New EU list of high-risk third countries

EU Commission steps up fight against money laundering and terrorist financing- Questions and Answers

Why is the Commission presenting a new list of high-risk third countries?

Criminals and terrorists are not sitting back during the Coronavirus pandemic. Europol has provided a recent assessment of new threats posed by criminal groups trying to take advantage of the pandemic.

The EU is committed to protecting the integrity of its financial system and preventing financial flows involving countries with strategic deficiencies in their anti-money laundering and countering terrorist financing regimes. In line with the risk-based approach, banks and other obliged entities must apply enhanced due diligence in case of financial flows to/from high-risk third countries identified in the EU list.

As defined under the 4th and 5th Anti-Money Laundering Directives, the EU has to establish a list of high-risk third countries, to make sure that the EU’s financial system is equipped to prevent money laundering and terrorist financing.

The Commission issued the first such list in 2016, and updated it subsequently over the past years. Since the adoption of the 5th Anti-Money Laundering Directive, the criteria by which a third country is assessed have been extended substantially, thereby requiring the Commission to carry out an autonomous assessment. This required an adaptation of the listing process based on a refined methodology.

This also follows calls from the European Parliament to have an autonomous list. Today, the Commission has amended the list of high-risk third countries, via a Delegated Act, in order for it to be better aligned with the lists published by FATF. This update is necessary since the EU list has not reflected the latest FATF lists adopted since October 2018.

Further updates will take place once the Commission has engaged with third countries subject to the EU’s autonomous assessments, according to the refined methodology published today.Given the Coronavirus crisis, the date of application of today’s Regulation listing third countries – and therefore applying new protective measures – only applies as of 1 October 2020. This is to ensure that all stakeholders have time to prepare appropriately.

The delisting of countries, however, is not affected by this and will enter into force 20 days after publication in the Official Journal.

What countries have been added to the EU list?

The Commission took into account the latest lists issued by FATF. As a consequence, the Commission has listed 12 new countries on the EU list. Based on the FATF “Compliance documents”, the Commission considers that The Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Panama and Zimbabwe meet the criteria set out in article 9(2) of Directive (EU) 2015/849.

Those countries have expressed a high-level political commitment to implement an action plan agreed with FATF to address their strategic deficiencies. We welcome those commitments and invite those jurisdictions to implement them swiftly.Given the Coronavirus crisis, the date of application of today’s Regulation listing third countries – and therefore applying new protective measures – only applies as of 1 October 2020.

What countries have been removed from the EU list?

Following progress made, the Commission has removed 6 countries from the EU list. The Commission’s review concluded that Bosnia-Herzegovina, Guyana, Lao People’s Democratic Republic, Ethiopia, Sri Lanka and Tunisia addressed their strategic deficiencies and should therefore be delisted.This decision will enter into force 20 days after publication in the Official Journal.

What is the situation of other countries recently delisted by FATF?

For those countries delisted by FATF since the adoption of Delegated Regulation (EU) 2016/1675, the assessment by the Commission is still ongoing (i.e., Afghanistan, Iraq, Trinidad and Tobago and Vanuatu).

Regarding Iraq and Afghanistan, the available information and the security situation in the countries did not allow the Commission to conclude, at this stage, whether they effectively addressed their strategic deficiencies. This is due in particular to the fact that those countries were delisted by FATF based on a former procedure that did not assess the effective application of AML/CFT measures. Effective application of AML/CFT measures is a criteria explicitly included in the requirements set out in the AML Directive.

Regarding Vanuatu and Trinidad and Tobago, the available information did not allow the Commission to conclude, at this stage, whether they addressed their strategic deficiencies, notably as regards the transparency of beneficial ownership, which is a specific requirement set in the AML Directive.

The Commission will review the anti-money laundering regime of those countries as a matter of priority and will engage with them as appropriate, based on the refined methodology.

What is the situation of Albania with regard to its AML/CFT regime?

The assessment of high-risk third countries is applicable to enlargement countries – which can be listed in case strategic deficiencies are identified. As set out in the methodology, the Commission can also address these issues in the framework of the accession process where the Candidate Countries are requested to fulfil a set of stringent criteria. Therefore, alternative mitigating measures can be put in place in such instances within the framework of other EU policies, as part of the enlargement policy.

In February 2020, Albania made a high-level political commitment to work with FATF and the Council of Europe to strengthen the effectiveness of its AML/CFT regime. Similarly, the Commission developed additional mitigating measures that were put in place to address key concerns.

Albania expressed a high-level political commitment towards the Commission to implement further mitigating measures, notably further aligning with the EU Anti-Money Laundering Directive and putting in place registers of beneficial ownership. These commitments go beyond the action plan agreed with FATF.

Therefore those mitigating measures are considered as appropriate to address risks posed to the EU financial system at this stage. This option does not apply to third countries that are not in the process of acceding to the EU.

What are the consequences of the listing for financial institutions?

Under to the 4th Anti-Money Laundering Directive, banks and other financial institutions (“obliged entities”) have to apply extra checks (“enhanced customer due diligence requirements”) for transactions involving high-risk third countries identified on the list.

Customer due diligence corresponds to a series of checks and measures that a bank or an obliged entity has to use in case they have suspicions of high risk of money laundering or terrorist financing. Enhanced due diligence measures include extra checks and monitoring of those transactions by banks and obliged entities in order to prevent, detect and disrupt suspicious transactions.

The Fifth Anti-Money Laundering Directive clarifies the type of enhanced vigilance 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 listing does not entail any type of sanctions, restrictions on trade relations or impediment to development aid but requires banks and obliged entities to apply enhanced vigilance measures on transactions involving these countries.

What are the consequences of the listing for the financial system?

According to the 4th AMLD, banks and other obliged entities are required to apply enhanced vigilance in transactions involving high-risk third countries (so called “enhanced customer due diligence requirements”).

This is also in line with international obligations, where FATF already calls on its members to apply enhanced due diligence to high-risk jurisdictions. Those enhanced measures will lead to extra checks and monitoring of those transactions by banks and obliged entities in order to prevent, detect and disrupt suspicious transactions.

These measures do not entail any type of sanctions, restrictions trade relations or impediment to development aid but it aims to apply enhanced vigilance measures in those cases. In order to further clarify the type of enhanced vigilance to be applied, the 5th AMLD, adopted in June 2018, harmonises those enhanced measures.

What is the impact of the EU anti-money laundering list on EU-funded financial operations?

The listing process does not affect EU humanitarian assistance, EU development policy or the provision of grants, procurement and budget support.

The use of EU funded financial instruments and budgetary guarantees is subject to stricter provisions in relation to anti-money laundering and countering terrorist financing. According to the EU’s Financial Regulation and the European Fund for Sustainable Development Regulation, there is a prohibition against “Implementing Partners” (such as International Financial Institutions or National Promotional and Development Banks) entering into new or renewed operations with entities established in countries on the EU’s list of high risk third countries, when carrying out financial operations supported by the EU budget.

There is however an exemption when the action is physically implemented in the third country in question (subject to the absence of other risk factors). That means that when an action is physically implemented in a listed jurisdiction (i.e. when the financial operation supported by the Union budget is implemented in a listed jurisdiction exclusively for the purpose of financing a project in that same jurisdiction), the Implementing Partner can still carry out financial operations with entities established in that jurisdiction with the support of the EU. Therefore, there should be no adverse effect with regard to actions physically implemented in listed jurisdictions.

Why will the new protective measures only apply as of 1 October 2020?

The very exceptional and unpredictable situation arising from the Coronavirus pandemic has a global impact and is leading to significant disruption for economies and national administrations around the world.

Therefore, the date of application of today’s Regulation listing third countries – and therefore applying new protective measures – only applies as of 1 October 2020. This is to ensure that all stakeholders have time to prepare appropriately. The delisting of countries, however, is not affected by this and will enter into force 20 days after publication in the Official Journal.

Will there be any technical assistance available for the countries identified as high-risk third countries?

The EU is committed to providing technical assistance to the countries identified as high-risk third countries. The Commission is one of the world’s leading donors when it comes to providing targeted support to tackle anti-money laundering / countering terrorist financing.

The Commission currently has a programme (€20 million) under the Global Facility (AML/CFT) to support countries in the world to monitor, disrupt and deny the financing of terrorism and money-laundering. The Commission aims at supporting more partners to address AML/CFT issues. This process is demand-driven – i.e. countries will have to define their needs and request technical assistance to improve their AML/CFT regimes in the framework of the external aid policy of the Commission.

What are the next steps?

The Delegated Regulation has now been transmitted to the European Parliament and to the Council for a 1-month scrutiny period (extendable by 1 more month). If there is no objection during this period, the Delegated Regulation will be published in the Official Journal in view of its entry into force.

The Commission will re-initiate its reviews under the autonomous assessment and come up with, at an appropriate time, a new autonomous list. These assessments will be subject to consultation of Member States’ experts and appropriate engagement with third countries, in cooperation with the European External Action Service (EEAS), as set in the refined methodology.

The European Parliament and the Council will have access to all relevant information at the different stages of the procedures, subject to appropriate handling requirements. The Commission will continue to engage in FATF in order to ensure increased synergies between the EU and the FATF listing process.

Finally, as part of the planned review of AML/CFT rules at EU level, the Commission will conduct an impact assessment and propose legislative proposals in early 2021. Input from today’s open public consultation will feed into this impact assessment. The legislative proposals should ensure that risks posed by third countries are appropriately addressed.

Daniel FERRIE