EU Money Laundering Directive

The Passing Of The 3rd E.U. Money Laundering Directive, How Effective Are The Laws Now In Existence To Combat This Crime

Introduction

The terrorist attacks of September 11 clearly illuminated the importance of anti-money laundering laws and controls. The attacks fostered an even greater recognition of the importance of anti-money laundering cooperation around the world. This recognition galvanized international cooperation and led to important modifications to anti-money laundering laws. The framework of laws and regulations enacted during the last decade to address money laundering paid prompt dividends in the world community’s ability to trace the funds of those who finance international terrorism. The developments that have taken place since September 11 will further enhance global efforts against terrorist financing and the full range of money laundering challenges. But first of all we have to understand this concept.

What Is Money Laundering?

Money laundering has by tradition been considered to be method by which criminal attempts to hide the origins and ownerships of the earnings of their criminal activities. The aim is to enable them to retain control over the proceeds and to provide, ultimately, a cover for their income and wealth. This has led people to believe that money laundering can be described in one of the following ways:

• Turning dirty money into clean money
• Washing drug money
• Disguising criminal money

The word laundering is used because these techniques are intended to turn dirty money into clean money. By doing laundering it allows criminals to maintain control over the proceeds of their activities and allows them to spend the money safely, avoid suspicion and thus detection, and avoid forfeiture. Finally, then, it gives a legitimate cover for the illicit funds.

The goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardising their source.

Illegal arms sales, smuggling, and the activities of organised crime, including for example drug trafficking and prostitution rings, can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to “legitimise” the ill-gotten gains through money laundering.

When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.

In response to mounting concern over money laundering, the Financial Action Task Force on money laundering (FATF) was established by the G-7 Summit in Paris in 1989 to develop a co-ordinated international response. One of the first tasks of the FATF was to develop Recommendations, 40 in all, which set out the measures national governments should take to implement effective anti-money laundering programmes.

Professionals such as lawyers and accountants who help place dirty money into the financial system. Regional anti-money laundering bodies in Europe, Asia and the Caribbean continued working effectively, and nascent anti-money laundering regional organizations in South America and Africa became operational.

Why We Must Combat Money Laundering

Money laundering is organized crime’s way of trying to disprove the adage that “crime doesn’t pay.” It is an attempt to assure drug dealers, illegal arms dealers, corrupt public officials and other criminals that they can hide their profits and to provide them the fuel to operate and expand their criminal enterprises. Fighting money launderers and strengthening anti-money laundering regimes globally will reduce financial crime by depriving criminals of the means to commit other serious crimes. To a lesser but real extent, strengthening anti-money laundering regimes, particularly in the areas of identifying the originators of international wire transfers, will impact terrorist financing as well. At a minimum, strong anti-money laundering measures help to create a body of evidence that exposes criminal behaviour and help law enforcement identify perpetrators and build cases against them that lead to their arrests and convictions.

As the tragic events of September 11 graphically demonstrated, crime has become global, and the financial aspects of crime have become more complex, due to rapid advances in technology and the globalization of the financial services industry. Modern financial systems, in addition to facilitating legitimate commerce, permit criminals to transfer millions of dollars instantly, using personal computers and satellite dishes. Only his or her creativity limits the criminal’s choice of money laundering vehicles. Money is laundered through currency exchange houses, stock brokerage houses, gold dealers, casinos, automobile dealerships, insurance companies, and trading companies. Private banking facilities, offshore banking, shell corporations, free trade zones, wire systems, and trade financing all have the ability to mask illegal activities. In so doing, criminals manipulate financial systems throughout the world.

Money laundering generally involves a series of multiple transactions used to disguise the source of financial assets so that those assets may be used without compromising the criminals who seek to use the funds. These transactions typically fall into three stages: (1) Placement, the process of placing, through deposits, wire transfers, or other means, unlawful proceeds into financial institutions; (2) Layering, the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions; and (3) Integration, the process of using an apparently legitimate transaction to disguise the illicit proceeds. Through this process the criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source.

Unchecked, money laundering can erode the integrity of a nation’s financial institutions. Due to the high integration of capital markets, money laundering adversely affects currencies and interest rates as launderers reinvest funds where their schemes are less likely to be detected, rather than where rates of return are higher. Money launderers also negatively impact jurisdictions by reducing tax revenues through underground economies, competing unfairly with legitimate businesses, damaging financial systems, and disrupting economic development. Ultimately, laundered money flows into global financial systems where it can work to undermine national economies and currencies.

There is now worldwide recognition that we must deal firmly and effectively with increasingly elusive, well-financed and technologically adept criminals and terrorists who are determined to use every means available to subvert the financial systems that are the cornerstone of legitimate international commerce. The continued abuse of some offshore financial centres, the proliferation of on-line Internet banking and the widespread use of underground banks and money-changers highlight the importance of using new technologies and strong strategies to combat money laundering schemes and terrorist financing schemes.

Council Of Europe

The Council of Europe’s (COE) Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (PC-R-EV) has achieved significant progress since its creation in 1997. At the plenary meeting of the PC-R-EV held in January 2001, first round mutual evaluation reports on Latvia, the Russian Federation, San Marino, and Ukraine were adopted. That plenary also agreed that the FATF 25 criteria to identify non-cooperative countries and territories would be considered in assessing members. Anti-money laundering regimes during the PC-R-Eves’ second round of mutual evaluations, and a new questionnaire was designed for that purpose. The second round of mutual evaluations began with an on-site visit in July 2001 to Slovenia, followed by Cyprus in September. Slovakia, the Czech Republic and Hungary also underwent second round mutual evaluation reviews during the last quarter of calendar year 2001. A second PC-R-EV plenary meeting of the year was held in December and saw the adoption of first round mutual evaluation reports on Albania, Moldova and Georgia.

Role Of United Kingdom

The United Kingdom (UK) plays a leading role in European and world finance and remains attractive to money launderers because of the size, sophistication, and reputation of its financial markets. Although drugs are still the major source of illegal proceeds for money laundering, the proceeds of other offenses such as financial fraud and the smuggling of goods have become increasingly important. The trend over the past few years has witnessed the movement away from High Street banks and mainstream financial institutions for the placement of cash. In laundering funds, criminals continue to use bureaux de change (small tourist-type currency exchanges); cash smuggling in and out of the UK; professional money launderers (including solicitors and accountants); and the purchase of high-value assets as disguises for illegally obtained money.

The United Kingdom has implemented the provisions of the European Union’s Anti-Money Laundering Directive and the Financial Action Task Force Forty Recommendations. Drug-related money laundering has been a criminal offense in the UK since 1986. Subsequent legislation criminalized the laundering of proceeds from all other crimes. The UK has a requirement for the reporting of suspicious transactions that applies to banks and non-bank financial institutions.

The Bank of England Act 1998 transferred responsibility for UK bank supervision from the Bank of England to the newly established Financial Services Authority (FSA). The FSA primary responsibilities are in areas relating to the safety and soundness of the institutions in its jurisdiction. The FSA plays an important part in the fight against money laundering through its continued involvement in the authorization of banks and investigations of money laundering activities in banks. Where appropriate, the FSA even assembles small teams of investigators to follow-up leads in newspapers and other public sources. The Financial Services and Markets Act were implemented in December 2001. The FSA administers a new civil-fines regime and prosecution powers. The FSA has the power to make regulatory rules in relation to money laundering, and enforce those rules with a range of disciplinary measures (including fines) if the institutions fail to comply.

In October 2001, the Proceeds of Crime Bill was introduced to improve the efficiency of the forfeiture process and increase the amount of illegally obtained assets recovered. The bill proposes to consolidate the existing laws on forfeiture and money laundering into a single piece of legislation. Additionally, it would create the Assets Recovery Agency (ARA) with lead responsibility for asset recovery and containing a “centre of excellence” for financial investigation training. This would bring forward the time at which a freeze order may be issued by a court to any time after an investigation has commenced, and provide for new powers to recover criminal assets through civil proceedings without need for a criminal conviction. The Bill is currently in the committee stage, and should be submitted to Parliament in 2002.

Secondary regulations, affecting the financial sector only, require that systems be in place to prevent and detect money laundering.

In 1997, Guidance Notes on best practices were issued by the Money Laundering Steering Group of professional and trade bodies. The government also has specific provisions in secondary legislation to extend thorough money laundering controls to other sectors, including to lawyers, accountants and other professionals. In December 2000 the government also proposed legislative changes to allow tax authorities to share information with police in serious criminal cases. The proposed changes have been shelved temporarily, and will be re-introduced at a later date.

Suspicious transaction reports are filed with the Economic Crime Unit of the National Criminal Intelligence Service (NCIS), which serves as the UK financial intelligence unit (FIU). The NCIS analyzes reports, develops intelligence, and passes information to police forces and Her Majesty’s Customs for investigation. The NCIS is an active member of the Egmont Group and has Memoranda of Understanding (MOU) for sharing intelligence with foreign counterparts. An arrangement is in place with the U.S. Financial Crimes Enforcement Network (FINCEN), and also the FIU of Belgium, France, and Australia.

The UK banking sector provides accounts to residents and non-residents, who can open accounts through various intermediaries that often advertise on the Internet and also offer various offshore services, or as a part of private banking activities. Private banking constitutes a significant portion of the British banking industry. Both resident and non-resident accounts are subject to the same reporting and record-keeping requirements. Individuals typically open non-resident accounts for taxation or investment purposes.

The UK cooperates with foreign law enforcement agencies of other countries investigating narcotics-related financial crimes. The UK is a party to the 1988 UN Drug Convention and a member of the Financial Action Task Force and the European Union. The UK signed the United Nations Convention against Transnational Organized Crime in December 2000. The Mutual Legal Assistance Treaty (MLAT) between the UK and the U.S. has been in force since 1996. The UK also has an MLAT with the Bahamas. Additionally, there is an MOU between the U.S. Customs Service and Her Majesty’s Customs and Excise.

The UK should continue the strong enforcement of its comprehensive anti-money laundering program and its active participation in international organizations to combat the domestic and global threat of money laundering.

Purpose Of Third Money Laundering Directives

The main purpose of the Directive is to provide a common EU basis for implementing the revised FATF Recommendations on Money Laundering issued in June 2003. It also takes account of the new risks and practices which have developed since the previous Directive. The Directive replaces the First Money Laundering Directive, as amended by the Second Money Laundering Directive.

Key Provisions

The Directive applies not just to the financial sector but to lawyers and accountants, casinos, estate agents, trust and company service providers and high value dealers; all persons subject to the Directive will have to be supervised for AML purposes by a competent authority.

• • It explicitly covers terrorist financing as well as money laundering.
  • It contains more detailed ‘customer due diligence’ provisions than existing directives. In particular these:

Are defined as comprising not just customer identification and verification of identity, but also establishment of the purpose and intended nature of the business relationship and ongoing monitoring;

apply to new and existing customers; require identification of beneficial owners, and the verification of the beneficial owner’s identity; introduce exemptions from full customer due diligence “simplified due diligence” for certain low risk situations; and require ‘enhanced due diligence’ measures for situations that present a higher money laundering or terrorist financing risk and at least for non-face-to-face business, ‘politically exposed persons’ and international correspondent banking relationships.

• • The Directive provides for cosmetology measures – legally binding implementing measures the Commission can adopt to clarify certain provisions of the Directive. Among others, the Commission may adopt criteria for simplified and enhanced due diligence, definitions of e.g. beneficial owner and politically exposed persons, and identify third countries which do not meet the provisions of the Directive.
  • It recognises in EU law the concept of a risk-based/risk-sensitive approach to anti-money laundering.
  • It applies a licensing/registration system for ‘currency exchange offices’, trust and company service providers that involves a fit and proper test for those who direct or beneficially own such businesses.
  • It requires financial firms to apply customer due diligence and record-keeping standards to overseas branches and majority-owner subsidiaries (unless not permitted by local law).
  • It introduces more explicit obligations on institutions to have systems for AML risk management and compliance.
  • It includes miscellaneous provisions on, for example, the suspicious activity reporting regime and the relationship with Financial Intelligence Units.

Evolution Of Third Money Laundering Directive

The three Directives have been introduced by EU in order to encounter the issue of money laundering. First directive was introduced on 10 June 1991, second was introduced on 4 December 2001 and third was introduced on 26 October 2005.

A year on from this, in 2005, the European Union’s new money laundering Directive took a similar approach to corporations guilty of money laundering: Member States were to introduce civil/administrative sanctions in such cases. Again, they could provide also for criminal sanctions if they so chose. This contrasted sharply with the revised FATF Recommendations, which prescribed that civil/administrative sanctions were to be introduced solely as a last resort, where the legal system of a given jurisdiction did not permit criminal liability to be imposed on corporate entities; the criminal approach was, however, to remain the preferred option. The EU took the reverse approach.

Action By The European Community

The First Directive Of Money Laundering

The definition of money laundering was introduced in 1991 in money laundering directive. In the 1988 UN Convention, Member States were called on to prohibit such money laundering, at least when it involves the proceeds of drug trafficking. On the defensive side and looking into FATF 1990 recommendation, numerous obligation were started for credit and financial institution such as

• duties to identify customers and keep records
• to refrain from transactions they know or suspect are linked with money laundering
• Tipping off-not to tip off customers that they are being investigated for and a proactive duty to report suspicious transactions to the competent national authorities.
• Credit and financial institutions would be subject to sanctions– the nature of which was left to Member States to determine–in cases of noncompliance with these duties.

The commission closely monitored the implementation of this regulatory and legislative framework by Member States .At the same time, Member States used the opportunities now offered by the third pillar of the EU Treaty, to complement the directive provisions with measures with a stronger criminal law element. Therefore the Council adopted a Joint Action on money laundering and confiscation of instrumentalities and proceeds from crime in 1998. Three years later the main provisions of this instrument were repealed three years later by a Framework Decision on the same subject.

The motive of the Framework was to make reservation to 1990 Council of Europe money laundering Convention regarding the confiscation of proceeds of serious crime (with an exception regarding tax offences) and the criminalization of the laundering of the proceeds of serious crime. Apart from this it also laid specific penalties for proceeds of money laundering

act. These provisions were undertaken by many of the member states in 2004. The directive of 1991 initiated a duty for credit and financial institutions to report suspicious transactions to the competent national authorities. It must be noted that directive did not contain any provisions regarding the nature, functions and powers of these authorities. Member States had authority regarding the designation of such authorities, in order for the reporting system better outlay the specific legal and socio-political domestic reality. Three types of reporting systems were established

• the independent/administrative model, where financial institutions report suspicions to an independent unit or a unit based within a government department for example Ministry of Finance
• the police model, where suspicions are forwarded to a police/intelligence agency for example NCIS in the UK
• And finally the judicial model, where accountability lies with the Public Prosecutor’s office. As matter of fact this disparate national models has the potential to result in obstacles to cooperation in the light of the different nature and legal regulation of these units. Member States adopted a third pillar Decision in 2000 on cooperation between financial intelligence units to overcome these hindrances. The Decision calls on each Member State to set up a ‘financial intelligence unit’, which is defined in accordance with the definition adopted in 1996 by an ad hoc group of countries and international organizations called ‘the Egmont Group’.

The Second Money Laundering Directive

Steps to fight money laundering changed with the passage of the time. The FATF, established with the motive of enhancing effective action against this situation, has been monitoring closely trends and disparities in money laundering, not only this but also the legal and practical effect of its provisions and implementations by its member States. Henceforth in the mid1990s, in the realization that the existing global anti- money laundering framework was not effective to nurture the changes in money laundering dilemma , the foreseen crisis resulting from technological advances, or the profits derived from non-drug-related criminal activity. Taking these factors among others into account, the FATF revised its 40 Recommendations in 1996, with the idea of extending the various predicate offences for money laundering, extending the preventive duties beyond the financial sector, and updating the customer identification system taking into account new technologies. Just as the 1991 directive moved ahead of the original FATF 40 Recommendations in requiring mandatory suspicious transaction reporting, the European Union should continue to impose a high standard on its Member States, giving effect to or even going beyond the 1996 update of the FATF 40 Recommendations. In particular the EU can show the way in seeking to involve certain professions more actively in the fight against money laundering alongside the financial sector.

Negotiations kept going till 2 years mainly because of concerns by the European Parliament, which was co-legislating with the Council of Ministers on the directive regarding the impact of the extension of the duties to the legal profession in terms of the right to a fair trial and the principle of lawyer-client confidentiality. Consequently, second money laundering directive was adopted in the year December 2001 post-9/11 era.

There were amendments introduced to 1991 directive by the 2001 directive thereby establishing that both should be read together. The prominent changes brought about by the Directive were:

• the extension of predicate offences to include, in a manner similar of the third pillar Framework Decision on confiscation, ‘serious crime’;
• the meticulous identification of duties;
• and the extension of the ratione personae scope of the Directive.

Professions such as auditors, external accountants and tax advisers, estate agents, art dealers, and to casinos were also included in 2001 directive. Controversially it also applied to lawyers, i.e. notaries and other independent legal professionals, when engaged in a series of specified financial activities.

The Third Money Laundering Directive

18 months were given to member states to implement the second money laundering Directive, the deadline being 15 June 2003. One would expect that, at the time of writing, the Commission and Member States would be focusing on how it has been implemented across the EU. However, the adoption of a revised–and controversial—anti- money laundering Directive, as recently as 2001, did not stop the Commission tabling in 2004 a proposal for a third Directive, amending the two earlier texts. The most important justification for this proposal has again been the need to update EC law in the light of new work by the FATF. in fact revision of its 40 Recommendations were issued by FATF in 2003, to take into account developments in money laundering typologies. The main aim of the revisions were to extend the scope of predicate offences and providing guidance on customer identification requirements, which now must take place on a risk-sensitive basis and take into account specific categories of individuals in this context (such as politically exposed persons), focusing on the misuse of corporate vehicles, and dealing specifically with the work of FIUs.

Though, there was one more reason for the prioritization of further amendments to the EC anti- money laundering framework: the war on terror. After 9/11, the guidelines were issued to FATF to combat not only money laundering, but also terrorist finance. Its main focus is on to put a check on the terrorist funding, a central component of which is to extend the anti- money laundering legal and regulatory armoury to terrorist finance activities. This ideology came into existence with the help of series of eight Special Recommendations that the FATF adopted in October 2001 and the ninth measure came into existence in October 2004. But the fact is that some of these Recommendations are already in existence in the framework of United nations and in security council, others refer specifically to the use of the anti- money laundering framework in this context.

The main target is on wire transfers, the regulation of alternative remittance systems, the targeting of cross-border cash movements by terrorists, and taking steps to reduce the vulnerability of the non-profit sector to abuse.

The Negotiations were more difficult in second money laundering between the Council and the European Parliament. The third money laundering directive repealed the earlier directive and was published in November 2005. The major changes begin in the title of the instrument, which now refers to money laundering and terrorist financing. The aim of complying with international standards is again reflected in the Preamble, with specific references to the threat from terrorism, the need to take into account the work of the FATF and the need to change customer identification provisions in the light of international developments.

There were numerous changes involved in the criminal law-related aspects of the Directive. This was prohibited in the 1991 and 2001 money laundering Directive. Another interesting addition, that may have criminal law repercussions, is Article 27, which calls on Member States to protect employees who report suspicions of money laundering or terrorist financing from being exposed to threats or hostile action. The nature and means of such protection are left vague, and the broader subject is whether the Community has proficiency to impose this

compulsion, which may lead to the addition of such employees in protection schemes under national criminal justice systems, in a first pillar instrument.

To align the Community framework with FATF-related developments, major changes have been introduced in the field of customer identification and due diligence.

Chapter II of the money laundering Directive now entitled ‘customer due diligence’ and comprises no less than 15 Articles, many of them prolonged from the earlier text. A new provision is Article 6, which prohibits unspecified accounts or unnamed passbooks. The provisions on customer identification have been prolonged to commence various levels of thoroughness, which may range from simplified due diligence to enhanced due diligence, in particular when cross-frontier correspondent banking with third countries, transactions with politically exposed persons, or the use of shell banks is involved. This ‘layering’ is primarily achieved by the use of the principle of due diligence ‘on a risk-sensitive basis’. This is falling in line with the new FATF approach embraced in 2003, and may be a useful code in ensuring that the institutions and professions concerned are not unnecessarily overburdened with obligations.

On the reporting duties, the most significant change has been the inclusion in the Directive of express provisions covering financial intelligence units, probably to follow the express reference to FIUs in the revised FATF recommendations. Apart from this suspicious transaction reporting is now looked within the specific context of FIUs, as the institutions and persons involved must now send suspicions not to the competent authorities, but to the FIU. This also applies to the case of legal professionals, notwithstanding the fact that the 2001 Directive authorized Member States to make provisions for suspicious transactions to be transmitted to self-regulatory bodies (eg bar associations) instead of the ‘competent authorities’.

Tipping Off Amendment

On the subject of lawyers, the exception from reporting duties remains. There has been an important change to the ‘tipping off’ provision, now mainly in Article 28. The controversial reference to the possibility of Member States exempting lawyers from this obligation, inserted in 2001, has been deleted. The reason behind this amendment was discussed in the 2004 Commission proposal as follows:

‘The Member State option to allow members of the professions acting as legal advisors to inform their client that a report is being made has been dropped as it is not in conformity with the revised FATF 40 Recommendations.’

Instead, Article 28(6) now states that where lawyers seek to deter a client from dealing in illegal activity, this will not constitute tipping off within the meaning of the Directive, an exemption specifically contemplated by the interpretative note to FATF Recommendation 14. In this context, therefore, the protection of lawyers has been watered down substantially in comparison with the 2001 Directive.

Conclusion

While the third Directive enjoys pride of place in the efforts of the Union to avoid money laundering and to curb the financing of terrorism, it is not comprehensi