News

European banks must conduct more rigorous screening of clients from Saudi Arabia, Panama and Tunisia following the inclusion of those and 20 other nations on a list of non-EU jurisdictions with poor controls against money launderers and other financial criminals.

The blacklist, mandated by the European Union’s Fourth Anti-Money Laundering Directive two years ago, was published Wednesday by the bloc’s executive branch, the European Commission, following evaluations of 54 “priority jurisdictions” against standards finalized last year.

“This will help better address risks stemming from the setting up of shell companies and opaque structures which may be used by criminals and terrorists to hide the real beneficiaries of a transaction,” the Commission said Wednesday. EU banks must observe the list in the same manner as a separate list of high-risk nations kept by the Financial Action Task Force, or FATF.

But the appearance of American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands on the EU list drew immediate condemnation from the U.S. Treasury Department, which described the Commission’s methodology as superficial and opaque in comparison to FATF’s “thorough methodology.”

“Treasury has significant concerns about the substance of the list and the flawed process by which it was developed” and “does not expect U.S financial institutions to take the European Commission’s list into account in their AML/CFT [combating the financing of terrorism] policies and procedures,” the department said in a statement Wednesday.

Nigeria, Iran, North Korea, Afghanistan, the Bahamas, Botswana, Ethiopia, Ghana, Iraq, Libya, Pakistan, Samoa, Sri Lanka, Syria, Trinidad and Tobago, and Yemen also appear on the EU list.

Jennifer Hanley-Giersch, managing partner at Berlin Risk, said the list will force European banks to recalibrate their risk management frameworks and categorize more countries as high-risk, including jurisdictions to which the bloc has considerable exposure, such as Tunisia, Nigeria and Saudi Arabia.

“It basically means they’ll have to do more in-depth due diligence before engaging in a business relationship,” Hanley-Giersch said, adding that European banks will also have to reconsider their provision of correspondent services to financial institutions in newly blacklisted nations.

The EU list includes 10 jurisdictions not considered high-risk by FATF.

Its issuance marks a departure from Europe’s favored risk-based approach, according to Annechien Daalderop, an attorney with NautaDutilh in Rotterdam, the Netherlands.

“A client can be based in Panama for business reasons or to create a corporate or tax structure, as such there is still room to determine which cases require enhanced due diligence,” Daalderop said. “But it does seem like somewhat of a return to a tick-box approach to always require enhanced due diligence in case of involvement of such a country.”

Transatlantic rift

EU officials outlined their methods for populating the list of countries with “strategic” anti-money laundering deficiencies in June after European lawmakers rejected a previous list for simply duplicating the one already kept by FATF.

The EU list draws on intelligence assessments, international evaluations and the Commission’s own set of eight criteria for measuring a jurisdiction’s corporate transparency, recordkeeping and suspicious-transaction-reporting rules, and efforts to criminalize money laundering and terrorist financing in line with global standards.

The frequency with which nations share accurate data and cooperate with financial-crime investigators from EU nations also factored in to the list, which the Commission modified several times since publishing the first draft in September 2016.

EU officials added American Samoa, the Bahamas, Botswana, Ghana, Guam, Libya, Puerto Rico, Panama, Samoa, the U.S. Virgin Islands, Nigeria and Saudi Arabia to the latest version and removed five others—Bosnia and Herzegovina, Guyana, Laos, Uganda, and Vanuatu.

Unlike FATF, however, the European Commission does not publish its assessments of national AML frameworks. According to U.S. officials, the policy gives jurisdictions scant information on the reasons behind their inclusion and no “meaningful opportunity” to challenge it.

Tom Keatinge, director of financial crime and security studies at the Royal United Services Institute in London, said U.S. criticism of the list indicates that the global AML architecture and assessment process has become “increasingly politicized.”

The dispute heaps further uncertainty on global banks following the U.S. withdrawal from a nuclear pact with Iran last year, Keatinge said. The European Union still supports the agreement and has threatened to penalize firms that reject or exit business with Iran to comply with renewed U.S. sanctions against the country.

“The global AML response has been pretty united for 30 years since FATF was founded, but the U.S. has been the hegemon in all that,” said Keatinge. “Meanwhile, financial institutions are stuck in the middle.”

U.S.-headquartered banks with European branches, for example, may expose themselves to enforcement actions in the European Union if they choose to follow the Treasury Department’s instruction and ignore the list.

The list may not carry the same weight outside of the European Union given that nations in the bloc are not eligible for inclusion, Anna Bradshaw, an attorney with Peters & Peters in London, said.

“A competing EU blacklist is problematic in principle, both in terms of what it is ultimately trying to achieve and what specific compliance steps or other countermeasures it should give rise to,” Bradshaw said.

The effect of the list on financial institutions within the European Union will vary from country to country.

Panama’s inclusion, for example, may heavily impact banks in Spain, while Dutch AML rules require banks in the Netherlands to report every transaction involving parties in blacklisted countries.

Hughes Bouchetemble, an attorney with Kramer Levin in Paris, said French banks may conduct a cost-benefit analysis and close accounts, particularly because the French Prudential Supervision and Resolution Authority “systematically checks” compliance with blacklists already maintained by FATF and the European Union.

“Some institutions will terminate their relationship with some customers or request more guarantees,” Bouchetemble said. “The risk is that they will preserve large accounts and that small accounts will be closed.”

British officials have already committed to comply with the European Union’s Fifth AML Directive and will require financial institutions to observe the EU blacklist despite their country’s planned exit from the bloc next month.

“We will continue to expect all U.K.-regulated firms to meet the relevant international requirements placed on them,” a spokesperson for the Financial Conduct Authority spokesperson wrote in an email to moneylaundering.com.

Contact Gabriel Vedrenne at gvedrenne@acams.org and Koos Couvée at kcouvee@acams.org