Money laundering

Summary

The first Money Laundering Directive of 1991 required the imposition of an obligation on financial institutions to establish customers’ identity and report any suspicion of money laundering. It was based on the 40 recommendations of the Financial Action Task Force on money-laundering (FATF), of which the EU is a member. This is an inter-governmental body established by the G7, promoting anti-money laundering policy at national and international level.

The second directive of 2001 extended the number of crimes to which the provisions applied and widened the range of professions who had to observe it to include lawyers, auditors, accountants, notaries, casinos and estate agents. It also provided for the establishment of financial intelligence units in each member state to which suspicious transactions reports (SRTs) were to be made.

The third directive will incorporate into EU law revisions made to the FATF recommendations in June 2003. It will also extend the provisions to any financial transaction which might be linked to terrorist activities. Further provisions are:

• identity checks on customers opening accounts (i.e. accounts cannot be held anonymously);
• checks apply to any transaction over €15,000;
• stricter checks on 'politically exposed persons' (those in responsible public positions and their families);
• penalties for failure to report suspicious transactions to national financial intelligence units.

Issues

The main issue can be stated briefly: requiring information for security reasons versus individual privacy rights. How far should such legislation go in requiring details of financial transactions to be ascertained, which organisations should be subject to the requirements and should there be exceptions, for example for information handled in confidence by lawyers?

Haste

The second Money Laundering Directive was adopted in 2001. It was due to be transposed into national law by June 2003 but only around half the member states have done so. In those where the directive has been implemented, the level and therefore the burden of reporting has varied considerably. A commitment within the directive not to legislate further until an evaluation had been carried out has not been respected. In the light of the serious concerns over the second directive, proposals for a third directive were seen by many as premature and inappropriate.

Legal Challenge

Legal challenges against the 2001 directive have been launched in Belgium and Portugal. Following a request from the Belgian Bar Association, the Belgian Cour d'Arbitrage, on 13 July 2005, referred a question to the European Court of Justice as to whether the 2001 directive is compatible with the right to a fair trial. The Belgian Bar's argument is that the reporting obligations placed on lawyers by the directive prejudice their ability to fully and independently represent their client.

Effectiveness

Even leaving aside the above points, there is still a question of to what extent this legislation is actually effective in combating money laundering. Is it fulfilling its function or does it simply put irksome and money-wasting obstacles in the way of financial transactions carried out by business and consumers? Many argue that, without the study promised, the answer to this question is unknown.

Opposition

The proposal for a third directive was approved by Parliament on 26 May 2005 in the face of very stiff opposition. Many amendments were tabled by MEPs who had been heavily lobbied by banking and financial institutions which felt that the disclosure requirements imposed would be far too heavy a burden. Of particular concern were provisions on politically exposed persons and the obligation, in relation to transactions made by companies, to identify large shareholders. However, Parliament rejected the majority of the amendments.

Other measures 

The Commission is also pursuing other measure to cut off financing for terrorists:

• Customs: A proposal for the mandatory declaration of large sums of money being taken across external borders was approved by the Parliament on 8 June 2005. (See EurActiv 18 Feb 2005 and IP/05/702). 
• Easing the way to seize proceeds of crime (2001 Framework Decision on money laundering, the identification, tracing, freezing, seizing and confiscation of instrumentalities and the proceeds from crime). 

Positions

Internal Market Commissioner Charlie McCreevy welcomed Parliament's approval of the third directive, saying that it would not only help the fight against terrorist financing but would also benefit "the integrity and stability of the financial sector."

The European Banking Industry Committee had serious reservations about the third directive, in particular that the concept of 'beneficial owner' (shareholders to be identified in the case of corporate transactions) was too specific and that the definition of 'politically exposed persons' stood in contradiction to the risk-based financial approach, in that it included everyone, not just those posing a genuine risk. These concerns were to some extent met by Parliamentary amendments.

The Federation of European Banks (FBE), while welcoming the new directive as 'a positive step', also regrets the limited application of the risk-based approach. The FBE considers that banks do not have access to reliable information which would enable them to properly identify beneficial owners.

A European lawyers association, the Council of the Bars and Law Societies of Europe (CCBE), has argued that the reporting provisions of the second directive threaten the independence of lawyers and therefore the fundamental right to legal advice and representation. In a letter to the Commission on 8 February 2005, the Presidents of the European Bars called for a halt to the proposed third directive. Further, in a press release giving full support to the Belgian court's referral of the directive to the European Court of Justice, the CCBE comments: "discussions on a third directive were concluded at an alarming pace without regard to the concerns raised by the CCBE (on the legality of the second directive)."

KPMG, leading financial services firm, has warned that universities and business schools could find themselves caught under the third directive as it requires that any cash payment of over €15,000 be scrutinized for possible laundering. Overseas students often pay fees for their entire degree in up-front cash payments.

Timeline

• The directive was adopted on 20 September 2005.
• It is to be implemented by 2007.

External Links

EU official documents

• Kommission, Pressemitteilung:Directive on money laundering and terrorist financing(20. September 2005)
• Eur-Lex:Richtlinie zur Verhinderung der Nutzung des Finanzsystems zum Zwecke der Geldwäsche und der Terrorismusfinanzierung(26. Oktober 2005)
• Eur-Lex:Proposal for a Directive on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing(COM (2004) 448) (3 June 2004) [FR] [FR] [DE]
• Eur-Lex:Commission Communication on the prevention of and fight against organised crime in the financial sector(COM (2004) 262) [FR] [FR] [DE]
• Eur-Lex:Second Money Laundering Directive on prevention of the use of the financial system for the purpose of money laundering(2001/97/EC) (28 Dec 2001) [FR] [FR] [DE]
• Eur-Lex:Framework Decision on money laundering, the identification, tracing, freezing, seizing and confiscation of instrumentalities and the proceeds from crime(5 July 2001) [FR] [FR] [DE]
• RAPID:Approval of new Directive will boost fight against money laundering and terrorist financing(26 May 2005) [FR] [FR] [DE]
• RAPID:Money Landering: Commission proposes to update and improve Directive(30 June 2004) [FR] [FR] [DE]
• Parliament Daily NotebookMoney laundering directive to cover funding of terrorism(26 May 2005) [FR] [FR] [DE] [FR] [DE] Report of MEP Nassauer on Proposal for a Directive on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing
• RAPID:Customs: Commission welcomes approval of new cash controls to combat money(9 June 2005) [FR] [FR] [DE]
• Council:Council common position on controls of cash entering or leaving the Community(17 Feb 2005)
• OEIL:Money laundering: prevention of the use of the financial system, including terrorist financing
• Theresa Villiers MEP:Letter on Money Laundering Directive(9 Dec 2004)

International Organisations

• Financial Action Task Force:FAFT targets cross-border cash movements(20 Jan 2005)
• Financial Action Task Force:The 40 Recommendations on Money laundering(2003)
• European Central Bank:Opinion on a Proposed Directive in the Prevention of the Use of the Financial System for the Purpose of money laundering, Including Terrorist Financing(11 Feb 2005)

Think tanks & Academia

• Credit Suisse Economic Research:Update Cash Controls: The New Rules at the Borders(May 2007)