Revised anti-money laundering blacklist on the way

The EU is revising its list of countries at high risk of money laundering as part of a renewed drive to tackle corruption, and CFOs will soon be required to adhere to enhanced due-diligence requirements when conducting transactions with these countries.

The revised blacklist was originally published by the European Commission in February. While its previous list included 16 countries and territories, February’s has 23. Saudi Arabia, Panama, and four US territories — American Samoa, Guam, Puerto Rico, and the US Virgin Islands — were among the new names. This drew a swift rebuke from the US and others on the list.

The European Council ordered the commission in March to make a new list and use a clearer set of criteria for the blacklist of countries to which the new rules will apply, although there is no specific timetable for it to do so. Věra Jourová, the EU’s justice commissioner, recently told the Financial Times that the commission will release new criteria for the list in October.

Although the commission is still revising the blacklist for which the new checks will apply, finance departments should not wait to see what comes next, said Marcus Thompson, a London-based partner in the Government & Internal Investigations Group of UK-based law firm Kirkland & Ellis.

Changes due by January 2020 in the EU will require companies to expand the range of information they must collect about their clients and the instances in which they must do so. However, finance professionals will have to wait for the updated version of the blacklist to find out which countries are to be subjected to increased scrutiny.

However, simply complying with the new standards for the listed countries will not be enough to eliminate the risks companies face from money laundering.

“A proper risk-based approach means doing more than looking at lists of countries and being a little extra careful with the risky ones,” said Thompson. “That’s too binary. There are high-risk clients in low-risk countries.”

For companies, the risks of being caught facilitating money laundering include criminal investigations, reputational damage, and leadership churn. Danske Bank in September 2018 accepted the resignation of CEO Thomas Borgen following a money laundering scandal and eventually shut its branches in the Baltic countries. In March 2019 Swedbank fired its CEO, Birgitte Bonnesen, after similar accusations and accepted the resignation of chairman Lars Idermark.

Prem Sikka, a professor of finance and accounting at the UK’s University of Sheffield, agrees that it is important to consider making extra checks for clients in countries that are not traditionally seen as tax havens or hubs for illicit financial flows. “The banking system in a country with a developed financial system is inevitably a magnet for people who want to cleanse their money,” he said.

Increased scrutiny over money laundering adds yet another layer of political risk for corporations and investors in the global economy.

Under the Fourth Anti-Money Laundering Directive enacted in June 2015, banks and other financial institutions operating in Europe were obliged to apply extra checks for transactions involving countries on the blacklist to prevent, detect, and disrupt suspicious transactions.

The Fifth Anti-Money Laundering Directive (AMLD5) — which was adopted by the European Parliament in April 2018 — specifies the extra vigilance required for countries on the list, which includes “obtaining additional information on the customer and on the beneficial owner or obtaining the approval of senior management for establishing a business relationship”, said the EC.

EU member states will be expected to meet the stricter standards set by the AMLD5 by January 2020, and they will apply to a greater variety of corporations. Along with financial services firms, art dealers, digital currency exchanges, and electronic commerce companies will be required to make the same checks under the new compliance obligations.

Money laundering remains a major issue worldwide. Exact figures are impossible to establish due to the illicit nature of the activity, but the amount of money laundered annually is estimated to be equivalent to 2% to 5% of global GDP by the UN Office on Drugs and Crime — or between $800 billion and $2 trillion.

In 1989 the Group of Seven (G-7) countries established the Financial Action Task Force to combat money laundering, and it conducts in-country evaluations of state-level controls over financial flows. It also maintains its own list of high-risk jurisdictions, which currently has 12 names on it.

The problem has persisted despite these efforts, and some are unconvinced by the efforts to tackle it.

“There may be more forms to fill out and more regulations to follow, but things remain the same,” said Sikka.

— Matt Mossman is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.