REPORT FROM THE COMMISSION TO THE COUNCIL on controls on cross-border cash movements

(presented by the Commission)

1. INTRODUCTION

1. This document contains the Commission's final report in response to a request from the Council of Ministers (JHA/ECOFIN), which concluded at its meeting of 17 October 2000 that: "The Council, recognising that the surveillance of cross-border cash flows can improve the effectiveness of the daily struggle against money laundering, calls on the Commission to examine, before 1 July 2001, the possibility of submitting a proposal aimed at rendering existing national provisions more consistent and strengthening them, enabling the Member States to institute such a system and providing for the exchange of information".

2. The Commission made a preliminary oral report to the Council (JHA/ECOFIN) on 16 October 2001 and was asked to produce a final report by the end of the year. This document constitutes that final report.

2. RESULTS OF OPERATION MONEYPENNY

3. The Council's initial request was made in the light of the report on Operation Moneypenny.

4. Operation Moneypenny [1] was a joint operation carried out by the Member States' customs services in the period September 1999 to February 2000. The aim was to monitor cross-border cash movements in excess of EUR 10 000 and examine whether the scale of such movements posed a threat to the controls applied by financial institutions to prevent money laundering.

[1] Document 9630/2/00 rev. 2 of the Council of 7.9.2000.

5. The results of Operation Moneypenny revealed, first and foremost, the scale of cross-border cash movements, movements likely to involve money laundering. The total means of payment recorded during the operation was EUR 1.6 billion, EUR 1.35 billion of it in cash.

6. The report also revealed substantial differences in the controls applied by Member States.

7. Although the report offers a useful starting point for examining the need for cash controls, the figures need to be viewed with caution because some Member States do not apply controls and were therefore unable to provide input, while others also provided information on intra-Community trade.

3. NEED FOR ACTION AT THE COMMUNITY LEVEL

8. To combat money laundering, Directive 91/308/EEC, [2] as last amended, lays down provisions, at Community level, governing controls on currency movements in excess of EUR 15 000 when the transactions are made via the financial institutions.

[2] Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering, (OJ L 166, 28.6.1991, p. 77), as amended by Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001 (OJ L 344, 28.12.2001, p. 76).

9. However, though some Member States have introduced controls on cash movements at their national borders, no provision has been made for controlling such movements along the entire length of the Community frontier.

10. Though it is not possible at this stage to gauge the exact scale of money laundering via cash movements, the volume of cash being transported is such that it presents a potential risk to Community and national interests.

11. The Moneypenny report did not distinguish between intra- and extra-Community cash movements, but the great majority of significant intra-Community movements are in all likelihood legal. This stems from the great volume of legitimate business under way in the Community, a volume further boosted by the ease of selling, transferring, purchasing, etc. in the single market. The introduction of the euro has accentuated this trend.

12. The Moneypenny report also showed that existing controls to prevent money laundering are undermined by the disparate nature of controls on cross-border cash movements. The highly divergent approaches adopted by the Member States undermine protection at Community level and leave open loopholes for criminals to exploit.

13. Since the events of 11 September 2001 controls on money movements via the financial institutions have necessarily been tightened. There could therefore be increasing recourse to cash as an alternative solution.

14. European economic integration, topped off by the introduction of the euro, demands a fresh take on the need for a Community approach in this matter. While the disparate nature of national controls may in the past have been a logical reflection of the segmentation of Europe's territory and the co-existence of different national currencies, the present interpenetration of the Member States' economies means that such disparities are destined to become exceptional and hard to justify. Tight controls in one Member State could well divert movements through a neighbouring Member State with few or no controls. The disparate nature of the control systems applied by the Member States is also questionable from the standpoint of the single market. Depending on the Member State whose borders they are crossing, travellers in the Union find themselves subject to rules that are divergent and thus difficult to understand. It would therefore make sense not just to harmonise the declarations required in this matter by national law at the external frontier by introducing a standard Community-wide declaration but to review the need for national declarations (see paragraph 23 below).

15. The Commission therefore considers that the Money Laundering Directive should be complemented by a measure introducing controls on large sums of cash crossing the Community's external frontier.

16. For the controls to be effective, a system is also needed whereby the Member States can exchange information on suspect movements. The complementary nature of mutual administrative assistance mechanisms in countering money laundering also needs to be underscored, and in particular the exchange of multidisciplinary information with other Member States and with the Commission, an exchange provided for in the proposal for a European Parliament and Council Regulation establishing a cooperation mechanism between the competent national authorities of the Member States in order to ensure the protection of the Communities' financial interests against illegal activities [3].

[3] Commission Work Programme for 2001 (Programme No 2001/98).

17. There should also be a sustained public relations effort to inform travellers of the rules and their obligations in the matter. That effort will be all the more effective if today's disparate arrangements are replaced by a uniform set of rules.

4. SCOPE OF ANY PROPOSAL

18. The obvious advantages of such an approach in terms of prevention and law enforcement have to be reconciled with the need to adhere to single market principles, and especially the free movement of capital.

19. Striking a balance between proper supervision and the free movement of capital demands careful consideration of the scope of any proposal, its possible impact on existing national measures and its specific form.

Threshold for intervention

20. Any proposal would have to complement the controls currently applied to money transfers via the financial institutions and so plug any loopholes created by the present lack of a uniform Community approach to cash movements. Accordingly, only significant cash movements should be controlled. The threshold for controls should be the same as that for transfers through financial institutions, namely EUR 15 000. This threshold ought to be high enough to save travellers and traders from additional administrative formalities and customs administrations from a disproportionate workload. There nevertheless remains the risk of frequent trips by travellers carrying sums below the threshold laid down. Any attempt to deter such traffic by lowering the threshold would inevitably create serious enforcement problems for the administration.

The Money Laundering Directive addresses this practice (commonly termed "smurfing") by obliging the operator involved to report any suspicious financial transaction. This is not a viable option for travellers carrying cash. Such movements can always be controlled by using the powers invested in customs administrations to control persons and their baggage, in particular through the use of risk analysis methods to identify high risk travellers. At any event, were it to emerge that risk analysis did not offer a suitable means of resolving the problem, thought would have to be given to reviewing and strengthening the Regulation.

Controls at the Community's external frontier

21. The Member States currently control a variety of movements (intra- and extra-Community) in a variety of different ways (for example, by declarations or risk analysis).

22. At Community level it is clear that controls could only be introduced at the external frontier. Quite apart from their political incompatibility with single market principles, controls at internal national frontiers are impracticable in a Community without internal frontiers (particularly in the Schengen area and the Eurozone).

23. In view of the free movement of capital guaranteed by the Treaty and the proposed Community action to deal more effectively with the potential increase in the risks associated with extra-Community cash movements, it is important that national measures should preserve the delicate balance between control and free movement. Any restriction, even the obligation to declare, should result in controls only where absolutely necessary.

24. No Community measure can restrict the scope of Article 58(1)(b) of the EC Treaty, which allows the Member States to take certain measures affecting the free movement of capital. However, logic dictates that such powers should be exercised with great restraint in the single market and the Eurozone. In particular, the introduction of a standard Community declaration for controlling cross-border cash movements should cause Member States which have brought in national declarations to ensure that their systems are compatible with the Community measure and to consider whether they need to maintain them.

25. Similarly, the introduction of controls along the entire external frontier should lead to the disappearance of controls on cash movements at internal frontiers. Member States which have such systems will obviously have to consider whether they need to maintain them.

Controls on inward and outward capital movements

26. Money laundering takes many forms. The bringing of cash into the Community for conversion into another currency is usually considered the classic money laundering scenario. It could therefore be argued that controls should be confined to operations of this kind.

27. The reality is somewhat different. Member States applying controls have found that it is often more important to control outward cash movements than inward ones. As a net importer of drugs, the Community exports cash in the form of profits and financing for further consignments. In some Member States, the same pattern is frequently observed with regard to highly taxed products like alcohol and tobacco.

28. The need to tackle terrorism also increases the need to control outward cash movements. Funds connected with the financing of terrorism are just as likely to enter the Community as they are to leave it. As other anti-terrorist measures, particularly the freezing of assets, take effect, terrorist groups will have to turn to alternative forms of financing to avoid the risks associated with bank transactions. Terrorist organisations which finance their activities from drugs (or smuggling highly taxed products or counterfeit goods) may well try to make good their loss of income with the profits from new transactions.

29. Any measure to introduce controls at Community level would therefore have to cover both inward and outward cash movements. No Community measure should encourage Member States to maintain intra-Community controls.

5. CONTROLS

30. The introduction of a control system would enable significant inward and outward cash movements to be monitored without excessively inconveniencing the public or unduly burdening administrations.

31. Those Member States which apply controls have followed a diversity of approaches. These range from a system based on a formal declaration backed up by intelligence to approaches based almost exclusively on intelligence. Some Member States require a written declaration, while in others a declaration is obligatory if customs ask for information. Still others impose no declaration. The variety of these rules make them difficult to grasp for travellers. This diversity militates against the retention of these rules after the entry into force of the Community act and against the simultaneous application of both sets of rules. This juxtaposition of rules poses awkward practical problems, especially for tourists from non-member countries wishing to visit a number of Member States during their trip. Furthermore, as pointed out above (paragraph 14), the introduction of the euro means there is no possible justification for having different levels of controls. From the standpoint of the internal market and the free movement of capital, logic demands a system whereby, with due regard for Article 58 of the EC Treaty, today's different and disparate national approaches are replaced by one requiring a single declaration at the external frontier. The Community instrument should make national declaration procedures concerning extra- and intra-Community transactions redundant (see paragraph 23 above).

Declaration-based system

32. Those Member States which apply declaration-based systems consider that obligatory declarations offer more clarity, more legal certainty and more legally usable information for the purposes of risk management.

33. Those Member States without declaration systems fear that a declaration-based system would generate a mass of paperwork and take up customs resources when almost all the information obtained will come from legitimate travellers (rather than the targeted criminals). Proponents of a declaration-based system argue that its effect as a deterrent should not be underestimated and that the resources required are very limited when compared with the results and benefits obtained, especially with a threshold for declaration as high as EUR 15 000.

34. At the Community level, the considerations are more complex still. Given the very divergent approaches applied and the fact that some Member States have very little experience of enforcing controls on cash movements, any system would have to be clear enough to allow uniform application throughout the Community.

35. A system based exclusively on intelligence would be difficult to set out in a legal act and would not necessarily guarantee a uniform approach.

36. In the interests of clarity, a uniform approach comprising fair warning to travellers, a universal obligation to declare, a common threshold and a simple standard form for use in all Member States can be considered the best way of introducing uniform controls. Logic dictates that the Member States draw the consequences of this harmonisation effort and review the need to continue imposing a national obligation on travellers to declare extra- and intra-Community cash movements.

Monitoring by customs

37. Any system introduced at Community level must guarantee the competent authorities of Member States which do not currently control such cash movements under national law the powers to apply effective controls.

38. This will require not only the powers to administer and monitor the declaration system but the introduction of penalties proportionate to the offence committed. The possibility of detaining cash for a limited period, usually where required to gather intelligence in doubtful cases (particularly if cash is on its way out of the territory), will be crucial.

39. However, any proposal must respect the principle of the free movement of capital, meaning that any measure adopted can only apply to suspicious movements. The system must therefore enable suspicious movements to be identified and dealt with under the relevant Community or national legislation.

40. It is logical that the customs administration should handle the declarations. Its services are located along the external border and process declarations as a routine part of their work. This solution would be the most convenient for the public and economise Member States' resources. Customs administrations not only have the requisite experience of exchanging such information, they have procedures in place to ensure secure and rapid exchanges.

41. Wherever possible, information should be exchanged using existing systems and legal provisions. This solution would limit the need for new legislation, keep formalities and administrative costs to a minimum and guarantee a high level of security. All these arguments militate in favour of using existing arrangements for mutual assistance in customs matters and their legal framework.

42. Relevant information gathered by a customs administration would be shared as appropriate with the national financial control body responsible for money laundering and with the customs administrations of any other Member States connected with the suspect movements. Sharing relevant information with the Commission would also help protect the Community's financial interests.

43. Consideration must also be given to the usefulness of exchanging information with third countries in serious cases, especially where terrorism might be involved. Suitable administrative arrangements in this field could be established with the Union's major partners.

6. CONCLUSIONS

44. At a time of increasing concern over money laundering, and in particular its role in financing international crime and terrorism, the adoption of a Community approach to controlling cash movements has much to commend it.

45. Given the differing levels of experience in the Member States, any approach will need to be reinforced by pooling experience, intelligence and risk management techniques used in this area.

46. Any system established would have to be reviewed at a suitable date to make sure that it is still relevant.

47. The Commission is forwarding a proposal for a Regulation to the Council for this purpose.