EU Commission publishes ‘controversial’ list of high-risk third countries

On 13 February 2019, the European Commission adopted its draft list identifying high-risk third countries with strategic deficiencies in their Anti-Money Laundering and Counter-Terrorist Financing (AML/CTF) regimes (Draft List). The Draft List, which demonstrates the Commission’s stricter approach in this area, was criticized by the US and Saudi Arabia and was unanimously rejected by the Council of the EU. As a result, the Commission will need to reconsider its position.

The Draft List

The Draft List aims to protect the EU financial system from money laundering and terrorist financing risks stemming from third countries with weak AML/CTF frameworks. Entities that are subject to the EU anti-money laundering regime, such as banks, must apply enhanced checks and due diligence measures when entering into financial transactions with customers involving financial institutions from the jurisdictions identified in the Draft List. In practice this means that doing business with entities from the relevant countries becomes significantly more difficult. To become effective, the Draft List also needs to be approved by the European Parliament and the Council.

The Draft List includes 23 jurisdictions with “strategic deficiencies” in their AML/CTF frameworks. Notably, the EU Commission has gone beyond the list published by the Financial Action Task Force (FATF), which is the global standard setting body in this area. In particular, the FATF has identified only 12 high-risk jurisdictions with strategic deficiencies. The Commission has further added Afghanistan, Iraq, Libya, Nigeria, Saudi Arabia, Samoa, Guam, Panama, Puerto Rico, American Samoa and the US Virgin Islands. According to the Commission, adding previously unlisted countries does not indicate a deterioration in the situation, since the last update. Rather, it results from a “more ambitious approach” to identifying high-risk third countries based on the stricter methodology set out in the Fifth Money Laundering Directive (MLD5), which came into force in July 2018. For instance, MLD5 introduces the obligation to review the availability of information on companies’ beneficial ownership.

This can also be seen as yet another attempt by the Commission to adopt a stricter approach to AML/CTF supervision, particularly following the recent money laundering scandals involving the EU banking sector. “We have established the strongest anti-money laundering standards in the world, but we have to make sure that dirty money from other countries does not find its way to our financial system,” said Věra Jourová, Commissioner for Justice, Consumers and Gender Equality. However, the Draft List was criticized, both within the EU and internationally.

The Council’s response

On 7 March 2019, the Council of the EU unanimously rejected the Draft List. The majority of delegates objected on the grounds that the Draft List “was not established in a sufficiently transparent way.” The Council concluded that it “cannot support the current proposal that was not established in a transparent and resilient process that actively incentivizes affected countries to take decisive action while also respecting their right to be heard.”

US and Saudi Arabia reaction

The inclusion of Puerto Rico, Guam, American Samoa and US Virgin Islands in the Draft List was heavily criticized by the US. The US Treasury Department raised “significant concerns” both about the substance of the Draft List, as well as the process of its adoption. It highlighted that the Commission’s list diverges “starkly” from the relevant FATF list, purportedly without reasonable support. According to the US Treasury Department, the EU Commission did not conduct sufficiently in-depth analysis and did not give affected states the chance to challenge its decision or address the identified issues.

The US Treasury Department further stated that “the commitments and actions of the US in implementing the FATF standards extend to all US territories” and that it “does not expect US financial institutions to take the European Commission’s list into account in their AML/CFT policies and procedures.” Saudi Arabia also expressed its regret about its inclusion the Draft List, highlighting its recent efforts to combat money laundering and terrorist financing. In its mutual evaluation report for Saudi Arabia of September 2018, the FATF also recognized that Saudi Arabia has taken significant steps to strengthen its AML/CTF framework, despite the remaining issues.