The European Commission’s anti-money laundering blacklist: diplomacy or bust (in this case, bust)

The move by all of the European Union’s (EU’s) member states to block the European Commission’s recent anti-money laundering blacklist, mostly as a result of the political damage caused by the inclusion of Saudi Arabia and a number of US territories, arguably demonstrates that perceived “objective” criteria cannot be the only determinant of whether a country gets onto such a list. Politics dictates that some countries simply must not be included.

Background to the list

Much was made of the desire to move away from “white-lists” under revisions to the EU’s Fourth and Fifth Anti-Money Laundering Directives (4AMLD and 5AMLD respectively) and instead to a more “risk-based”, tailored approach to KYC and customer identification. Nevertheless the concept of a blacklist never really went away: an anodyne list covering the 16 countries considered to be “high risk third countries” for anti-money laundering and terrorist financing (AMLTF) purposes and, importantly, designated by the Financial Action Task Force (FATF) which became officially recognised by the EU on the passing of the 5AMLD in July 2018.

The list once again re-entered popular discussion following the publication on 13 February 2019 by the Commission of an expanded list of 23 countries including some politically sensitive choices. A copy of the publication, in the form of a draft Commission delegated regulation is here.

Inclusion on the list carries no outright penalty but it is highly relevant for determining enhanced due diligence measures that need to be taken by EU financial institutions and other “obliged entities” under 5AMLD-related rules.

Criteria used

The most recent, now rejected list was produced by the Commission on the basis of criteria set out in the 5AMLD and related implementing measures. Under the Commission’s approach an assessment was conducted of 54 “priority” jurisdictions looking at the levels of existing threat posed, their legal frameworks and controls currently in place, as well as the effectiveness of implementation of AMLTF rules.

According to the Commission a country posing a risk to the international financial system and identified by the Financial Action Task Force (FATF) as a high-risk jurisdiction is presumed to represent a risk to the EU internal market as well. Additionally, the Commission has stated that it also wanted to adopt its own methodology for assessing high-risk third countries; hence in identifying the countries on the list on the basis of its own expertise and other sources such as Europol.

The list of 23 comprised:

• 12 countries listed by FATF as being AMLTF-deficient (generally non-controversial ones) and
• 11 non-FATF listed jurisdictions (highly-controversial ones in some cases).

All 23 were considered by the Commission to have strategic deficiencies in their AMLTF frameworks. Interestingly, despite the initial strong objections of some quarters of the EU, in particular from the UK, the revised list of 23 countries included Saudi Arabia, Panama and four US territories; Puerto Rico, Guam, the US Virgin Islands and American Samoa.

FATF reaction, US condemnation

In a surprising turn of events, shortly following the issuance of the Commission’s list the FATF’s President, Marshall Billingslea[1], commented that “[t]here are obvious questions as to whether (a) list elaborated outside of the FATF, or without our involvement or help, helps or undermines this leading role of our organisation”.

The US Department of Treasury followed up, on the same day as the publication that the Commission’s process for developing its list contrasts starkly with FATF’s thorough methodology. According to US Treasury, the Commission’s process:

• did not include a sufficiently in-depth review necessary to conduct an assessment related to such a serious and consequential issue;
• provided affected jurisdictions with only a cursory basis for its determination;
• notified affected jurisdictions that they would be included on the list only days before issuance; and
• failed to provide affected jurisdictions with any meaningful opportunity to challenge their inclusion or otherwise address issues identified.

Treasury also rejected outright the inclusion of US territories on the list noting that the commitments and actions of the US in implementing the FATF standards extended to all of its territories and that it was not provided with any meaningful opportunity to discuss the basis for the listing beforehand.

EU-turn

The list of 23 was unanimously rejected by the EU's Council on 7 March 2019 which stressed the need for introduction of such list in “an orderly process” in order to achieve the full impact of this instrument to improve the AMLTF regime.

The Council refused to support the Commission’s proposal, commenting that it “was not established in a transparent and resilient process that actively incentivises affected countries to take decisive actions while also respecting their right to be heard” and was not sufficiently autonomous.

The Council called for a revised EU listing that is proportionate to the EU’s high standards, in line with the provisions of the 5AMLD. The link to the relevant public statement of the Council can be found here.

In summary, the Commission is going back to the drawing board on this one.

If you have any questions, please contact Aki Corsoni-Husain or your usual Harneys contact.

[1] Mr Billingslea also serves as Assistant Secretary for Terrorist Financing in the U.S. Department of the Treasury and in 2018 spearheaded US initiatives to combat corruption, money laundering, and other financial threats in various European countries, including in Latvia and Cyprus.