complies with FATF revised international standards?

Key Changes introduced in EU legislation :

Consolidating the risk-based approach: The new standards put more focus on the risk-based approach. This means that countries need to clearly understand the money laundering and terrorist financing risks which affect them, and adapt their Anti Money laundering/Counter Financing of Terrorism (AML/CFT) system to the nature of these risks – with enhanced measures where the risks are higher and the option of simplified measures where the risks are lower. Thus, countries will be able to target their resources more effectively and apply preventative measures that correspond to the risks of particular sectors or activities. A well-implemented risk-based approach means that the AML/CFT system will be more effective and less costly.

Improving Transparency measures: There is a lack of transparency at the moment around the ownership of companies, making them potentially vulnerable to misuse by criminals and terrorists. The new Recommendations have strengthened transparency requirements. Reliable information available about the ownership and control of companies, trusts, and other legal persons or legal arrangements is required as well as more rigorous requirements on the information which must accompany electronic funds transfers. Measures to improve transparency, implemented on a global basis, will make it harder for criminals and terrorists to conceal their activities.

Towards more effective International Cooperation: With the increasing globalisation of money laundering and terrorist financing threats, the FATF has also enhanced the scope of international cooperation between government agencies, and between financial groups (e.g. simplified extradition mechanisms). The revised Recommendations will allow more effective exchanges of information, tracing, freezing, confiscation and repatriation of illegal assets.

Identification of clear Operational Standards: the FATF Recommendations concerned with law enforcement and FIUs have been expanded significantly. The revisions clarify the role and functions of the operational agencies responsible for combating money laundering and terrorist financing; and set out the range of investigative techniques and powers which should be available to them.

New threats & new priorities to be covered: The FATF has also addressed new and aggravated threats and responded to the priorities set out by the international community, e.g. through the G20, in particular:

  1. Corruption & Politically Exposed Persons - The FATF Recommendations tighten the requirements on "politically exposed persons"; i.e. people who may represent a higher risk of corruption by virtue of the positions they hold. The requirement to apply enhanced due diligence to foreign politically exposed persons has been expanded with the new Recommendations also applying to domestic politically exposed persons and international organisations, and to the family and close associates of all politically exposed persons – reflecting the methods used by corrupt officials and kleptocrats to launder the proceeds of corruption.

  2. Tax Crimes - The list of predicate offences for money laundering has been expanded to include tax crimes which are brought within the scope of the powers and authorities used to combat money laundering. This will contribute to better coordination between AML and Tax authorities, and remove potential obstacles to international cooperation regarding tax crimes.

  3. Terrorist Financing – The financing of terrorism remains a serious concern for the international community, and a major focus of the FATF. The Recommendations reflect both the fact that terrorist financing is a long-standing concern, and the close connections between anti-money laundering measures and measures to counter the financing of terrorism.

5. Next steps

The two proposals will have to be adopted by the European Parliament and the Council of Ministers under the ordinary legislative procedure.

The Commission is planning to organise a public hearing on 15 March 2013 which will be a forum where the main changes in the international framework as well as the new Directive will be debated among various groups of stakeholders.

More information:

http://ec.europa.eu/internal_market/company/financial-crime/index_en.htm

1 :

Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, The Netherlands, Luxembourg, Portugal, Spain, Sweden, The UK. The other 12 Member States are members of MONEYVAL which is an associate member of the FATF.


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