Explanatory Memorandum to COM(2004)448 - Prevention of the use of the financial system for the purpose of money laundering, including terrorist financing - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2004)448 - Prevention of the use of the financial system for the purpose of money laundering, including terrorist financing. |
|---|---|
| source | COM(2004)448  |
| date | 30-06-2004 |
The Community effort to combat money laundering is reflected in Directives of 1991 and 2001. The 1991 Directive followed closely the recommendations of the Financial Action Task Force on Money Laundering (FATF), the world standard in this area.
The 1991 Directive defined money laundering in terms of drugs offences and imposed obligations solely on the financial sector. The 2001 amendment extended the scope both in terms of the crimes and the range of professions and activities covered.
The 2001 Directive left open the precise definition of serious offences and called on the Commission to table a further proposal in 2004 on this subject.
In June 2003 the FATF revised its Recommendations also now covering terrorist financing. The present proposal for a directive also makes specific reference to the combating of terrorist financing and envisages the changes needed to take account of the revised FATF Forty Recommendations.
Contents
- Introduction
- Commentary on the individual articles of the proposal
- Article 2
- Article 3
- Article 5
- Articles 6 and 7
- Article 8
- Article 9
- Article 10
- Article 11
- Articles 12 to 16
- Article 17
- Articles 18 to 22
- Article 23
- Article 24
- Article 25
- Articles 26 to 29
- Articles 32 and 33
- Articles 34 to 36
- Articles 37 and 38
- Articles 39 to 41
The Community effort to prevent and combat money laundering (the efforts of criminals to disguise the illicit origin of criminal proceeds) began with Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering.
The 1991 Directive took particular account of the Forty Recommendations of the Financial Action Task Force on Money Laundering (FATF), the international body leading the global effort in this field.
The 1991 Directive required Member States to prohibit the laundering of drugs proceeds, to oblige their financial sector to identify their customers, keep records, establish internal control procedures and to report any indications of money laundering to the competent authorities.
The limitation to drugs proceeds was soon found to be too restrictive. It was also seen that the tightening of controls in the financial sector had prompted money launderers to seek alternative laundering methods.
In 1999, the Commission proposed widening the range of criminal offences covered and bringing under the Directive a wide range of vulnerable non-financial activities and professions.
The amending Directive 2001/97/EC was adopted on 4 December 2001. It substantially followed the Commission proposal on the coverage of non-financial activities and professions. With respect to the coverage of criminal activity, the co-legislators decided to cover the laundering of the proceeds of serious offences. A final element in the definition referred to offences generating 'substantial proceeds' or 'punishable by a severe sentence of imprisonment'. Article 1(E) stated that 'Member States shall before 15 December 2004 amend the definition provided for in this indent in order to bring this definition into line with the definition of serious crime of Joint Action 98/699/JHA' and the Commission was invited to bring forward a proposal to this end.
Although there was no specific reference to terrorist financing, the Member States agreed that the concept of serious offences should cover all offences relating to the financing of terrorism. The new proposal makes specific reference to the coverage of terrorism and terrorist financing.
In June 2003 the FATF agreed on a substantial revision of the Forty Recommendations to take account of experience acquired and the enhanced measures required to combat the phenomenon more effectively.
In a number of areas, the FATF considerably extended the level of detail in its Recommendations, notably as regards customer identification and verification, the situations where a higher risk of money laundering may justify enhanced measures and also situations where a reduced risk may justify less rigorous controls.
The EU Member States and the Commission believe that the revised FATF Forty Recommendations should be applied in a coordinated way at EU level.
For the sake of clarity it has been decided to repeal the existing Directive and propose a new autonomous text. The Commission's starting point is that the new Directive should build on the current acquis and that the existing provisions, in particular as regards the treatment of the professions, should not be called into question where there is no need to do so.
The Contact Committee will lose its basis in Community law and a new Committee will need to be established. The Commission should be entrusted with limited implementing powers in certain technical areas and to that end should be assisted by a new Committee on the Prevention of Money Laundering in accordance with the provisions of Decision 1999/468/EC.
Article 1
Money laundering as defined in the Directive should be a criminal offence. The application of criminal law sanctions is essential to ensure effectiveness.
A new definition of money laundering is proposed specifically to cover terrorist financing. The Directive's title refers to the 'use of the financial system for the purpose of money laundering, including terrorist financing'. The case of lawful property being diverted to finance terrorism is now envisaged as part of the definition of money laundering. All subsequent references to money laundering therefore also include terrorist financing.
The new proposal seeks to complete certain gaps in coverage and to follow the revised FATF Forty Recommendations. It makes specific reference to trust and company service providers and also includes life insurance intermediaries.
It is now proposed that all persons trading in goods or providing services and accepting cash payments above the threshold should come within the scope of the Directive.
This definitions article takes over all of the definitions from the earlier Directive. It makes technical adjustments to certain definitions, makes more substantial amendments to others and also adds certain new definitions.
The definition of financial institution is amended in line with the approach followed by the FATF. Any undertaking carrying on the specified lines of financial business is considered to be a financial institution but Member States are allowed not to apply the Directive in very low risk situations.
Definitions are added of insurance intermediaries, terrorism, beneficial owner, trust and company service providers, politically exposed persons (PEPs), the financial intelligence unit, the business relationship and shell banks.
The most substantial amendment relates to the definition of criminal activity. Terrorism is introduced as a separate element and all serious offences as defined in the relevant third pillar instrument should be covered. This will result in a more coordinated approach, though the exact coverage in each Member State will continue to depend on the relevant national criminal code.
The 1991 Directive stipulated that customers should be identified when 'entering into business relations' and did not specifically deal with the case of pre-existing situations. The new text, based on the FATF Recommendations, states clearly that credit and financial institutions must not maintain anonymous accounts.
These articles deal in detail with the range of measures that the institutions and persons subject to the Directive must take in order to make sure that they know their customers and understand the nature of their financial and business activities. These new provisions are not radically different in nature to those contained in the earlier Directive. However, in line with the revised FATF Recommendations, the new proposal contains more detailed requirements. It is specified that those procedures may be conducted on a risk-sensitive basis.
The rather general requirement of the earlier Directive on beneficial ownership is now no longer considered sufficient. The persons and institutions subject to the Directive should satisfy themselves that they have ascertained and understand any beneficial ownership situation, based on a clear definition of the concept of the beneficial owner. Particularly complex or opaque situations should prompt additional vigilance.
The basic principle is that customer identification and verification should be completed before the business relationship is established but it is now also stipulated that the business relationship may begin while the customer identification procedures are still in progress. This meets a concern voiced by the professions in particular. At the same time it is now clearly stated that if customer identification cannot finally be carried out in a satisfactory way the relationship should be terminated. Old accounts and relationships should also be examined at an appropriate moment where there might be a money laundering risk.
This article reproduces the customer identification provisions for casinos from the 2001 Directive.
This article, framed as a Member State option, introduces the concept of simplified due diligence where there is clearly a reduced risk of money laundering and provides examples. To ensure co-ordination, Articles 37 and 38 provide for the Commission, assisted by a new Committee, to adopt implementing measures involving the establishment of criteria for determining which situations represent a low risk of money laundering.
There are also cases where the money laundering risk is clearly greater and particular care must be exercised. This article specifies three such cases as a minimum, namely cases where there is no face-to-face contact with the customer, cross-frontier correspondent banking relationships and relations with politically-exposed persons. Here too the Commission, assisted by the new Committee, should be able to adopt implementing measures involving the establishment of criteria for determining other situations where there is a need for enhanced due diligence.
Unnecessary duplication of customer identification procedures can be an obstacle to legitimate business or professional activities. This concerns, for example, the case where a customer is referred or introduced by one bank or lawyer to another bank or lawyer. It should often be possible for such customers to be accepted without any renewed application of the customer identification procedures, subject to certain safeguards.
This article reproduces provisions of the earlier Directive requiring special attention to be paid to complex or unusual transactions. Useful guidance can be derived from the work of the FATF on money laundering trends and techniques.
These articles on the reporting of suspicious transactions make specific reference to the financial intelligence unit as the body responsible for receiving and processing such reports. The definition of the financial intelligence unit is taken from the Council Framework Decision 2000/642/JHA of 17 October 2000.
The reporting arrangements for the legal and other professions and the relevant safeguards are taken over without change from the 2001 Directive.
It is confirmed that reporting a suspicion of money laundering does not constitute a breach of any obligation of confidentiality under criminal or civil law. The reference to reports being made 'in good faith' is replaced by a reference to reports being made in accordance with the requirements of the Directive.
This is a new provision. The Commission is aware that employees have been subjected to threats because it has emerged that they are at the origin of the report to the authorities which has led to an investigation or prosecution. Although this Directive cannot seek to modify Member States' court or prosecution procedures, this article is included, given the importance of this issue for the effectiveness of the Directive, to draw Member States' attention to this serious problem. They should do whatever is in their power to prevent employees from being threatened or victimized.
When a suspicious transaction report is made the client concerned should not be informed of this fact. 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. It is specified, however, that where legal advisors seek to dissuade a client from illegal activity this will not constitute a breach of the ban on warning the client.
Article 26 confirms the existing obligation to keep records for a minimum of five years. Article 27 requires the credit and financial institutions subject to the Directive to apply as far as possible the Directive's obligations regarding customer identification in their branches and subsidiaries outside the EU. Article 28 stipulates that EU credit and financial institutions must be able to respond fully and rapidly to requests from the financial intelligence unit or other competent authorities for information on their business relations with named legal or natural persons. Although the Commission is not at this stage proposing a mandatory register of bank accounts in all Member States, the new proposal sets out the objective but leaves it to each individual Member State to determine how it should be achieved. The Commission will monitor the impact of this provision. Lastly, Article 29 requires Member States to keep appropriate statistics, particularly on the use made of and results obtained from suspicious transaction reports. Such information, as well as the feed-back referred to in Article 31, can be a motivating factor for those subject to the Directive and may help them to develop more effective procedures.
These articles require that bureaux de change and trust and company service providers must be subject to a licensing or registration obligation and that casinos must be licensed. The Member States must require their competent authorities to monitor compliance by all the institutions and persons subject to the Directive.
This addresses the question of sanctions. Some approximation of the approach to penalties for money laundering and terrorist financing has already been achieved by Council Framework Decision 2001/500/JHA on money laundering and Council Framework Decision 2002/475/JHA on combating terrorism. Article 34 requires Member States to impose appropriate penalties for infringement of the national implementing measures adopted under the Directive. Article 35 and 36 deal with corporate liability.
This Article 37 lays down the areas where the Commission may adopt implementing measures under the comitology procedure of Decision 1999/468/EC in order to take account of technical developments and to ensure a uniform application of the Directive.
Article 38 establishes a new Committee on the Prevention of Money Laundering replacing the old Contact Committee. The Commission, assisted by this new Committee, should adopt the implementing measures referred to under Article 37.
Article 39 reproduces the obligation to present periodic implementation reports. Article 40 repeals the earlier Directive and makes reference to an annexed correlation table. Lastly, Article 41 provides for a 12 month implementation period.