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The uphill battle in preventing money laundering: a reflection of May’s news headlines
Julian Dixon
May 29, 2020

As countries around the world attempt to pick their economies back up from the shock of Covid-19, the headlines this month are much more forward looking.  

From an EU AML/compliance perspective, we have seen a clear focus on preventing money laundering. The European Commission has launched its new Action Plan and Luxembourg is facing a new threat of legal action for non-compliance.  

As perhaps a more fascinating reflection of the uphill battle in preventing money laundering, if you’ve noticed the EU’s new dirty money blacklist is surprisingly short, or that London’s streets are filled with money service businesses, then our summary analyses explain why.

European Commission's Action Plan aims to remove weak links in the EU’s money laundering and terrorist financing rules

European Commission publishes Action Plan to close loopholes and remove weak links in the EU’s money laundering and terrorist financing rules

Following last year’s identification of several EU money laundering and counter terrorism financing weaknesses, this month the European Commission published an ambitious, comprehensive Action Plan to strengthen the EU’s approach over the next 12 months.

The Action Plan is built on six pillars, including:  

  1. Effective application of EU rules – The Commission will continue to closely monitor member states. The plan encourages the European Banking Authority to actively use its new powers.
  2. A single EU rulebook – To shutdown loopholes, the Commission will propose a harmonised set of rules in the first quarter of 2021.
  3. EU-level supervision – The Commission will propose to set up an EU-level supervisor in the first quarter of 2021 to address gaps in how each member state supervises EU rules.
  4. A coordination and support mechanism for Member State Financial Intelligence Units – A mechanism to help further coordinate and support the work of these bodies will be put forward in the first quarter of 2021.
  5. Enforcing EU-level criminal law provisions and information exchange – To clarify and enhance data sharing, the Commission will issue guidance on the role of public-private partnerships.
  6. The EU’s global role – The plan, in addition to a new methodology issued alongside it, provides the EU with the necessary tools to adjust its approach to third counties with deficiencies in their AML/CTF regime that are putting the EU’s Single Market at risk.

The Commission has launched a public consultation on the Action Plan, which runs until 29 July. You can download a copy of the plan here.

Luxembourg faces legal action from EU over money laundering and tax avoidance

Luxembourg is once again dragging its heels and facing the threat of legal action after it failed to apply the latest laws to prevent money laundering and tax avoidance. Luxembourg’s tax rules allow multinationals to hide behind shell firms and benefit from “unlimited deductibility of interest” from tax bills.  

Luxembourg is a country of just 600,000 people and yet hosts as much foreign direct investment as the US and far more than China. A large part of that money is held within shell companies set up by multinationals.

More than half of the EU member states face similar legal challenges. It goes without saying this creates a huge issue for money laundering defences, which are only as strong as the weakest link.

Earlier this month Thomson Reuters reported how EU member states recently hit by major money laundering and financial fraud scandals have opposed a plan to boost EU powers to curb the flow of dirty money through banks.  

In March, we reported how most EU states have failed to provide beneficial ownership transparency.

Why the EU high risk country list is so short

A fascinating analysis by Andrew Rettman, Foreign Editor at EUobserver, tells how the EU’s new dirty money blacklist reveals more by its omissions than by its inclusions.

Some of the 20 countries named and shamed include the Bahamas, Barbados, Syria and Yemen. Iceland, Liechtenstein, Norway and all 27 EU states were automatically excluded.

Significantly however, Rettman’s analysis highlights how political interference is having a significant impact on who makes the list and who doesn’t.  

There are many money laundering hotspots, such as the British Virgin Islands, China, US Virgin Islands and Saudi Arabia, that are not included in the list, with the EU allegedly picking and choosing its “fights”.  

The automatic pass for EU states in itself doesn’t make sense when many countries have banking sectors known for money laundering – Luxembourg, Estonia and Malta, to name but a few.

Bill Browder, the CEO of UK hedge fund Hermitage Capital, said: “If the objective is to clean up the financial system, the [EU] list is weak and unhelpful.”  

Michel Koutouzis, a former FATF inspector, adds: The lists were designed “to put pressure on small countries to turn down the tap a little” on mafia money, not “to clean up the financial system”… “If we had a real [money laundering] blacklist, half the countries of the world would be on it.” 

Money service businesses are fuelling London’s surge in crime and drug trade

A damning article, part of the special report Europe’s dirty (money) secret, tells how money remittance and foreign exchange shops are playing a key role in London’s surge in vicious drugs trade and violent crime.

The article reveals the loopholes criminals and money service businesses are exploiting, making a direct link between the rise in crime in London and the growing number of money service businesses that are crowding the streets. London alone has 9,000 such shops (which is suspicious in itself), but the real number is likely to be much higher.

Money service business regulator, HMRC, provides guidance for money services businesses to meet their requirements for money laundering supervision.

Julian has more than 20 years of financial services experience gained at major investment banks including Deutsche Bank, JP Morgan and Commerzbank. His roles have ranged from front-office sales leadership to private equity. Julian has extensive knowledge of financial services processes and technology.