Money laundering is the primary danger to the stability of any market, and the European Union (EU) is not an exception. How it negatively affects the economy and the market is through distortions deriving from the legalization of the money gained from illegal business activities. The European Union fights this problem by adopting laws and regulations.
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One of the examples of such regulations is the package of anti-money laundering and counter-terrorist financing laws including the Fourth EU Anti-Money Laundering Directive. Its full name is Directive (EU) 2015/849 of the European Parliament and the Council on the prevention of the use of the financial system for money laundering or terrorist financing (“Directive (EU) 2015/849 of the European Parliament and the Council” 73). It was published on 20 May 2015, and on 26 June the same year entered into force. The governments of the EU member states are expected to bring their national legislation into compliance with the provisions of the Directive within the next two years, before 2017.
This Directive is fourth of a kind, and it amends the previous Directive of 2005. For this purpose, it is referred to as the Fourth EU AML Directive, and the previous version is hence known as the third EU AML Directive. It was adopted after the two years of fierce debate on the necessity to strengthen the EU anti-money laundering and counter-terrorist financing system. Initially, the need to implement this legislation was empowered by the Financial Action Task Force (FATF) established in 1989.
It was the authority apparatus that recommended the adoption of the First Directive in 1991 and provoked its revisions up to this version. The motivation for the update is that the financial environment and the ways of illegal activities aimed at money laundering and financing terrorism constantly change, that is why regulations guaranteeing its safety and stability should be revised and updated on a timely basis (Hutton par. 9).
The Fourth EU Anti-Money Laundering Directive offers some new provisions. For example, it sees the protection of the financial system and market stability through using the risk-based approach that implies the assessment of risks of money laundering and terrorist financing at all levels – local, national, and European. Risk assessment at the local and national levels should be conducted by the authorized organs of the national government of the European Union member states.
As of the European level, it lies in the hands of the European Commission (“Directive (EU) 2015/849 of the European Parliament and the Council” 76). The primary objective of this comprehensive approach is to diminish the risk of money laundering and financing terrorism, thus guaranteeing the safety of the EU financial sector. It should be noted that the approach is individual for every country because it is based on the primary manufactured goods and provided services, geographical location, and the potential transaction and delivery channels of the illegal finance (Berglin et al. par. 13).
What is even more crucial is that such a risk-assessment policy should be implemented in every obliged entity. That means that each of these entities is obliged to make sure that each transaction it makes is safe and bears no threat to the stability of the EU financial sector. This step can meet some hardships in implementation, as it requires overall awareness and appropriate levels of skills of every employee. Together with that, the stress is made on the fact that if the provisions are softer than the national legislation, then these are the national laws that should be applied to developing the mechanism for risk assessment and bringing it to life (Coppini par. 50), so, the primary attention is focused on the safety of the financial sector.
Second, the Directive proposes the update of the due diligence principle through the know-your-customer concept. This provision rests upon the various verification procedures and imposing limits on the customer’s operations with the electronic funds. The primary idea behind it is that if the entity knows its customer together with the family members, the customer’s interests and needs, and monitors the expenditures, it will guarantee the protection of the EU financial sector and diminish the risk of money laundering and financing terrorism (“Directive (EU) 2015/849 of the European Parliament and the Council” 74).
The point here is that this process of monitoring is based on numerous limitations to the customer’s freedom in using electronic financial services. For example, it can be used only for paying for goods and services and the sum of the purchase should not exceed the established level of EUR 250 (“Directive (EU) 2015/849 of the European Parliament and the Council” 91). Similar steps will help ensure the system or, at least, track the source of the potential threat. The only challenge left is the cash sector.
Next, the EU AML Directive introduces the use of relevant thresholds. This step is about imposing limits on cash payments and electronic transactions. That said, the Directive prohibits making or receiving cash payments of more than EUR 10,000, (“Directive (EU) 2015/849 of the European Parliament and the Council” 74). It is believed that the mentioned sums cannot be used for money laundering or financing terrorism, however, it is strongly recommended that the member states establish even lower levels of limitations because this is the level for the European Union. It is also stressed that special attention should be paid to consecutive operations conducted by one person or the operations that seem interconnected because this step will help reduce the risks of operations aimed at legalizing illegally earned money.
Furthermore, the Directive stresses the necessity of data protection and access to personal data when it is necessary to the bodies of authority. It implies that personal data including all information about the client and the transactions will be kept for five years and then deleted unless provided otherwise by the national legislation (“Directive (EU) 2015/849 of the European Parliament and the Council” 79). It should be noted, however, that there is the possibility of extension for another five years in case if there is a suspicion of the individual’s involvement in money laundering and financing terrorist activities. What is also special about this Directive is that it mentions tax crimes as a potential way of money laundering and financing terrorism, however, does not specify them (Hutton par. 16).
Another innovation introduced by the EU AML Directive is the novelty of administrative sanctions. They are imposed for failing to follow the provisions of the Directive. For example, the entity can be charged if it does prove the financial regulators with the necessary information about the clients who exceed the established sums of transactions mentioned above or the suspicious cases and activities (“Directive (EU) 2015/849 of the European Parliament and the Council” 81-82). This regulation can be referred to as the ‘name and shame’ approach because the local authorities have the right to issue the public statement containing the name of the law-breaker, the reason for the sanction, and the institution that did not provide the information about the breach (Coppini par. 53).
Finally, the Fourth EU AML Directive introduces the novelty of the Central Register of the customers. The document says that the obliged entities should provide the information that will be available to the central governmental authorities, financial institutions and regulators, and other subjects of the Directive, The minimum volume of information should include name, date of birth, nationality, residency, and the interest in transactions (“Directive (EU) 2015/849 of the European Parliament and the Council” 75). It will keep the data for five years as was already mentioned above, and then it will be deleted.
Bearing in mind everything that was said about the Directive provisions, it can be said that obliged entities will undoubtedly feel its impact. First of all, it should be said that the range of obliged entities is wide from financial institutions and banks to accountants and auditing companies (“New EU Anti-Money Laundering Directive to Come into Force from 26 June” par. 3). They face the challenge of improving the skills and the overall awareness of their employees so that they bring the risk-assessment approach to life. Second, these entities may find the lowering of the threshold disadvantageous.
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Finally, they are forced to spend additional time and money on inserting the data to the Central Register that might not always be greeted by the customers (“4th EU AML Directive: The Point of View of the European Banking Federation” 17), so, it might lead to the decrease in their amount, at least, during the initial phases of the Directive’s provisions embodiment. It is especially true in the case of banks because the clients value confidentiality above all.
As of the consequences the Anti-Money Laundering Directive will have on the banks, the primary source of these effects will lie in the provision implying the need for transparency and creating Central Register. It is not a secret that what many clients value in their banks is their right to confidentiality that will not be kept under these regulations, and it is one of the primary challenges faced by the banks. Of course, the information passed to the Central Register will not crucial, however, it will include residency that is not always greeted to be revealed, especially in the case of the residents to third states.
In addition to that, I believe that imposing limitations on the transaction cannot be applied to the banking sector because the sums mentioned above are laughable for big purchases, for example. Of course, this measure may have sense, but in most cases, to my mind, it will just become the source of unnecessary work because the banks will spend plenty of time adding the information about the client and the interest in the transaction to the Central Register. I am strongly inclined to believe that there was no real need to reduce the limit of one transaction from EUR 15,000 to EUR 10,000. What, instead, should have been done is the offer of the mechanism for defining the linked operations that might witness the threat of money laundering.
On the other hand, what may seem negative or disadvantageous to the banks, will be of great benefit to external bank auditors. The demand for transparency in transactions and the interest of the customers can help reveal whether the banking institution has conducted some hidden operations of had the problems with following the regulations and the national legislation. Nevertheless, some problems might emerge because not all banks will willingly provide information about their clients to the Central Register.
That said, some banks might find it more beneficial to hide the customers’ data for the special reward. It should be noted that it might be especially true in the case of the real money laundering activities because, I think, those people who have nothing to hide will not care in the bank passed that personal data to the authorities for their limited use. That means that this demand for transparency and access to personal data might lead to a higher level of corruption and worsen the situation of making the illegally earned money legally. However, it is only true in the case of the banks involved in suspicious operations.
In the case of the banks that follow all the regulations and do not infringe the legislation, the new Directive will have a positive impact on the internal audit activities. First of all, it will help assess and minimize the risks of money laundering and save the bank from penalties for hiding similar information from the government and financial regulators. Second, it will help them know their customers better, as they will document every detail more carefully, so, it will add to the level of customer satisfaction in the banking services. Third, it requires a higher level of skills and awareness in detecting suspicious activities, and that means that the employee will gain additional knowledge and experience to meet the requirement.
It should be noted that the banks might face particular challenges in following the regulations concerning the audit. For example, they might need to buy software for conducting auditions, train their staff or even involve the external auditors to help in reaching all the Directive’s requirements. However, it is costly only in the short run. Instead, in the long term, it will become the source of unlimited benefits for the banking institution because it will prove that it is thorough in its activities and protect its operation as the institution that keeps to the legislation and strives for the stability of the financial sector of its economy.
In conclusion, I would like to say that even though the AML Directive will face certain challenges, its impact on precluding money laundering cannot be underestimated. First of all, the mentioned provisions, if thoroughly implemented, will undoubtedly minimize the risks of money laundering because they will establish an effective system of prevention and control. Moreover, it could help trace the origins of the threatening activities and those involved not only through creating the Central register but also by saving personal data and making the banking institutions cooperate with the government because of the possible administrative sanctions.
4th EU AML Directive: The Point of View of the European Banking Federation. 2015. Web.
Berglin, Mathilda, Maike Kronbichler, Dirk Queisner and Rosa Hultvall. Finalization of the Fourth Anti-Money Laundering Directive. 2015. Web.
Coppini, Stephanie J. The Proposed Fourth Anti-Money Laundering Directive: What Has Changed? . 2015. Web.
“Directive (EU) 2015/849 of the European Parliament and the Council.” Official Journal of the European Union L141 (2015): 73-117. Web.
Hutton, Ilana. “Fourth Anti-Money Laundering Directive.” Criminal Law & Justice Weekly 179.25 (2015). Web.