Back to Black – but not quite yet: Revised methodology agreed but no new EU blacklist before 2020

• United Kingdom

• Financial services disputes and investigations
• Fraud and financial crime
• Litigation and dispute management

11-10-2019

As the European Council met today to discuss a revised methodology to be used in the creation of a new EU blacklist of ‘high-risk third countries’ with strategic AML and CTF deficiencies, Zia Ullah and Ruth Paley of Eversheds Sutherland LLP examine the proposed revisions to the methodology for a future EU blacklist, and consider whether these are likely to address the Council’s earlier criticisms of a previous draft list.

Background

Following last month’s resolution from the European Parliament urging the European Commission (the Commission) to adopt a ‘transparent process’ in developing a new blacklist of high-risk third countries with AML deficiencies, the European Council (the Council) met today to exchange views on the revised methodology which, once settled, will form the basis of a new draft blacklist in the form of a delegated act. Criticisms of the previous list included a lack of transparency; a failure to recognise the need to incentivise third countries to become compliant; and a lack of acknowledgement of those countries’ right to be heard.

The Council unanimously decided to reject a previous draft list put forward by the Commission in March 2019, at which stage the original was withdrawn. The Commission has been working  since then on enhancements to the methodology in order to address the Council's concerns while maintaining an autonomous EU listing process. The key new elements of a refined methodology for identifying high-risk third countries include the following:

1. Better detail around interaction between the EU and the Financial Action Task Force (FATF), third countries listed by the FATF will in principle also be listed by the EU. Specific EU requirements might ‘top up’ the existing FATF list, by referring to additional EU-specific conditions, for example; a particular threat posed by a third country of specific relevance or application to the EU; or requirements with regard to beneficial ownership transparency. 

2. Improved engagement with third countries, involving a staged approach:  

i.   consultation with the third country on preliminary findings;
ii.  drafting country-specific ‘EU benchmarks’ to address each country’s concerns in relation to the criteria set by the Anti-Money Laundering Directive,
iii.  seeking third countries’ commitment to implementing specific corrective measures before a listing is considered.

3. Member States experts will be consulted at every stage of the process regarding the assessments of third countries’ regime, the definition of mitigating measures, third countries' implementation of ‘EU Benchmarks’ and the preparation of the Delegated Regulation. This consultation will include Competent Authorities likely including – in the UK – the FCA, PRA and NCA.

A deadline of 12 months would be given to third countries to address concerns. A listing would only occur in the event the third country failed to implement in full the benchmarks / commitments within the timeframe allowed, or if the third country declined to express such a commitment. For countries with an ‘overriding level of risk’ which requires to be mitigated, the Commission may retain the option of formally identifying strategic deficiencies without consultation and listing the third country immediately.

These potential amendments to the Commission’s methodology are more about fine-tuning rather than seismic changes to the previous version, and so it remains to be seen whether or not the new list will ultimately be more palatable to Members States than that published in March.

Alignment with the FATF list will come as no surprise. Controversy over the list in March centred on third countries outside the FATF list and therefore this additional proposal is unlikely to have a material impact on the Council’s concerns around lack of transparency. Any EU-specific threats or issues bringing other non-FATF third countries into scope will need to be compelling, and care will need to be taken so that what constitutes a genuine but nonetheless non-FATF ‘strategic deficiency’ is clearly articulated. 

The new proposal for consultation with ‘experts’ from Member States is an interesting development which may alleviate some concerns around lobbying or political pressure from those Member States with strategic reasons for wanting to avoid the appearance of, for example, an overseas territory or a strategic ally appearing on the list. The perceived expert status of Competent Authorities may well give more credibility to the ‘consultation’ process, as regulators and financial intelligence units will be perceived as having a degree of freedom and independence from political pressures.

One seemingly more substantive change involves the proposals for improved engagement with third countries, who will now have an opportunity to make representations during a preliminary phase and this is likely to be welcomed. However, the apparent 12 month lead time means the listing process will be much slower than anticipated. Suggestions the Commission could reserve its position with regard to those countries with an ‘overriding level of risk’ and to list those jurisdictions immediately is nonetheless likely meet the same protests expressed in March. The expectation is that many, if not all, of the countries proposed by the EU would feature an ‘overriding’ level of risk in any event and so the purpose of including any such carve-out is yet to be made clear.