By Bob Lyddon, IBOS

Introduction

In February 2012 the Financial Action Taskforce issued the latest round of its “International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation”. To respond to that and prepare the way for adoption of these recommendations in EU Member States, the European Commission issued under ref 2013/0025 its proposal for an EU Directive on “the prevention of use of the financial system for the purpose of money laundering and terrorist financing”.

Being an EU Directive, it has then to be transposed into Member State law, and then further interpreted by the financial supervisor of the Member State, and then also by the Compliance department of each “obliged entity” (aka bank).

At each level there is no penalty for an excess of zeal in interpretation, meaning that what is permitted at the Directive level may be discounted in national law, or supervisor or bank-specific implementation.

At first glance the very thickness of the papers appears to presage another turning of the screw on international banking.

In the tent or outside?

Current EU AML legislation divides the world into EU/EEA and equivalents, and the rest. It is possible with some difficulty for residents of “EU/EEA and equivalents” to get bank accounts and services in different countries in the EU and EEA where they count as a non-resident. It has become all but impossible for residents of countries outside the tent to get normal banking services inside the tent, because the documents of proof of identity, beneficial ownership etc are issued by entities that cannot be relied upon by the EU/EEA bank.

Instead the customer would have to have those documents translated, notarized and apostiled in their own country, and passed to a lawyer in the country of the bank, who would then confirm their authenticity to the bank.

The countries defined by the EU currently as “equivalents” are limited to the whitelist of Australia, Brazil, Canada, Hong Kong, India, Japan, South Korea, Mexico, Singapore, Switzerland, South Africa and the USA.

Main proposals in 4AMLD

A main step in 4AMLD is the retirement of the EU Whitelisting procedure in terms of a list of countries, to be replaced with a definition of what sources of information a bank can rely on. The sources include the subsidiaries and branches outside the EU of banks that count as an “obliged entity” under 4AMLD. 4AMLD specifies that those subsidiaries and branches must work to the same standards as the “obliged entity” itself: in other words the “obliged entity” is not just that part of the bank that operates within the EU, but all of it worldwide.

The positive impact of this is that a warranty by, for example, a Spanish bank’s subsidiary in Chile can be accepted by (a) other subsidiaries and branches of the same bank (b) other “obliged entities” and their subsidiaries and branches, and this can be regarding any country, not just the ones previously on the whitelist.

4AMLD contains several examples of requirements for banks to verify information independently. It is important for customers that warranties from the customer’s bank can be relied upon by other banks, working within a long-standing and contractual framework, because otherwise it is hard to see how banks will get the comfort they need – other, that is, than by going down the route of translation, notarization and apostiling, with high legal fees and loss of time.

For example, 4AMLD requires that customers maintain records of their own Beneficial Ownership, rather than banks having to piece it together very time. That is all well and good, but it then says that banks cannot rely on data supplied by customers: it must be independently verified. How do you verify the data? Are there any reliable third-party databases that do not themselves use data supplied by customers or by other databases? Are we at risk of Data Laundering? i.e. data that is unreliable at source but is inserted into a database that is used by a second database that the third database regards as reliable.. and so the data becomes solid by being handed on.

One possible outcome of 4AMLD is a field day for lawyers, translators, notaries and makers of apostiles, on the basis that this is the traditional manner of demonstrating documentary bon fides to a foreign third-party. But the intermediaries whose business it is to pass the trust on between third-parties entities themselves fall within the scope of the Directive, such that lawyers inside the EU/EEA may not be permitted to rely on warranties from non-EU notaries and unrelated legal firms, unless that non-EU entity is a subsidiary or branch of the same lawyer. So, for example, if a lawyer in the EU is being asked to confirm the authenticity of papers from Argentina, it could not then directly rely on the notarisation and apostile from Argentina, unless the EU lawyer itself had an office in Argentina to issue it or confirm it. Then the third-party notary should warrant to the Argentinian office of the lawyer in the EU, who then warrants to its related lawyer in the EU, who can then give the warranty to the bank that it is permitted to accept: a lot mouths to feed, with time and money.

The possible good news

The possibility that banks within the EU can rely on the warranties, issued on behalf of customers, of their own subsidiaries and branches outside the EU, or of the subsidiaries and branches outside the EU of other EU banks, that structure appears to be legitimized by the Directive (although it can always be taken away at the levels of Member State law, financial supervisor or individual bank). The warranties could then be regarded as independent. This looks like the most reliable structure for getting the job done, and far quicker and cheaper than translation/notarisation/apostiling.

Secondly there are wider provisions for a risk-based approach and Simplified Due Diligence under certain circumstances and as long as tripwires are not fallen over on Beneficial Ownership and the involvement of PEPS (Politically Exposed Persons).

If frameworks can be created – or existing ones adapted – so that banks can apply Simplified Due Diligence to new customers when these are referred into them from a reliable source, then we have a workable way of continuing to offer international banking services to legitimate businesses. Otherwise customers from outside the tent may find themselves excluded from banking services inside the tent, meaning they are excluded from the marketplace.