The Financial Challenge to Crime and Terrorism

The Third EU Money Laundering Directive is an essential instrument in the constant international struggle to control and then, if it were ever feasible or possible, to halt the misuse, by criminals and terrorists, of the financial services industry and aligned organizations. Some may certainly consider this a utopian paradigm, but without that archetypal vision, it becomes an unpromising and probably hopeless task that is doomed to failure unless the principles of it are supported and obligatory.

This Directive intensifies further the incorporation of the 40 recommendations of the Financial Action Task Force (FATF) into EU legislation. It will enter into force after its publication in the Official Journal of the European Union, probably about (but not later than) the fourth quarter of 2007.

What is a European Union Directive?

A directive is a collective legislative act of the European Community that requires member states to achieve a particular result without dictating the means of achieving that result. It can be distinguished from European Community regulations, which are self-executing and do not require any implementing measures. Directives normally leave member states with a certain amount of leeway as to the exact rules to be adopted. Directives can be adopted by means of a variety of legislative procedures depending on the subject of the directive.

Directives are only binding on the member states to whom they are addressed, which can be just one member state or a group of them. In practice however, with the exception of directives related to the Common Agricultural Policy, directives are addressed to all member states.

If the member state fails to pass the required national legislation, or if the national legislation does not adequately comply with the requirements of the directive, the European Commission can initiate legal action against the member state in the European Court of Justice.

Implementing the Third EU Money Laundering Directive

In June 2006, the UK Treasury issued a consultation document on implementing the Third Money Laundering Directive. This document discussed the UK government’s approach to implementing each of the Directive’s main articles. The areas covered are:

• The scope of sectors subject to the new regulations, and new definitions included.
• New customer due diligence requirements including new measures for higher and lower risk.
• The opportunity to rely on a third party for customer due diligence.
• New measures on equivalence of third countries.
• The reporting obligations of the Directive.
• The record keeping, training and procedures required by the Directive.
• The new requirements applicable to the government and its agencies.
• The new requirement for all sectors covered by the regulations to be monitored for their compliance and for certain sectors to be subject to a fit and proper test as a condition of registration.
• Penalties for non-compliance with the regulations.

This Directive applies to credit institutions; financial institutions; auditors, external accountants and tax advisors; legal professionals; trust and company service providers; estate agents; high value goods dealers who trade in cash over €15,000 or more; and casinos. All these areas are at risk from being used by those involved in money laundering and also the financing of terrorism.

Importance of the Third Directive

The third Directive will harmonise anti money-laundering and counterterrorism standards throughout the EU and will continue the pan-European approach in the fight against money laundering and terrorist financing. By using this Directive to strengthen existing legislation, member states will ensure constant and cohesive prevention and enforcement measures.

It is anticipated that the UK will have the new measures before its parliament by mid 2007, with a view to allowing companies until 15 December 2007 to implement new practices and procedures.

The new Directive also affects politically exposed persons (PEPs) and, for this purpose, they have been defined as ‘natural persons who are or have been entrusted with prominent public functions and immediate family members, or persons known to be close associates of such persons’, which include:

• Heads of state; heads of government; ministers or assistant ministers.
• Members of parliament.
• Members of supreme courts or other constitutional courts that are not subject to appeal except in exceptional circumstances.
• Members of courts of auditors and of the boards of central banks.
• Ambassadors, charge d’affaires and high-ranking military officers.
• Members of administrative, management or supervision of state-owned enterprises. Middle-ranking or junior officials are not considered within this context.
• Immediate family members are construed to be any spouse or spousal equivalent, parent and children and their spouses or partners.

Role of Due Diligence

Customer due diligence is essential in the fight against money laundering and financial crime in general. It is particularly important in curbing terrorist financing. This is addressed in the Third Directive. Four requirements are included with the specific addition of a further requirement for ongoing monitoring. They are as follows:

1. Identifying the customer and verifying the customer on the basis of documents, data and information obtained from a reliable and independent source.
2. Identifying, where applicable, the beneficial owner and taking risk based and adequate measures to verify his identity so that the firm is satisfied that it knows who the beneficial owner is.
3. Obtaining information on the purpose and intended nature of the business relationship.
4. Conducting ongoing monitoring of the relationship on a risk sensitive basis.

These apply under the new directive when a business relationship is being established, when carrying out one-off transactions of €15,000 or more, when there is a suspicion of money laundering or terrorist financing regardless of any derogation, exemption or threshold, where there is a doubt or question surrounding the veracity of any previously obtained customer identification data.

It is also a requirement that companies apply customer due diligence requirements to existing customers on a risk sensitive basis.

The term ‘beneficial owner’ is also addressed in the Directive. It starts with the FATF definition that the beneficial owner is the person who ultimately has ownership or control of the customer or person on whose behalf the activity or transaction is being conducted.

This directive now explicitly prohibits credit and financial institutions from keeping anonymous accounts or anonymous passbooks and is clearly in line with the FATF 40 recommendations. It introduces enhanced due diligence for customers or circumstances that are considered to be high risk. Three examples are given:

1. Where the customer is not physically present;
2. For credit and financial institutions with cross-border correspondent banking relationships with respondent firms from third countries; and
3. When performing transactions or business relationships with, and for, politically exposed persons.

The Directive specifies further due diligence in each of these cases.

Conclusion

The impact of the Third Directive, an improvement of the previous two directives, will substantially increase pressure on all organisations identified by it and subject to it. This will have ramifications on operations, practices, procedures and – importantly – costs.

This is no longer the ‘price of doing business’ but the price of doing business responsibly. We have all seen the tragedies of recent history that have shown how criminals and terrorists alike have managed to avail themselves of finance for their criminal and malicious operations against the innocent public as well as financial and other industries. The over-used sentiment of ‘lessons will be learnt’ has now manifested itself as the Third European Money Laundering Directive.