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Britain’s Treasury recently launched a consultation regarding the implementation of the Fourth Money Laundering Directive (4MLD), a piece of EU legislation that took several years to agree, was finally passed in 2015 and should be transposed into member states’ domestic laws by June 2017.
However, on 5 July the European Commission published proposals to amend the agreed text of the 4MLD and suggested that the implementation date (including the as-yet-to-be-decided amendments) should be brought forward from June 2017 to a remarkably optimistic 1 January 2017.
This accelerated timetable will place member states and EU institutions under pressure to agree and implement the new provisions, which are a response to the terrorist attacks in France and Belgium and the ‘Panama Papers’ affair. The Commission will need to demonstrate that its proposals are not merely a response to a feeling that ‘something must be done’, but represent genuine solutions to problems encountered in the fight against money laundering and terrorist financing.
As originally agreed, the 4MLD reflects the 2012 revision of the Financial Action Task Force (FATF) 40 Recommendations. So, notwithstanding uncertainty over the shape and extent of the UK’s future relationship with the EU, Britain has an interest in implementing the provisions which it played a full part in negotiating in order to bring the UK’s anti-money laundering and counter-terrorist financing framework into line with the FATF standards. The UK will undergo its next FATF evaluation in 2018.
In any case, and as the Treasury consultation document itself makes clear, despite the verdict of the Brexit referendum, the UK remains legally obliged to transpose the Directive as long as the country remains a member of the EU. As things stand, the UK will remain an EU member until at least 2019. The government fully intends to do this – it plans to replace the UK’s own Money Laundering Regulations 2007 before the deadline date of 26 June 2017.
The announcement by Prime Minister Theresa May at the Conservative Party Conference that her government intends to introduce the so-called Great Repeal Bill to annul the automatic effect of EU legislation inside the UK merely illustrates this point. By transforming EU legislation into British legislation, the wording of the Directive will remain the basis for UK law once the country has left the EU. However, the UK faces a dilemma over the proposed amendments, some of which it will find difficult to agree.
The Commission has proposed, among other things, to revisit some of the provisions of the 4MLD as they relate to counter-terrorist financing, such as new requirements relating to digital currencies and pre-paid cards being potentially misused by terrorists.
The proposals seek to lower the transaction threshold requiring users of these cards to identify themselves at the much more stringent €150 from the €250 originally agreed in the text. However, there is no empirical proof that the original threshold is inadequate, since the Directive has yet to be transposed into member states’ law. In an extensive Impact Assessment on the proposed amendments, the Commission relies on evidence of the use of pre-paid cards in recent terrorist attacks in Europe as proof that the requirements should be made more onerous.
Furthermore, the ‘Panama Papers’ affair prompted the Commission to look again at aspects of the text relating to transparency and beneficial ownership. This includes wider provisions in relation to trusts.
The UK opposed the establishment of central registers of trusts during the negotiations on the 4MLD and believes that there are genuine privacy concerns relating to family trusts that outweigh the benefits of disclosing beneficiaries (an argument the UK has had for many years with civil law jurisdictions, and on which it so far has managed to hold the line).
On the other hand, the UK has already implemented a registry of beneficial owners of companies, in advance of the requirements of the 4MLD, but the proposed amendments lower the percentage thresholds for ownership-reporting the UK has put in place.
The UK’s initial response to the amendments is outlined in a note from the Economic Secretary to the Treasury, Simon Kirby. The note states that a large number of member states have expressed concerns about the expedited transposition date and that it may be liable to change. The lengthy Impact Assessment is criticised for a lack of quantitative detail on some of the proposals. It is possible the government will seek to use the lack of detailed information on the costs of some of the measures to argue that they are not demonstrably proportionate or risk-based and should therefore be changed to more acceptable provisions. However, the note does welcome at least some of the proposals, particularly in areas where the UK is already ahead of the curve, such as public registries of beneficial ownership of companies.
Where the proposals go beyond current UK policy, the note expresses concerns. In addition to the areas noted above, these include the introduction of a central mechanism for the identification of the holders of bank accounts. The UK believes that there is already an adequate system in place here for identifying bank account holders (such as through the use of credit agencies) that has stood the test of time and the fire of live terrorist investigations.
In short, in a period prior to, and potentially after, invoking Article 50, the UK is faced with negotiating on some unwelcome proposals, which are presented as being imperative in the fight against terrorist finance or in the cause of greater transparency.
It is not necessary for the UK to implement such proposals to meet the FATF Standards. However, it may be necessary to do so in order to achieve future equivalence with EU standards from outside the bloc, a possible factor in single market access. It will be a test of the UK’s influence and resolve post-Brexit vote to find a satisfactory solution to this dilemma.