Explanatory Memorandum to COM(2016)825 - Controls on cash entering or leaving the Union - EU monitor

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Explanatory Memorandum to COM(2016)825 - Controls on cash entering or leaving the Union

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This page contains a limited version of this dossier in the EU Monitor.

dossier COM(2016)825 - Controls on cash entering or leaving the Union.
source COM(2016)825 EN
date 21-12-2016


1. CONTEXT OF THE PROPOSAL

Reasons for and objectives of the proposal

This proposal brings the Cash Control Regulation (hereinafter CCR) into line with international norms and best practices in the fight against money laundering and the financing of terrorism. It addresses areas in which an evaluation of the CCR identified room for improvement and implements a number of action points set out in the Commission’s Communication on an Action Plan for strengthening the fight against terrorist financing 1 .

The first CCR was adopted in 2005 2 . This Regulation complemented the provisions of the Anti-Money Laundering Directive (hereinafter: AMLD) 3 by laying down a system of controls that applied to natural persons entering or leaving the Union who were carrying currency or bearer-negotiable instruments worth EUR 10 000 or more. In doing so, the Regulation implemented at EU level international standards in the area of anti-money laundering and terrorism financing, notably a Recommendation of the Financial Action Task Force on Money Laundering (hereinafter: FATF) on controls of cash movements.

An evaluation of the extent to which the first CCR achieved its objectives, information received from Member States as well as the evolution of the international standards to control crossborder flows of cash led the Commission to conclude that, while the overall performance of the Regulation was good, a number of areas posed problems and should be strengthened to improve its functioning.

Specifically, this proposal seeks to address the following issues:

1.

1. The imperfect coverage of cross-border cash movements


The current CCR requires natural persons entering or leaving the EU with EUR 10 000 or more to make a declaration to that effect. However, there is no provision for cash that is sent in post, freight or courier shipments. Public authorities have signalled that criminals have resorted to sending or receiving cash via such shipments in order to escape the obligation to make a declaration under the CCR.

2.

2. Difficulties in the exchange of information between authorities


The current CCR requires only that declaration data be ‘made available’ by the competent authorities to the financial intelligence unit (FIU) of the Member State in which it was collected. This somewhat passive requirement can be met by simply making completed declaration forms available for inspection by the FIU. However, this is not sufficient as the information should be actively transmitted to the FIU in order to enable them to analyse it. Also, declaration data can be exchanged with competent authorities of other Member States only where there are indications of illegal activity and even then it is optional. This has given rise to inconsistent implementation and little systematic sharing of data.

3.

3. The impossibility for competent authorities to temporarily detain sub-threshold amounts


The current CCR does not allow authorities to detain cash temporarily when they detect movements of sub-threshold amounts in relation to which there are indications of illegal activity.

4. The imperfect definition of ‘cash’

In line with international standards, cash is defined as ‘currency that is in circulation as a means of exchange, or bearer-negotiable instruments’. However, cases have been flagged in which criminals have moved significant quantities of highly liquid commodities such as gold to transfer value so as not to have to make a declaration. The standard customs declaration does not address this issue sufficiently, as it captures no details regarding, for example, the economic origin or purpose of cash and is not always required. It is also essential to take into account the rapidly changing face of criminality and the rise of cybercrime, online frauds and illicit online market places, which are facilitated by the development of the electronic-money market and the products it offers, specifically targeting prepaid payment instruments. Extending the definition of cash to cover such payment methods is required in order to close a legislative loophole signalled and substantiated by law enforcement agencies 4 .

4.

5. Divergent penalties for non-declaration in Member States


Penalties for failure to declare cash vary widely across Member States. Some impose very low penalties which may not be dissuasive, while the severity of penalties in others seems to point to an automatic assumption that a failure to declare cash is evidence of an underlying offence (which has yet to be established and should be the object of a separate investigation). The current CCR required Member States to notify the Commission of the penalties in place when it entered into force, but not of any subsequent changes.

5.

6. Different implementation levels among Member States


Under the current CCR, most Member States voluntarily use the same declaration form, but this is not obligatory. Member States also provide the Commission with statistical data, but neither this nor the level of detail of the data can be enforced, which can lead to problems in ensuring consistent application and evaluating effectiveness.

Another problem is raising travellers’ awareness of their obligations. This is best done by the Member States, taking into account their specific needs and situations. The Commission will reflect on how to best achieve this objective and liaise with Member State national experts on this issue and stands ready to help Member States with developing appropriate materials.

Consistency with existing policy provisions in the policy area

This proposal should be seen in the context of the EU and international framework for fighting money laundering and the financing of terrorism.

At international level, the FATF, in which the Commission represents the Union, makes recommendations for jurisdictions on tackling money laundering and terrorist financing. The recommendations are not directly applicable legal instruments, but they do carry weight: FATF members’ evaluations of each other’s compliance are closely scrutinised and have great reputational impact. FATF recommendation 32 addresses the issue of crossborder movements of cash.

At EU-level various legal instruments have been adopted to form an effective framework for countering money laundering and terrorism financing; these include:

– the Fourth AMLD 5 , which covers most of the FATF recommendations;

– Regulation (EC) No 1781/2006 on information on the payer accompanying transfers of funds 6 , which implements FATF SR VII on wire transfers;

– Directive 2007/64/EC on payment services in the internal market 7 (Payment Services Directive), which, in combination with the AMLD, implements FATF SR VI on alternative remittances;

– Regulation (EC) No 2580/2001 on specific restrictive measures directed against certain persons and entities with a view to combating terrorism 8 , which, together with Regulation (EC) No 881/2002 9 implementing UN Al-Qaeda and Taliban sanctions, implements part of FATF SR III on freezing terrorist assets.

Broadly speaking, in the fight against money laundering and terrorist finance:

– the AMLD lays down a framework of rules as regards the functioning of the formal financial sector; and

– the CCR lays down a complementary framework of rules to protect the Union against cross-external border transfers of cash by money launderers and terrorist financiers seeking to circumvent controls on the formal financial system.

Consistency with other Union policies

The proposal is in line with and contributes to other Union policies, notably:

– the European Agenda on Security 10 , which emphasises the importance of the fight against terrorism and organised crime, and highlights the importance of informationsharing between competent authorities, in particular FIUs;

– the Action Plan for strengthening the fight against terrorist financing, which lists a number of policy and legal initiatives (including this proposal) to be taken as part of a comprehensive approach in this area; and

– the Commission’s proposal for a Directive of the European Parliament and of the Council on combating terrorism and replacing Council Framework Decision 2002/475/JHA on combating terrorism 11 , which includes provisions on criminal sanctions for people or entities who provide material support to terrorism.

- The principle of the free movement of capital which prohibits restrictions on payments and capital movements between Member States and third countries without prejudice to non-discriminatory measures justified on grounds of public policy and public security.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

Legal basis

The proposal has a dual legal basis in primary law:

– Article 114 TFEU (internal market) – because, in order to guarantee the proper functioning of the internal market and to protect Union citizens and enterprises, measures must be taken to stop money launderers and terrorist financiers exploiting divergent national approaches in order to move cash. To be effective, these measures need to be harmonised; and

– Article 33 (customs cooperation) of the Treaty on the Functioning of the European Union (TFEU) – because controls on cash should take place at the external border of the Union, where customs administrations are widely present. Also, these administrations have significant expertise in controls on passenger traffic and the general cross-external border movement of consignments.

Subsidiarity (for non-exclusive competence)

The proposal is part of the EU’s anti-money laundering / anti-terrorist finance framework. It establishes a parallelism with the AMLD as regards cross-external border movements of cash.

Organising an internal market with free movement of goods, persons, services and capital involves taking harmonised measures across Member States, where necessary in the public interest, in order to maintain an appropriate and equal degree of protection and a level playingfield.

It would not be possible to achieve the required degree of harmonisation on the basis of national legislation only. Money launderers and terrorist financiers could exploit divergences and attempt to move their cash into or out of the EU through the Member States where control measures are weakest. Given the amounts of declared cash entering or leaving the EU each year (EUR 6070 billion on average carried by natural persons), this could have a distortive effect on the internal market.

This proposed Regulation would not prevent Member States taking national control measures on cash moving across internal borders, provided that these are compatible with Article 65(1)(b) and Article 65(3), TFEU.

This Regulation does not concern measures taken by the EU or Member States which restrict capital movements in case of serious difficulties for the operation of economic or monetary union (Article 66 TFEU) or in case of a sudden crisis in the balance of payments (Article 143-144 TFEU).


Proportionality

The Commission considers that the policy options selected to address the above issues and achieve the objectives are both suitable and necessary.

Extending the scope of controls to cash sent in post and freight and allowing authorities to detain sub-threshold amounts where there is an indication of criminal activity would ensure full and explicit compliance with international norms and standards of best practice. In addition, authorities would have better control powers, while the additional administrative burden on citizens, enterprises and authorities will be limited, notably by a disclosure system for cash sent in post and freight which would give national authorities full powers of control but would not impose a systematic declaratory burden on legitimate operators.

As regards the exchange of information between competent authorities, laying down an active obligation to make data available to the FIU of the Member State in question would ensure that this FIU receives all data necessary for analysis. This degree of harmonisation is required to avoid the data being ‘made available’, but not actively transmitted to the FIU. The exchange of information between competent authorities would be made compulsory as regards infractions and cash movements where there are indications of criminal activity, so as to increase competent authorities' ability to fight against money laundering and terrorism financing, while ensuring proportionality.

By extending the definition of ‘cash’ to include gold and selecting a mechanism in which the components can be amended flexibly by delegated act in the light of evolving trends and technology, the proposal takes account of the latest developments and demonstrates the EU’s commitment to tackling possible future escape routes used to transfer value. The proposed penalties for non-declaration leave discretion to Member States to take the measures that they deem necessary to achieve the objectives. Given their characteristics, prepaid cards risk being used to transfer value across the external borders to finance illicit activities. In line with Better Regulation principles, the possible future inclusion of certain prepaid cards by delegated act should be preceded by an assessment of the evidence of such a risk, of practical enforceability and proportionality, taking into account the legitimate use of prepaid cards.

Choice of instrument

The appropriate legal instrument to achieve the objective and the required degree of harmonisation is a Regulation.

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

Ex-post evaluations/fitness checks of existing legislation

An extensive ex post evaluation of the original CCR in 2015 12 identified several areas which could be considered for improvement:

• including cash movements by mail and freight at EU external borders in the scope of the Regulation;

• widening and harmonising the possibilities for information exchange between Member States by:

6.

a. including all cash control information (including non-suspicious voluntary declarations); and


b. setting out clear procedures and providing effective tools for the exchange of information;

• explicitly allowing the use of cash declaration information for tax purposes, including the fight against tax fraud and evasion;

• approximating cash control penalties applied by Member States at EU external borders;

• streamlining the cash declaration exchange process as it pertains to FIUs;

• amending the definition of cash to include gold and precious stones; and

• developing a mechanism to ensure a sufficient and consistent level of implementation in the Member States.

These areas were analysed in the subsequent impact assessment.

Stakeholder consultations

A public stakeholder consultation on the various policy options 13 was conducted on the EUSurvey platform. A limited number of responses were received, but in general the options taken up are those viewed favourably by respondents, with the exception of the expansion of the definition of ‘cash’, which was opposed by a small majority. However, a targeted consultation produced another result (see below) which the Commission judged to be of overriding relevance. Subsidiarity considerations led the Commission to conclude that awarenessraising measures would be best left to the Member States, with Commission support. Respondents favoured making it possible to exchange regular cash declaration data for fiscal purposes, but legal concerns were raised in the course of the impact assessment and the option could not be pursued in this proposal.

A more targeted consultation was conducted among customs, police and FIU authorities in all Member States on the possibility of extending the definition of cash beyond currency and bearer-negotiable instruments. The responses (72 from 27 Member States) were generally favourable and suggested that the approach taken should allow for the list of such stores of value to be amended easily. The Commission proposes to incorporate this advice and to expand the definition of ‘cash’, establishing a list of main categories in the proposal, with the components listed in an annex which can be amended by delegated act to take account of changes and to future-proof the Regulation while allowing for oversight by the European Parliament and the Council.

Finally, since the original CCR entered into force, the Commission has been in regular contact with national experts on cash controls. These experts have provided valuable input over the years, which has been taken into account in the drafting of this proposal.

Impact assessment

An impact assessment has been conducted 14 and the Regulatory Scrutiny Board has delivered a positive opinion 15 .

The options that have been selected to tackle the problems identified are compatible and would considerably improve the functioning of the current CCR without creating unnecessary administrative burdens. This would be done through:

• correct implementation of FATF recommendation 32 on cash couriers through measures based on disclosures for cash sent in freight and courier consignments which, coupled with adequate controls and evaluation, would provide insight and control without the additional burden of systematic declaration;

• streamlining and providing clarifications with regard to the exchange of data, identifying the actors and the procedure to be applied;

• explicitly allowing for sub-threshold amounts to be detained on the basis of national legislation, with a sufficiently high threshold for action;

• a redefinition of ‘cash’ based on objective elements, but future-proofed by the possibility of incorporating new elements through delegated legislation, under the supervision of Council and Parliament;

• leaving responsibility for penalties with the Member States, who should notify the Commission of applicable national provisions and any changes; and

• formalising a number of other supportive elements such as the provision of statistics, a harmonised declaration form and reporting on amendments to penalties for non-declaration, which have been mostly voluntary until now, thus providing guarantees for the quality of future evaluations and greater legal certainty for stakeholders.

As regards administrative burden and costs, the measures concern cash amounts of EUR 10 000 or more moved across the external EU borders, either by persons or as freight/post, a mode of transport very rarely used by enterprises. Currently, a physical person accompanying a cash shipment has to make a declaration. Experience shows that professional couriers are highly aware of their obligations and are largely compliant. The new disclosure obligation for cash shipments in post/freight is designed to allow authorities to carry out controls and, if necessary, request documentation. There is no systematic obligation to file a declaration and authorities can exercise discretion (e.g. in cases of shipments between banks). It is expected that, due to the relative rarity of this shipment mode and the approach proposed, any impact on professional couriers will be minimal. No specific SME or micro-enterprise impact is expected.

Fundamental rights

The envisaged measures are likely to impact the following rights which are enshrined in the following Articles of the Charter of fundamental Rights of the EU (hereinafter: CFR):

– respect for private life, home and family life (Article 7 CFR);

– the protection of personal data (Article 8 CFR);

– the freedom to conduct a business (Article 16 CFR); and

– the right to property (Article 17 CFR).

A number of the measures impact those rights: citizens may have to file a declaration and provide personal data which will be recorded, processed and transmitted to other authorities; more information will be collected than under the current system; in cases of suspected criminal activity in relation to the sums carried, authorities may decide to detain the cash temporarily, thereby impacting the right to property.

Article 52 CFR specifies that any limitation of the recognised rights and freedoms must be provided for by law, respect the essence of the rights and freedoms, meet objectives of general interest recognised by the Union and be proportionate.

The current proposal establishes a legal basis and pursues objectives of general interest. It provides a number of safeguards as regards the use of the data, including the obligation for competent authorities (acting as controllers) to ensure the security of the data and to treat it according to the duty of professional secrecy, the purpose limitation and a specific retention period.

The measures strike a careful balance between the rights in question and the legitimate interests of society by taking an approach that is efficient (achieves the objective) but affects the rights as little as possible.

4. BUDGETARY IMPLICATIONS

The proposal has no significant implications for the budget of the European Union.

5. OTHER ELEMENTS

Implementation plans and monitoring, evaluation and reporting arrangements

The Commission would monitor the implementation of the Regulation and its application in close cooperation with the Member States. Continuous and systematic monitoring would make it possible to determine whether the Regulation is applied as expected and address problems in a timely manner. Factual data would be collected to monitor the suggested indicators (i.e. statistical information on registered declarations passed on to the Commission; controls in cases where a declaration is made; controls in the absence of declaration and the results of the controls; statistical information on penalties for non-declaration) and provide a basis for the future evaluation of the Regulation.

The proposal provides for the Commission to submit an evaluation report to the Parliament and the Council five years after the Regulation has entered into force and every five years thereafter. The evaluation will assess the extent to which the objectives of the Regulation have been met.

Detailed explanation of the specific provisions of the proposal

Article 1 sets out the objectives of the proposal and makes clear that the intention is to establish a parallelism with the AMLD when it comes to cross-external border cash movements.

Article 2 establishes a number of definitions, most notably what is meant by ‘cash’. In order to take account of changes in behaviour by criminals seeking to avoid the obligation to declare, it establishes four broad categories: currency, bearer-negotiable instruments, commodities used as highly liquid stores of value and prepaid cards. The components of the second, third and fourth categories are described in an Annex which can be amended by delegated act under supervision by the Council and the European Parliament. The rationale behind this approach is that criminals who seek to avoid having to declare currency sometimes convert it into precious commodities such as gold coins. If, as proposed, gold coins and high-purity bullion are controlled, criminals may seek other means of circumvention in the form of other commodities. It is imperative that measures to react to these behaviours can be taken quickly, should a demonstrable need arise. When considering amendments to the Annex, the Commission will weigh that need against ease of implementation in the field, where competent authorities need to have the technical means to quickly determine the nature of a commodity and its value, and the proportionality of the measure from a fundamental rights perspective.

Article 2 point (i) defines the term criminal activity by reference to the activities listed in Article 3 i of Directive (EU) 2015/849. Moreover, a definition of criminal activity for the purposes of the criminalisation of money laundering has been proposed (footnote proposal for a Directive on countering money laundering by criminal law COM (2016)826 final of 21 December 2016). After adoption by colegislators of the proposal for a Directive on countering money laundering by criminal law, the Commission will assess whether it will be necessary to revise Directive (EU) 2015/849 with a view to aligning the definition of “criminal activity” as reflected in the Directive on countering money laundering by criminal law.

Article 3 requires natural persons to declare sums of EUR 10 000 or more and specifies the manner in which the declaration shall be made (in writing or electronically, using the form laid down in accordance with Article 15(a)) and the data that will need to be provided.

Article 4 imposes a disclosure obligation for unaccompanied cash (such as cash sent in freight or parcel consignments), which will enable competent authorities, on encountering a cash shipment of EUR 10 000 or more, to exercise discretion and require the sender, intended recipient or their representative to make a declaration. This approach ensures that authorities can obtain full information without having to impose a systematic declarative burden, e.g. on shipments between recognised financial institutions. As is the case for declarations under Article 3, it is proposed that disclosure declarations be made in writing or electronically, using the form laid down in accordance with Article 15(a).

Article 5 confers control powers on the competent authorities and specifies that, in cases of infraction, where no declaration has been made, they will be empowered to establish an ex officio declaration.

Article 6 enables authorities to register details of movements of cash amounts below the declaration or disclosure threshold. Given the impact that this has on fundamental rights and especially in connection with the temporary detention of cash under Article 7, any action is subject to a sufficiently high threshold and requires indications of criminal activity. The AMLD definition of ‘criminal activity’ will apply (money laundering, terrorist financing or predicate offences such as fiscal crime).

Article 7 enables authorities to detain cash temporarily where a declaration or disclosure declaration should have, but has not, been made or — irrespective of the amount — where there are indications of criminal activity. The detailed arrangements for this detention are to be laid down in national legislation, but it is important to emphasise that it is a strictly conservatory administrative measure, the sole objective of which is to enable competent authorities to detain cash between the moment they detect an anomaly and the moment that other authorities, such as the FIU or judicial authorities, decide whether there are sufficient grounds to proceed with an enquiry and judicially seize or liberate it. Any such temporary detention has to be justified by reference to specific circumstances and shall be subject to an effective remedy according to national law. In cases where the competent authorities do not decide within the time limit laid down for the period of temporary detention or in case that they decide that there are no reasons to further detain the cash, the cash should be immediately made available to the declarant.

Article 8 requires the competent authorities to actively transmit the information obtained under Articles 3, 4, 5(3) or 6 to the FIU; merely making this information at the disposal of the FIU is insufficient. The information would need to be transmitted according to the technical rules laid down pursuant with Article 15(c).

Article 9 provides for the exchange of information between competent authorities, i.e. customs authorities and other authorities designated by the Member States for the purpose of applying the Regulation (e.g. border guards, fiscal authorities, etc.). Given the transnational nature of money laundering and terrorist finance and the fact that it is possible to enter or leave the Union via one Member State, then to circulate without encountering additional controls, it is imperative for purposes of risk analysis and prevention that information on infractions (failure to declare, ex officio declarations or indications of criminal activity) be made available to competent authorities in other Member States. Competent authorities should also be able to make this information available to other authorities that are charged with investigating criminal activity as defined in the proposal, but are not directly designated as ‘competent authorities’, e.g. the police or (for the purpose of detecting and acting on tax crimes) the fiscal authorities. The Commission should be notified of any indications of criminal activity which could adversely affect the financial interests of the Union. Anonymised risk analysis information and the results of risk analysis should also be exchanged between competent authorities in the same and other Member States where they determine that the threat present a high risk elsewhere in the Union. The information would need to be exchange according with the technical rules laid down pursuant to Article 15(c) and using the form laid down pursuant with Article 15(d).

Article 10 allows the exchange of information with nonEU countries, subject to the agreement of the authorities that originally collected the information and compliance with all national and Union provisions regarding the transfer of personal data to nonEU countries.

Article 11 specifies that the competent authorities who obtain data under this Regulation shall act as controllers of the personal data obtained and that all information obtained under the Regulation is covered by professional secrecy and must be adequately protected. Information can be disclosed only where national legal provisions allow, notably in connection with ongoing legal proceedings.

Article 12 restricts the processing of personal data for the purposes of the prevention and the combating of criminal activity. The article also lays down the retention period for declaration data and determines it to be five years.

Article 13 lays down penalties for non-compliance with the obligation to declare. A new element is the obligation on Member States to keep the Commission informed of any amendments to their penalty provisions after the Regulation has entered into force. Member States are free to determine the penalties, but any penalty applies only to failure to declare under the Regulation and should be effective, proportionate and dissuasive in that respect. When imposing a penalty for failure to declare, authorities should not assume or take into account the absence or presence of underlying predicate offences with regard to the undeclared cash. The penalty does not avert the need for a separate investigation into the possibility of criminal offences, which is outside the scope of the Regulation. In determining the penalties for failure to declare, Member States should take account of relevant jurisprudence from the Court of Justice of the European Union and the European Court of Human Rights.

Article 14 confers on the Commission the power to adopt delegated acts so as to enable it to amend the Annex, which lists the components of the definition of ‘cash’. Such flexibility is required in order to future-proof the Regulation and enable policy-makers quickly to react to new criminal trends and take account of evolving international standards and best practices. Any amendment will be subject to demonstrated necessity, a proportionate approach that ensures that competent authorities will be able, in practice, to enforce any additions, and oversight by the European Parliament and the Council, who have the authority to object after being notified of the adoption of such an act and may revoke the delegated authority at any time. Before adopting a delegated act the Commission shall consult Member States national experts in the field of cash control in order to obtain their input.

Article 15 confers implementing powers on the Commission to lay down measures to ensure the uniform application of controls by establishing, inter alia, the templates for declaration and disclosure forms; the technical rules for the exchange of information (which shall include the electronic system to be used) and the rules and the format for the provision by Member States to the Commission of anonymous statistical information on declarations and infractions.

Article 16 establishes a Cash Control Committee for which national experts will be designated by the Member States and which will assist the Commission in the establishment of implementing acts.

Article 17 concerns the provision of information to the Commission and specifies that Member States shall provide information regarding the competent authorities for the application of the Cash Control Regulation and the penalties laid down for failure to declare. Member States should also keep the Commission updated about any subsequent modifications. Anonymous statistical data should also be provided to the Commission at a frequency to de determined by implementing provisions but at least once per year.

Article 18 concerns measures of evaluation and specifies that a report shall be sent by the Commission to the European Parliament and the Council five years after the entry into force of the Regulation and every five years thereafter.

Article 19 repeals Regulation (EC) No 1889/2005.

Article 20 specifies that the Regulation shall enter into force on the 20th day following its adoption. Its entry into force shall take place as determined by the legislator.