EU policy on high-risk third countries
The EU (European Union) has played its part in new money laundering problems, and it took significant measures to defend itself against risks from outside–namely from ‘high-risk third countries’. According to the European Commission, so-called countries have strategic weaknesses in their national anti-money laundering/counter-terrorist financing systems (AML-CTF) that pose a major threat to the EU's financial system.
Opposition against previous EU high-risk third country list
An EU high-risk third-country list was previously released on February 13, 2019, but it attracted widespread objections, especially from the United States and Saudi Arabia, and the EU Council dismissed the list by March 7, 2019. Saudi Arabia expressed regret for the EU's decision to put it on the list; however, the United States went one step further in its reaction. The US Treasury Department shared "serious concerns" regarding the document, rejecting the addition of Guam, Puerto Rico, Virgin Islands, and American Samoa, and indicating that it did not expect US financial companies to include the Commission's list in their AML/CFT policy and practices.
Revised EU high-risk third country list
The European Commission revised its list of high-risk third countries in AML/CTF risk assessment on June 19, 2020. Issued in the Official Journal of the EU (OJ) by Commission Delegated Regulation (EU) 2020/855, the list of high-risk third countries has critical AML/CTF weaknesses as specified in the Fourth Money Laundering Directive (4MLD). With 4MLD, the European Commission is required to compile a list of those high-risk third countries from time to time, and controlled companies are required to exercise improved due diligence in transactions or commercial partnerships with customers based in those countries.
The Delegated Regulation modifies the list of high-risk third countries with a written high-level political promise to fix strategic AML/CTF weaknesses and created a plan of action with the Financial Action Task Force (FATF).
The new EU high-risk third countries list is as follows:
EU policy for the identification of high-risk third countries and the revised path in strengthening its AML-CFT system
The EC has unveiled a new clear policy for identifying high-risk third countries that pose a danger to the EU's financial system in the light of the updates to the high-risk third country list. The improved policy is expected to strengthen the EU's interaction with third countries and the FATF. In addition to requiring collaboration with experts from the Member States, the policy is supposed to ensure close cooperation with the FATF and its listing system. The new policy was adopted as part of a "wide-ranging and detailed" Action Plan for a Comprehensive EU Policy on Money Laundering and Terrorist Financing.
The Action Plan outlines the European Commission's actions in the coming months to combat money laundering and terrorist financing in the EU. According to the Action Plan's core components, the EU must place itself as a pioneer in the battle against AML/CFT operations, which is focused on maintaining closer coordination with the FATF and updates to its policy. From 2018 to 2025, the European Commission has proposed further reviews of its frameworks and is considering additional steps to improve its AML/CFT capabilities. Several high-profile incidents have revealed flaws in the EU's AML/CFT mechanisms, and these measures demonstrate the EU's contribution to eradicating these practices from the bloc.
Implications for high-risk third countries
Countries that are on the list are subject to improved consumer due diligence (CDD) tests by banks, finance companies, as well as other “obliged entities” under EU AML regulations, according to Article 18 of the 4th Anti-Money Laundering Directive. As a result, affected companies need to prove that their AML processes and practices are updated and fully functional. An "obliged organization" must take appropriate precautions to recognize and evaluate the risks of money laundering on its company before defining and maintaining rules and procedures to handle successfully and minimize those risks concerning any qualifying transactions.
However, due to the current COVID-19 pandemic, the Regulation has a waiting period to provide stakeholders enough time to plan improved CDD protocols in newly listed jurisdictions. The time allocated to companies is coming to an end; thus, they must now have processes to deal with the changes.
Critical considerations for the companies that are under the EU list
Firms should re-evaluate their orientation and training and continuing due diligence processes for clients based in the recently introduced countries to ensure that they comply with the improved due diligence criteria. According to the regulations outlined in 2017 by The UK Money Laundering, Terrorist Financing and Transfer of Funds, looking for different independent, decent sources to verify information provided and enhance the monitoring of the commercial relationship, including more vital inspection of transactions.
Companies are supposed to provide that they do not base themselves on third parties among high-risk third countries on the list to carry out due diligence steps.
If there are links between clients or transactions to the newly listed countries, companies may be stopped from doing more straightforward customer due diligence, which is restricted to client relationships and transactions posing a small amount of risk.
Companies may consider adjusting their due diligence measures based on a risk-based strategy for clients located in countries that have been omitted from the list.
Businesses should consider updating and providing AML/CTF instruction to their related employees to represent these new requirements.