European Union Directives on Money Laundering

European Union Directives on Money Laundering The European Union AML Directives are issued periodically by the European Parliament and implemented by member states as part of domestic legislation. The Directives are intended to prevent money laundering and terrorist financing and establish a consistent regulatory environment across the European Union, while allowing some flexibility based on local law. This is done by addressing the emerging money laundering and terrorist financing typologies, helping to close AML compliance gaps. First Directive The EU’s First Directive of the European Parliament and of the Council, On Prevention of the Use of the Financial System for the Purpose of Money Laundering (91/308/EEC), was adopted by the Council of the European Communities in June 1991. Like all directives adopted by the Council, it required member states to achieve the specified results, by amending national law, if necessary. This First Directive required members to enact legislation to prevent their domestic financial systems from being used for money laundering. The unique nature of the EU as a community of states makes it fundamentally different from other international organizations. The EU can adopt measures that have the force of law even without the approval of the national parliaments of the various member states. In addition, European law prevails over national law in the case of directives. In this respect, EU directives have far more weight than the voluntary standards issued by groups such as the Basel Committee and FATF. Of course, the Directives apply only to EU member states and not to other countries. The First Directive confined predicate offenses of money laundering to drug trafficking, as defined in the 1988 Vienna Convention. However, member states were encouraged to extend the predicate offenses to other crimes. Second Directive In December 2001, the EU agreed on a Second Directive (2001/97/EEC), which amended the First Directive to require stricter money laundering controls across the continent. Member states agreed to implement it as national law by June 15, 2003; however, only Denmark, Germany, the Netherlands, and Finland met the deadline, with Ireland and Spain complying shortly afterward. Other member states eventually followed. The following were the key features of the Second Directive: • It extended the scope of the First Directive beyond drug-related crimes. The definition of criminal activity was expanded to cover not just drug trafficking, but all serious crimes, including corruption and fraud against the financial interests of the European community. • It explicitly brought currency exchanges and money remittance offices under AML coverage. • It clarified that knowledge of criminal conduct can be inferred from objective factual circumstances. • It provided a more precise definition of money laundering to include: o The conversion or transfer of property with knowledge that it is derived from criminal activity or from participation in that activity, for the purpose of concealing or disguising the illicit origin of the property, or assisting anyone who is involved in the commission of the activity to evade the legal consequences of his action o Concealing or disguising the nature, source, location, disposition, movement, and rights with respect to or ownership of property, knowing that the property is derived from criminal activity or from an act of participation in that activity o The acquisition, possession, or use of property, knowing when it is received that it was derived from criminal activity or from an act of participation in the activity o Participation in, association to commit, the attempt to commit, and aiding, abetting, facilitating, or counseling the commission of any of the mentioned actions • It widened the businesses and professions that are subject to the obligations of the Directive. Certain persons, including lawyers when they participate in the movement of money for clients, were required to report to authorities any fact that might indicate money laundering. Covered groups included auditors, external accountants, tax advisors, real estate agents, notaries, and legal professionals. The Second Directive was a significant step forward because its applicability included many of the important financial centers of the world. It went well beyond similar standards issued by other organizations, such as the United Nations and even FATF. Third Directive A Third EU Directive, 2005/60/EC, On the Prevention of the Use of the Financial System for the Purposes of Money Laundering and Terrorist Financing, based on elements of FATF’s revised 40 Recommendations, was adopted in 2005. The EU expected the Third Directive to be implemented by member states by December 15, 2007. Although several countries did not meet this original deadline, the Directive was eventually implemented by all members. In line with FATF’s AML recommendations, the Third Directive extended the scope of the First and Second Directives by: • Defining money laundering and terrorist financing as separate crimes. The Directive’s measures were expanded to cover not only the manipulation of money derived from crime, but also the collection of money and property for terrorist purposes. • Extending customer identification and SAR reporting obligations to trusts and company service providers, life insurance intermediaries, and dealers selling goods for cash payments of more than €15,000 • Detailing a risk-based approach to CDD. The extent of due diligence that is performed on customers, whether simplified or enhanced, should be dependent on their AML/CFT risk. • Protecting employees who report suspicions of money laundering or terrorist financing. This provision instructs member states to “do whatever is in their power to prevent employees from being threatened.” • Obligating member states to keep comprehensive statistics regarding the use of and results obtained from SARs, such as the number of reports filed, the follow-up given to those reports, and the annual number of cases investigated, persons prosecuted, and persons convicted • Requiring all financial institutions to identify and verify (ID&V) the beneficial owner of all accounts held by legal entities or persons. “Beneficial owner” refers to the natural person who directly or indirectly controls more than 25 percent of a legal entity or person. The Third Directive applies to: • Credit institutions • Financial institutions • Auditors, external accountants, and tax advisors • Legal professionals • Trust and company service providers • Estate agents o • High-value goods dealers who trade in cash over €15,000 euros Casinos The scope of the Third Directive differs from the Second Directive in that: • It specifically includes the category of trust and company service providers. • It covers all dealers trading in goods who trade in cash over €15,000. • It expands the definition of financial institution to include certain insurance intermediaries. There were three main points of contention regarding the Third Directive: 1. The definition of PEPs: The Third Directive defined PEPs as “natural persons who are or have been entrusted with prominent public functions and the immediate family members, or individuals known to be close associates, of such persons.” Close associates must be identified only when their relationship with a PEP is publicly known or when the institution suspects there is a relationship. Finally, the Commission stipulated that persons should not be considered PEPs after one year of not being in a prominent position. 2. The Directive included lawyers among those professionals who are required to report suspicious activity. 3. The precise role of a comitology committee: The European Commission coined the term “comitology,” which means the EU system that oversees the implementation of acts proposed by the European Commission. Fourth Directive Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 On the Prevention of the Use of the Financial System for the Purposes of Money Laundering and Terrorist Financing took effect on June 26, 2015. Member states had two years from that date to adapt their national legislations accordingly. This Directive repealed the Third Directive and its predecessors. Differences between the Fourth Directive and its predecessors include the following: • Natural and legal persons trading in goods are covered to the extent that they make or receive cash payments of €10,000 or more (decreased from €15,000). • The scope of obliged entities was enlarged from just casinos to all “providers of gambling services.” • CDD should be applied for transfers of funds exceeding €1,000. New definitions for: o Correspondent relationship • o PEPs’ family members and persons known to be close associates o Senior management and others Tax crimes relating to direct and indirect taxes are included in the broad definition of criminal activity, in line with the revised FATF Recommendations. • An explanation of “financial activity on an occasional or very limited basis” was included. • The European Commission must submit a report every two years on the findings of the risk assessment of money laundering and terrorist financing affecting the internal market. • The EU executive is also in charge of identifying third-country jurisdictions that have strategic deficiencies with regard to AML and CFT (i.e., high-risk third countries). • Special attention is given to PEPs. In this regard, EDD should be applied to every PEP, whether the individual is a domestic or third-country citizen. The risk these people pose is for at least 12 months, and measures they are subject to must also be applied to their family members and their known close associates. • For groups (and their branches and subsidiaries), this Directive sets the criteria for adequate compliance related to CDD of third parties. • New requirements regarding beneficial ownership information were introduced, particularly for trusts and similar legal arrangements. Subject to data protection rules, this information must be held in central registers in each member state and must be made available to competent authorities, FIUs, obliged entities, and any person with legitimate interest. • Data in the statistics relevant to the effectiveness of systems to combat money laundering and terrorist financing were enlarged to include, for example, size and importance of sectors and the number of cross-border requests for information managed by FIUs. • Obliged entities that are part of a group are required to implement groupwide policies and procedures and take measures proportionate to their risks. Criminals and their associates who are convicted in relevant areas are prevented from holding management functions and indirectly controlling certain obliged entities. • With regard to penalties for breach of the provisions, the set of administrative sanctions and measures now ranges from “name and shame” to withdrawal of authorization. Pecuniary sanctions for natural persons are set to at least €5 million or 10 percent of the total annual turnover for entities. • An entire section of the Directive is dedicated to the rules for cooperation between member state FIUs, the European Supervisory Authorities and the EU Commission. • Because it is a directive and not a regulation, this legislative act gives some discretion to member states on the application of its provisions. • At the national level, the Directive requests that member states conduct an AML/CFT risk assessment and designate a responsible authority. Moreover, they must ensure that obliged entities take appropriate steps to identify and assess their own risks. Nonexhaustive lists of potentially lower and higher risks are provided for guidance in these risk assessments and are based on: o Customer risk factors, such as public administrations versus cash- o Risk factors related to products and services, transaction, and delivery intensive businesses channels, such as low premium insurance policies versus private banking o Geographical risk factors, such as member states versus countries subject to sanctions. Fifth Directive Directive (EU) 2018/843 On the Prevention of the Use of the Financial System for the Purposes of Money Laundering and Terrorist Financing was put in place on July 9, 2018. The Fifth Directive further strengthens the EU’s AML and CFT regime. It focuses on seven areas: • Beneficial Owners: The Fifth Directive requires that national registers of beneficial ownership (excluding trusts) be publicly accessible. Regulated entities are required to provide “adequate, accurate, and up-to-date” information on their beneficial owners. • Cooperation and information sharing between regulators: The Fifth Directive strengthens the cooperation and information sharing among financial supervisors across EU members. • High-risk third countries: Additional monitoring on high-risk third countries is based on: o Countries on the FATF list and on the EU list o Autonomous assessment of additional countries that identifies the risk profile and level of threat to which each country is exposed and assesses the legal framework and its effective application in eight areas: 1. Criminalization of money laundering and terrorism financing 2. Customer due diligence (CDD) requirements, record keeping, and reporting suspicious transactions 3. Designated nonfinancial businesses and professions have the same CDD, record keeping, and reporting obligations. 4. Sanctions should be effective, proportionate and dissuasive. 5. Countries must ensure effective supervision. 6. International cooperation 7. Information about the beneficial owners of a legal entity and legal arrangements must be available. 8. Implement targeted financial sanctions (UN) to suppress terrorism. The Fifth Directive added a streamlined EDD approach when transacting with high-risk countries, including: o Collecting additional information on the customer, the beneficial owner and the nature of the business relationship, including source of funds and source of wealth • o Obtaining approval of senior management for business relationships o Enhancing the monitoring of those entities, including obtaining information on the reasons for the intended or performed transactions Prepaid Cards: The Fifth Directive lowers the threshold when prepaid cards may be used anonymously to €150 from €250 when making in-store purchases and €50 when making purchases online. • Enhanced identification of PEPs: The Fifth Directive introduces more efficient ways to identify PEPs by publishing a list of prominent PEPs gathered from each member state and accredited international organizations. • Extended scope of sectors and persons subject to AML/CFT obligations: The Fifth Directive extends applicability of prior directives to the following sectors and persons: • o Estate agents o Auditors, external accountants, and tax advisors o Art traders o Custodian wallet providers Exchangers between virtual currencies (e.g., cryptocurrencies) and fiat currencies will be required to have AML/CFT controls and need to be licensed or registered, while being supervised and monitored by relevant authorities. Virtual-to-virtual currency exchanges do not fall under this supervision. Sixth Directive In 2024, the two EU co-legislators—the European Parliament and the Council— reached a provisional agreement on certain parts of the Sixth Anti-Money Laundering Directive (6AMLD). The 6AMLD was originally presented as a package of legislative proposals in 2021 by the EU Commission to strengthen the EU’s rules for AFC efforts. The 6AMLD replaces the EU’s prior AML legislative framework, which consisted of the Fourth Directive, 2015/849, and subsequent updates. The 6AMLD’s framework strengthens regulatory features by: • Establishing a central body, the EU AML Authority (AMLA) to provide supervision of all AML and CFT regulation efforts. • Requiring only EU’s national parliament approval for new AML regulations to go into effect. This means that member state approval is no longer required. The Sixth Directive also introduces a wider regulatory scope and tougher rules regarding an array of important AML topics, such as the listing of obliged entities, CDD efforts, identification of beneficial owners, and establishing a limit for cash-based transactions. The key features of the new Directive are: EU risk assessment: The frequency of the risk assessment that the Commission conducts is increased to four years. The assessment will be based on input from AMLA in the form of an Opinion. Registries for beneficial owners, bank accounts, safe deposit boxes, and real estate: The Sixth Directive sets forth new powers and resources to ensure verification of beneficial ownership information and to oversee compliance. It also requires member states to retain this information in a registry for five years. When submitting data to beneficial ownership registries, member states must flag any entities associated with persons or entities subject to targeted financial sanctions. The Sixth Directive grants access to beneficial ownership registries to supervisory and public authorities and obliged entities, as well as members of the public with legitimate interest, including the press and civil society. The Directive further requires that member states maintain an up-to-date electronic database of existing registries for bank accounts and safe deposit boxes. EU authorities must have access to these databases. Members states must also provide their criteria regarding which information is included in bank and real estate registries. The Directive also sets minimum requirements for financial intelligence units (FIU) and other authorities to access existing real estate registries. Moreover, authorities must have access to information on price, property type, history, and encumbrances such as mortgages, judicial restrictions, and property rights. Financial Intelligence Units: The Sixth Directive introduces new provisions regarding FIUs. These include: • FIUs’ operational independence • Available resources and security • Access to minimum categories of information, including taxes, funds and other assets frozen due to targeted financial sanctions, transfers of funds and cryptoassets, national motor vehicles, aircraft and watercraft registries, customs data, and national weapons and arms registries • Clarification of FIUs’ financial analysis functions • Clarification of FIUs’ powers to suspend bank accounts or financial transactions after receiving a suspicious activity report (SAR). • Feedback to customs authorities regarding the amounts of cash physically entering or leaving EU boundaries AML supervision by member states: The Sixth Directive provides clarifications and new requirements for supervision of AML regulations by EU member states. These include a requirement for member-state authorities to share information with obliged entities and new guidelines furnished by the new EU AML authority regarding risk-based supervision. The new directive also calls for the creation of an AML “supervisory college.” In this manner, regulators at the member-state level can coordinate their activities and provide cross-border credit when dealing with a bank or other financial entity that does business in numerous member-state jurisdictions. Regulatory cooperation: The Sixth Directive includes additional powers allotted to AMLA. Those powers include requiring banks and other financial entities, as well as regulatory authorities in EU member states, to cooperate with AMLA’s inquiries and investigations. The provisions also require the full cooperation of financial supervisors and FIUs to report their findings annually to AMLA. It is possible that additional provisions could be added that require auditors to also cooperate fully with AMLA investigations. Criminality enforcement: The Sixth Directive is complemented by the Criminal Law Directive, 2018/1673. This Directive makes the criminalization of money laundering more consistent across the EU, introduces comprehensive measures for consistent AML enforcement across EU member states, and aims to close legal loopholes and enhance cross-border collaboration. The directive includes a list of 22 money laundering offenses, addressing emerging threats such as cybercrime and environmental crime. Additionally, the regulations extend criminal liability to organizations, imposing penalties on both entities and individuals. The regulations also introduce stringent sanctions, including increased prison sentences, to emphasize the EU's commitment to combat money laundering effectively.