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The European Commission adopts new list of high risk jurisdictions posing a significant threat to the EU’s financial system

  • United Kingdom
  • Financial services disputes and investigations
  • Fraud and financial crime

20-02-2019

On 13 February 2019, the European Commission (EC) adopted a new list of 23 high risk jurisdictions considered to have strategic deficiencies in their anti-money laundering (AML) and countering financing of terrorism (CFT) regimes. The EC states that the objective of the list “is not ‘name and shame’, but to protect the Union internal market through application of enhanced due diligence measures”.

The EC has adopted this new list through Delegated Regulation C(2019) 1326 which replaces the existing list that has been in place since July 2018. The new EC list takes account of the existing list issued by the Financial Action Task Force (FATF), the global standard setting body for combating money laundering, terrorist financing, and proliferation financing, which the EC is also a member of. The new EC list includes many of the same countries as the FATF list, with the addition of 11 new jurisdictions.

The scope of the FATF methodology and the EC methodology differs in that the EC makes clear that its methodology only applies to an assessment of the AML/CFT regimes of non EU Member States or those which do not apply the requirements set up in Directive (EU) 2015/849 (the Fourth Anti-Money Laundering Directive) (MLD4). However, the EC methodology does state that “any country representing a risk to the international financial system, as identified by FATF, is presumed to represent a risk to the EU internal market”.

The new EC list is still subject to final approval by the European Parliament and Council, if approved those countries considered to pose a significant threat to the EU’s financial system will be:

  1. Afghanistan
  2. Democratic People’s Republic of Korea
  3. Iran
  4. Iraq
  5. Pakistan
  6. Sri Lanka
  7. Syria
  8. Trinidad and Tobago
  9. Tunisia
  10. US Virgin Islands
  11. Yemen

The 11 additional jurisdictions are:

12.  American Samoa
13.  The Bahamas
14.  Botswana
15.  Ethiopia
16.  Ghana
17.  Guam
18.  Libya
19.  Nigeria
20.  Panama
21.  Puerto Rico
22.  Samoa
23.  Saudi Arabia

This EC list was formulated using a new methodology reflecting the stricter criteria of Directive (EU) 2018/843 (the Fifth Anti-Money Laundering Directive) (MLD5), which was published in the Official Journal of the European Union on 19 June 2018 and amends MLD4.

MLD4 provides the EC with the power to adopt Delegated Regulations in order to identify those countries with strategic deficiencies with respect to AML/CFT and requires banks and other financial institutions to apply enhanced customer due diligence requirements for transactions involving any jurisdiction appearing on the list, meaning extra checks and monitoring of those transactions must take place in order to prevent, detect and disrupt suspicious transactions. MLD5 broadened the criteria for the assessment of high risk countries and clarifies the type of enhanced measures to be applied, which includes obtaining additional information on the customer and on the beneficial owner or obtaining the approval of senior management for establishing a business relationship.

The new EC list has received criticism from the U.S. Department of the Treasury for allegedly not including a “sufficiently in-depth review necessary to conduct an assessment related to such a serious and consequential issue”, for providing the “affected jurisdictions with only a cursory basis for its determination”, for only notifying the affected jurisdictions that they would be included on the list “only days before issuance” and for not providing affected jurisdictions with “any meaningful opportunity to challenge their inclusion or otherwise address issues identified by the Commission”. OFAC rejects the inclusion of American Samoa, Guam, Puerto Rico and the U.S. Virgin Islands on the list and stated that they “do not expect U.S. financial institutions to take the EC’s list into account in their AML/CFT policies and procedures”.

Our thoughts?

The EC confirmed that “the listing does not entail any type of sanctions, restrictions on trade relations or impediment to development aid”, however banks and other financial institutions covered by EU anti-money laundering rules will be required to apply increased due diligence on financial operations involving customers and financial institutions from these high-risk jurisdictions.

All Member States must transpose MLD5 into national legislation by 10 January 2020. Although the UK is expected to withdraw from the EU in March 2019, before the deadline for EU Member States to implement MLD5, the current text of the draft withdrawal agreement includes a transitional or implementation period ending on 31 December 2020, during which the UK would be required to implement EU directives (including MLD5). The UK may therefore be obliged to implement MLD5 but, even if not, it may choose to do so.  

It would be prudent to carry out a review of any policies and procedures prior to formal adoption of the list i.e. publication in the EU Official Journal, to ensure that appropriate enhanced due diligence measures are in place in respect of those countries in the list, in particular the 11 new jurisdictions.

In addition, the EC has only assessed 54 out of the 132 countries considered to be in-scope of its assessment. Further assessments will be carried out over time to cover the remaining countries and monitoring will take place for those already assessed in order to account for new information which becomes available. This means that there are likely to be new additions to the list (and removals from the list) as the EC continue its assessments and it is important that this is monitored by banks and institutions on an ongoing basis.

The US Treasury’s statement against the new EC list adds a layer of complexity for those institutions processing transactions for or on behalf of US companies and institutions as these companies and institutions are not required to apply the additional due diligence measures to the new high risk countries listed on the EC list. EU institutions who are expected to comply with the new list will need to be mindful of this to ensure they do not fall short of their new enhanced due diligence obligations when dealing with transactions involving institutions not caught by EU anti-money laundering regulations.

 

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