Money Laundering Advisory Committee:

Discussion paper - Third EU Money Laundering Directive

Summary

This paper seeks initial views from MLAC members on a third money laundering directive. In particular, views, together with evidence on the costs and benefits of further action, are sought on the following issues that may form part of proposals put forward by the European Commission in the next few months:

The appropriate scope of the money laundering offence;
Whether to extend the regulated sector, and introduce new mechanisms for supervision of compliance;
What, if any, further customer due diligence requirements should be introduced into legislation;
If any further measures to increase transparency (e.g. of trusts, companies, bank accounts) are appropriate.

Background

1. The second money laundering directive, adopted in December 2001, included a provision for the European Commission to bring forward proposals for a third directive within three years. In June 2003, the Financial Action Task Force (FATF) issued its revised 40 recommendations on money laundering. A preliminary discussion between the European Commission and Member States was held in September 2003 on the possible scope of a third directive, including elements of the revised FATF 40 recommendations. A further meeting is expected to be on the 4th December.

2. The purpose of this paper is to seek initial views from MLAC members on a number of issues that may form part of the Commission’s proposals and to start to establish an evidence base of the costs and benefits to industry and others of further action. While this note draws on the discussions in September it is not intended to be comprehensive, but to cover the main issues that are likely to arise.

3. The UK Government would like to set out its views formally to the Commission and other Member States before the Commission publishes its proposals. It will strongly encourage the Commission to develop a full cost-benefit analysis of its proposals. It will also stress the need to maintain a risk-based approach and one that balances having the flexibility to reflect the different systems that exist in different Member States against concerns regarding achieving equivalence across them.

Possible Issues

Definition of Predicate Offences

4. The second money laundering directive highlights as one of the issues for a third directive a review of the definition of “serious crimes” that Member States must identify as predicate offences for money laundering, to bring it into line with the definition in Joint Action 98/699/JHA (see Annex 1). In the UK, under the Proceeds of Crime Act money laundering offences are applicable to the proceeds of all crimes.

Do MLAC members agree that that the Joint Action 98/699/JHA is appropriate? Should a third directive adopt an “all crimes” approach?
Should the reporting requirement be aligned with the definition of predicate offences?
Do MLAC members have evidence of the costs and benefits of extending the definition of predicate offences?

Terrorist Financing

5. A number of the revised FATF 40 recommendations extend to terrorist financing as well as money laundering. UNSCR 1373 requires all UN members to prohibit terrorist financing, and terrorist financing is a serious crime for the purposes of the second directive. There is an issue of whether to extend the prohibition of money laundering contained in the directive to the prohibition of terrorist financing.

Do MLAC members agree that terrorist financing should be included?

Negligence

6. The issue here is whether the law of negligence should apply in the case of money laundering – so that someone can be found guilty of money laundering for negligent behaviour where, for example, they ought to have known that a transaction was suspicious.

What are the likely costs and benefits of introducing this requirement? Does it conflict with wider UK law?

Persons and Institutions Subject to the Directive

7. The revised FATF recommendations extended the scope of persons and institutions that should be covered by regulations. The second EU money laundering directive covers all of the non-financial businesses and professions that are designated in the revised FATF recommendations, apart from those trust and company service providers who are not lawyers or accountants. The Money Laundering Regulations 2003 adopt an activity-based approach in implementing the second directive and cover all trust and company service providers (including those who are not lawyers and accountants). However, those who are not lawyers or members of accountancy bodies will not be directly supervised for their compliance with the Regulations.

8. In addition, the coverage in the second directive of lawyers and accountants is not exactly the same as in the revised FATF 40 recommendations. The recommendations apply Customer Due Diligence (CDD) and record keeping requirements to lawyers and accountants who prepare for or carry out certain kinds of transactions for their client, while they are required to make suspicious activity reports (SARs) when they engage on behalf of or for a client in a financial transaction in relation to one of those activities. The second directive, on the other hand, requires lawyers to carry out CDD or make SARs when they participate in financial or real property transactions but applies CDD and SAR requirements to accountants without any limitation to particular types of transaction.

The second directive covers dealers in high value goods (such as precious stones, precious metals and works of art) and auctioneers whenever payment is made in cash and over a threshold of 15,000 euros. The FATF recommendations cover dealers in precious metals or stones for transactions over 15,000 euros.

Do MLAC members have information on the numbers involved in providing trust and company services whom are not accountants or lawyers?
What are the costs and benefits of extending supervision to this group?
Should the coverage of lawyers, accountants and dealers in high-value goods be reviewed?

Regulation and Supervision

9. This is a more general issue of whether a third directive should impose an obligation that all businesses in the regulated sector should be supervised for their compliance, and if this supervision may be by self-regulatory organisations. This debate has implications for arrangements in the UK. For example, while banks are currently supervised by the FSA, lawyers and most accountants who are members of the CCAB will be supervised by their respective self-regulatory organisations, and there will be no designated supervisory body for estate agents.

What are the costs and benefits of extending formal supervision?

Customer Due Diligence

10. The revised FATF 40 recommendations include extended requirements for customer due diligence (CDD). Among the questions likely to be posed in the context of the 3rd Directive are whether it should include:

A provision prohibiting the keeping of anonymous accounts
Further definition of “reasonable measures” to verify identity of beneficial owners
A definitive list of where reduced CDD measures would be appropriate
Provision, in certain cases, for a customer’s identity to be verified after the establishment of the business relationship
Permission for those subject to the directive to rely on third parties to perform CDD functions
Alignment of the customer identification thresholds for casinos with those in the FATF recommendations
A provision prohibiting the authorisation of and engaging in business with shell banks.
Which of the CDD measures do MLAC members feel it would be useful to incorporate into a third directive? How detailed should any requirements be?
What are the costs and benefits of incorporating the CDD measures into a directive?

Transparency

11. The revised FATF recommendations cover the issue of information on the beneficial ownership of companies, including preventing the misuse of bearer shares. Last year HM Treasury and DTI published a joint consultation document on the disclosure of beneficial ownership of unlisted companies. The revised recommendations also cover measures to prevent the unlawful use of legal arrangements, including trusts.

Issues include whether companies should be required to register ownership and beneficial ownership at the point of formation and on an ongoing basis; and whether the benefits of requiring professional service providers to be subjected to some kind of registration or licensing outweigh the costs.

Do MLAC members think that the risks of the abuse of companies and/or trusts justify the introduction of additional measures to increase their transparency? If so, what measures would be appropriate and what would be their costs?

Central register of bank accounts

12. Some Member States maintain a compulsory register of bank accounts that is used in police and judicial enquiries. In the UK, the Proceeds of Crime Act provides for a Customer Information Order to be obtained and served on a bank or financial sector institution.

What are the costs and benefits of introducing such a register in the UK?

Protecting employees making suspicious activity reports

13. The Commission has been considering introducing a requirement to protect employees making suspicious activity reports from threats and intimidation. However, it is not clear whether a third directive would be the appropriate legislative vehicle in which to introduce such a requirement. Law enforcement, the National Criminal Intelligence Service (NCIS), HM Treasury and the Home Office are currently reviewing the processes used with a view to formulating recommendations for best practice, to be developed further in partnership with the regulated sector. The Government takes these issues seriously and is working on a non-legislative response.

Is there evidence of a problem in the UK? Do MLAC members believe that such a requirement would be useful?

Application of AML standards in branches and subsidiaries abroad

14. Members of the European Parliament have raised the issue of whether the directive should require financial institutions to enforce their anti money laundering standards in branches and subsidiaries that are located outside the EU.

What are the practical implications of this proposal for a compulsory system? Do the benefits justify the costs?