EU Releases List of High-Risk AML/CTF Third Countries and Revised Identification Methodology

Updated: May 11



Under the Anti-Money Laundering Directive (AMLD), the European Commission is legally required to identify high-risk third countries that have strategic deficiencies in their anti-money laundering and countering terrorist financing (AML/CTF) regime. In that respect, the Commission adopted a new regulation in regard to third countries having strategic deficiencies in their AML/CFT regimes that pose significant threats to the financial system of the European Union. This includes the publication of an updated list of high-risk third countries and a corresponding revised methodology for identifying high-risk third countries, scheduled to come into effect on October 1, 2020.


High-Risk Third Country List

On May 7, 2020, the European Commission released an updated list of identified high-risk third countries. The purpose of a high-risk third country list is threefold:


  1. To protect the integrity of the European Union's financial system and internal market from being used in furtherance of money laundering and terrorist financing. This is accomplished through the application of enhanced due diligence measures by obliged entities.

  2. To reinforce internal security.

  3. To promote sustainable development.


Enhanced due diligence (EDD) measures must be applied in any transaction or business relationship with a person established in a high-risk third country appearing on the list. The European Commission’s original list of high-risk third countries was first published in July 2016 and contained 16 countries. It was later amended three times: October 2017, December 2017, and July 2018. The May 2020 revision is the fourth revision and is in line with the broadened criteria of the EU's 5th Money Laundering Directive. The current list contains a total of twenty-two jurisdictions considered to be high risk.


Twelve jurisdictions were added to the latest list:


  1. Bahamas,

  2. Barbados,

  3. Botswana,

  4. Cambodia,

  5. Ghana,

  6. Jamaica,

  7. Mauritius,

  8. Mongolia,

  9. Myanmar,

  10. Nicaragua,

  11. Panama, and

  12. Zimbabwe.

Six jurisdictions were removed from the list:


  1. Bosnia-Herzegovina,

  2. Guyana,

  3. Lao People's Democratic Republic,

  4. Ethiopia,

  5. Sri Lanka, and

  6. Tunisia.


High-Risk Third Country Methodology

On May 7, 2020, the European Commission also published a revised EU methodology for the identification of high-risk third countries, which replaces the prior, June 2018, methodology. The methodology is applicable to any third-country jurisdiction. It was originally developed in order to ensure a fair and transparent process regarding the identification of high-risk third countries. The revised methodology is meant to provide additional clarity and to ensure an increased engagement with third countries. It describes the main steps, assessment criteria, and follow-up process.


The three main elements of the methodology include:


  1. The interaction between the EU and the Financial Action Task Force (FATF) Third countries listed by the FATF will, in principle, also be listed by the EU. For countries de-listed by the FATF, the European Commission services will assess whether the FATF Action Plans for a delisting are sufficiently comprehensive also in view of an EU delisting.

  2. Autonomous assessment by the EU The criteria used for assessing third countries’ AML-CFT regimes are defined in Article 9 of AMLD. In this context, the Commission services will assess the level of threat and the vulnerability of the country’s AML/CFT regime.

  3. Consultation of Member States experts and reporting Member State experts will be consulted at every stage of the process regarding the assessments of third countries.


Criticisms

The EU has the strongest anti-money laundering standards in the world. The updated list of high-risk third countries is another attempt by the Commission to adopt an even stricter approach to AML/CTF supervision, especially in light of the recent money laundering scandals involving the EU banking sector. However, the list is not without criticism, from both inside and outside the EU. This includes both the United States and Saudi Arabia, who heavily opposed the prior draft list.


Most notably, the Commission's draft list has been criticized in the past for the process used (i.e. not providing sufficient transparency) and method of adoption (i.e. not giving affected states the chance to challenge the Commission's decision or address the identified issues), as well as for the fact that it diverged significantly, and without reasonable support, from the relevant list published by the Financial Action Task Force (FATF), which is the global standard setting body in this area. The Commission's latest version of the list has been updated to address these issues.


Final Thoughts

Although applicable to countries subject to the AMLD, the European Commission's list of high-risk third countries and corresponding methodology may be more broadly useful to others outside the EU, particularly now that it is more in line with FATF standards. For example, financial institutions subject to Bank Secrecy Act (BSA) requirements may find the list and methodology to be useful in the assessment of high-risk jurisdictions and in the development or revision of their own risk-based policies and procedures.


Resources

A link to the list of high-risk third countries can be accessed here.


A PDF document of the 60-page Methodology for Identifying High-Risk Third Countries is available here.


A PDF document of the European Commission's 16-page Delegated Regulation is available here.


#AML #CTF #moneylaundering #AMLD #FATF #riskassessment #riskmanagement

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