COMMISSION STAFF WORKING DOCUMENT

Accompanying the documents Proposal for a Directive of the European Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing

and

Proposal for a Regulation of the European Parliament and of the Council on information accompanying transfer of funds

Contents

I. Introduction. 5

II. Procedural Issues and Consultation of Interested Parties. 6

II.1. Procedural issues. 6

II.2. External expertise and consultation of interested parties. 6

Box 1: Results of the Commission's public consultation. 8

III. Policy context, Problem definition and Subsidiarity. 8

III.1. Background and context 8

III.1.1. The nature of the problem of Money Laundering and Terrorist Financing. 8

III.1.2. Nature and size of the market concerned. 9

III.1.3. Main stakeholders affected by Money Laundering and Terrorist Financing. 9

III.1.4. Impact of Money Laundering and Terrorist Financing. 10

III.2. Overview of legislative framework. 11

Box 2: Overview of the main legal instruments in the field of AML/CFT. 11

III.3. Problem definition. 12

III.3.1. Quantification of Money Laundering and Terrorist Financing. 12

Box 3: Estimating the costs of mounting terrorist attacks. 13

III.3.2. Areas most affected by Money Laundering and Terrorist Financing. 13

III.4. Problem Drivers. 16

III.4.1. Problem Driver 1: the existing rules are inconsistent with the recently revised international AML/CFT standards 16

Box 4: Main Changes to the International Standards to combat Money Laundering and Terrorist Financing 17

III.4.2. Problem Driver 2: the existing EU rules are differently applied across Member States leading to reduced legal certainty. 22

Box 5: Different approaches to the calculation of the 25% beneficial ownership threshold in EU Member States 23

Box 6: Different levels of compliance with the international standards across EU Member States. 24

III.4.3. Problem Driver 3: Inadequacies and loopholes with respect to the current EU rules. 24

III.5. Baseline scenario – How will the problem evolve without action?. 27

III.6. Problem Tree. 29

III.7. The EU's right to act and justification. 30

IV. Objectives. 32

V. Policy Options: Description, Comparison and Impacts. 34

V.1. Summary Description, Assessment and Comparison of the Main Policy Options. 34

V.2. Main Policy Options Relating to the Operational Objectives. 35

VI. Analysis and quantification of Impacts. 43

VI.1. Compliance costs of the existing framework. 43

VI.2. Measuring Administrative Burden under the existing framework. 44

VI.3. Compliance Costs resulting from the changes to the framework. 45

VI.4. Impacts of the Framework on Stakeholders. 50

VII. Analysis of other impacts. 53

VII.1. Impact on fundamental rights. 53

VII.2. Impacts on Small and Medium-Sized Enterprises (SMEs) 54

VII.3. Environmental impacts. 56

VII.4. International aspects. 56

VII.4.1. International Standards. 56

VII.4.2. Third Country Equivalence. 56

VII.4.3. Competitiveness of EU.. 57

VIII. Overall impacts of the package. 57

VIII.1. Impacts of the preferred policy options. 57

VIII.2. Coherence with other EU initiatives. 59

IX. Monitoring and Evaluation. 60

X. Annexes. 62

ANNEX I: Glossary. 62

ANNEX II: The Development of EU and International Policies to Combat Money Laundering and Terrorist Financing 67

ANNEX III: Detailed Assessment of Policy Options. 70

ANNEX IV: Costs of Compliance with the Third AMLD by Cross-Border Banking Groups. 104

ANNEX V:Sector by Sector Analysis of Impacts. 110

V.1. The Banking Sector 110

V.2. The Payments Sector 111

V.3. The E-Money Sector 112

V.4. Accountants and External auditors. 113

V.5. The insurance Sector 114

V.6. Lawyers/notaries. 116

V.7. The gambling sector 117

V.8. Real estate sector 118

ANNEX VI: Membership of FATF and Moneyval 120

ANNEX VII: Efforts to measure effectiveness of AML measures by the Commission. 122

ANNEX VIII: Comparison of EU Member States' sanctions and penalties for non-compliance with AML/CFT rules 123

ANNEX IX: Comparison of EU Member States' rules implementing AML rules to casinos and the gambling sector 130

I. Introduction

This impact assessment has been prepared with a view to the revision of the Anti-Money Laundering framework[1].

Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (hereinafter referred to as the Third AMLD), sets out the framework designed to protect the soundness, integrity and stability of credit and financial institutions (FIs) and confidence in the financial system as a whole, against the risks of money laundering (ML) and terrorist financing (TF).

The objective of Regulation EC 1781/2006 on information on the payer accompanying transfers of funds (hereinafter referred to as the Fund Transfers Regulation) is to enhance the transparency of fund transfers of all types, domestic and cross-border, in order to make it easier for law enforcement authorities to track funds transferred electronically by terrorists and criminals.

The EU rules are to a large extent based on international standards adopted by the Financial Action Task Force (FATF)[2]. They have been adapted to fit to an EU context and, as the EU Directive follows a minimum harmonisation approach, the framework has been completed by rules adopted at national level[3].

The FATF has undertaken a fundamental review of the international standards, which culminated in the adoption of a new set of recommendations in February 2012[4], and which place an increased focus on the effectiveness of regimes to counter money laundering and terrorist financing. In parallel to the international process, the European Commission has undertaken its own review of the European framework. This review has comprised an external study published by the Commission on the application of the Third AMLD (hereafter the Deloitte study)[5], extensive contacts and consultations with private stakeholders and civil society organisations[6], as well as with representatives of EU Member State regulatory and supervisory authorities and Financial Intelligence Units (FIUs).

The results of the Commission's review were set out in a Report to the European Parliament and Council[7] adopted in April 2012. The Report analysed how the different elements of the existing framework have been applied and considered how the framework may need to be changed. The responses to the ensuing public consultation have indicated a need to introduce clarifications or refinements in a number of areas. A revision of the Directive would in any case have been needed in order to update it in line with the revised FATF Recommendations, which in themselves represent a substantial strengthening of the AML/CFT framework.

The constantly changing nature of money laundering and terrorist financing threats, driven by the limitless ingenuity of criminals coupled with constant technological evolution of delivery channels, necessitates the periodic review, and where necessary revision, of the legal framework designed to counter such threats.

II. Procedural Issues and Consultation of Interested Parties II.1. Procedural issues

The preparation of this impact assessment has involved close coordination across Commission services. An Inter Service Steering Committee (ISSC) on AML was set up in January 2012, to discuss initially the draft application report, and subsequently to discuss the preparation of the impact assessment. The ISSC comprised the following services: MARKT, HOME, JUST, SG, TAXUD, SJ, FPI, and ENTR. The ISSC met on 4 occasions.

Work on the IA began in March 2012 and has been conducted over a period of five months. The IA was submitted to the Impact Assessment Board on 27 July and discussed on 5 September. The Minutes of the last ISSC meeting were submitted to the IAB.

The comments received from the IAB resulted in the following main changes:

· Additional information has been included in the problem definition regarding important differences between certain aspects of Member States' anti-money laundering frameworks (with respect to different approaches to identification of the beneficial owner, different thresholds applied for cash transactions, differences between national penalty regimes for non-compliance with AML rules and the differences in application of AML rules to the gambling sector – beyond casinos);

· Further information has been added with respect to the main changes at international level;

· The presentation of objectives and analysis of policy options has been simplified;

· The analysis of impacts on SMEs has been strengthened;

· The chapter dealing with analysis and quantification of impacts has been strengthened, incorporating more data and in particular including a specific analysis of administrative burdens;

· Explanations have been provided regarding the choice to lower the threshold for cash transactions from €15,000 to €7,500;

· An explanation has been included as to why the delay for responses to the Commission's application report was set for a period shorter than the 12 week minimum standard for public consultation.

II.2. External expertise and consultation of interested parties

The Commission services have made substantial efforts to obtain evidence in this field and to ensure full engagement of the different stakeholders:

· Over the course of 2010, a study by external consultants Deloitte was carried out on behalf of the Commission to look into the application of the Third AML Directive. The study involved an extensive consultation of various stakeholders.

· Member State regulators have been closely associated throughout the process with the work to prepare revisions to the legislative framework through the Committee for the Prevention of Money Laundering and Terrorist Financing (CPMLTF).

· Member State supervisors have made important contributions via the European Supervisory Authorities’ (ESAs) Anti Money Laundering Committee[8]. In particular, in 2011 they produced two important studies on beneficial ownership[9] and simplified due diligence[10].

· Representatives of Member State Financial Intelligence Units (FIUs) have been associated with the preparation of the legislative texts, and have via the FIU platform[11] in particular contributed ideas on how cooperation between FIUs could be improved, as well as how to strengthen available tools and powers.

· Over the course of 2011-2012, the Commission organised two private sector stakeholder meetings[12] in order to discuss issues in relation to the preparation of its application report on the Third AMLD[13], and the followed these up with a number of bilateral or sectoral meetings with private stakeholder groups and civil society organisations. Participating stakeholders included representative European organisations in the banking, insurance, payments, e-money, accountancy, real estate, legal and gambling sectors. Also invited were representatives of various civil society organisations who had expressed clear interest in money laundering/terrorist financing issues. The Commission also carried out a written consultation of private stakeholder and civil society representatives between 11 April and 13 June 2012, the main results of which are described in Box 1[14].

Box 1: Results of the Commission's public consultation

In April 2012, the Commission adopted a report on the application of the Third AMLD, and solicited comments from all stakeholders on its considerations.

In particular, the report focused on a number of identified key themes (including application of a risk-based approach, extending the scope of the existing framework, adjusting the approach to customer due diligence, clarifying reporting obligations and supervisory powers, enhancing FIUs co-operation etc.), which are central to the review of the Third AMLD. In addition, the annex to the report addressed a closely related matter, namely cross-border wire transfers.

During the consultation period the Commission received 77 contributions[15] from public authorities, civil society, business federations and companies in several fields (including financial services, gambling sector, liberal professions, real estate sector, trust and company service providers), representing a broad variety of stakeholders. Replies came from 15 EU Member States and from some countries outside the EU (e.g. Jersey). 21 of the 77 replies, i.e. 27%, were provided by pan-European organisations.

The overall results of the consultation point to a general confirmation of the issues and problems highlighted by the Commission's Report, as well as broad support for the proposed alignment to the revised FATF standards and for greater clarification in particular in the areas of data protection and how to apply the rules in cross-border situations. Analysis of the responses reveals a diversity of opinions, which reflect the different categories of respondents. However, the industry most directly concerned by AML compliance generally welcomed this review as an opportunity to improve the effectiveness of the AML/CFT regime. Civil society organisations have responded with similar views. The feedback statement is available at the following address: http://ec.europa.eu/internal_market/company/docs/financial-crime/072012_feedback_statement_en.pdf

III. Policy context, Problem definition and Subsidiarity III.1. Background and context III.1.1. The nature of the problem of Money Laundering and Terrorist Financing.

Money laundering and terrorist financing are often subject to the same legislation. However, although the two concepts might share many elements, their defining features are quite different.

· Money laundering concerns activities related to assets which have a criminal or illicit origin. Criminals engaged in money laundering will therefore attempt to conceal or disguise the true nature, source or ownership of the assets in question and transform them into seemingly legitimate proceeds. If dirty money is allowed to flow through the financial system, the stability and reputation of the financial sector can be seriously jeopardised - which in turn could undermine the integrity of the single market.

· Terrorist financing on the other hand concerns the provision or collection of funds to carry out any of the offences defined in Council Framework Decision 2002/475/JHA on combating terrorism. Terrorist activities can be funded through legitimate as well as criminal activities and terrorist organisations engage in revenue-generating activities which in themselves may be, or at least appear to be, legitimate. There is a clear risk to the integrity, proper functioning, reputation and stability of the financial system, and with potentially devastating consequences for the broader society.

III.1.2. Nature and size of the market concerned

Obligations stemming from the EU's Third AMLD are applied not only by financial institutions (banks, insurance companies, the securities sector, etc.), but the framework extends beyond the traditional financial sector and covers gatekeepers of the financial system (auditors, external accountants, tax advisors, notaries, lawyers, real estate agents, casinos). Together, the combined sectors falling under the scope of the AML/CFT regime amount to nearly 10 million employees.

Compliance with AML/CFT rules has significantly different impacts according to the type of obliged entity. Large multi-national financial institutions may employ hundreds of thousands of staff, but there are also many small and medium-sized financial institutions, often active only at a local/domestic level. Persons working in the professional business services sector (lawyers, notaries, accountants, auditors, etc.) may be part of large cross-border groups, or may work as independent professionals in small offices. The ML/TF risks associated with each business, and consequently the compliance burdens resulting from application of AML/CFT rules, will vary in accordance with the type of activity, the type of client and the geographical location[16].

In view of these differences between sectors, it is not possible to provide general data regarding how many staff work on compliance issues, and how many of those are specifically engaged in AML/CFT compliance. Some indications as to the costs of compliance are provided in Annex V on a sector by sector basis, along with additional background information including a general description of each sector as well as some typologies of money laundering and terrorist financing.

III.1.3. Main stakeholders affected by Money Laundering and Terrorist Financing

Table 1 Main stakeholders affected by Money Laundering, Terrorist Financing and the necessary countermeasures (under the baseline scenario)

Who is affected? || How?

1. Obliged entities || · Credit and Financial institutions · Auditors · External accountants · Tax advisors · Notaries · Independent legal professionals (involved in transactions) · Trust or company service providers · Real estate agents · Casinos · Other natural/legal persons trading in goods when cash payments >€15,000 || They are required to implement the rules, identify and verify the customer, the beneficial owner, understand the nature of the business relationship, conduct ongoing monitoring of the business relationship, file suspicious reports to FIUs, maintain records, and comply generally with the rules set out in the EU framework.

2. Public authorities || · Regulators · Supervisors · Financial Intelligence Units · Law enforcement || They are required to implement and enforce the rules and protect the system against criminal/ terrorist abuse

3. Customers || Customers of the obliged entities (banks, financial institutions, auditors, etc.) || They bear the burden of increased controls, reduced access to and increased cost of services.

4. Business || Business community in general || While increased controls and restrictions may complicate business transactions, an absence of effective AML/CFT regimes would increase risks associated with money laundering and terrorist financing – which would in turn be harmful to business interests

5. Perpetrators || Criminals, terrorists, corrupt Politically Exposed Persons (PEPs) || Are prevented from abusing the financial system, or can be traced and caught as a result of the measures in place. However they are also quick to exploit any potential loopholes in the system.

6. EU Victims || EU Society/citizens || Need to be protected from terrorist attacks, increased criminality, loss of welfare resulting from corruption, tax evasion, damage to market integrity, trust, etc.

7. Non EU Victims || Society/citizens/governments in third countries || Need to be protected against the EU financial system being used as a channel for illicit proceeds drained away from the local economy as a result of corruption and criminality.

III.1.4. Impact of Money Laundering and Terrorist Financing

There is a general consensus globally and across political spectrums that immense damage can result if financial systems are insufficiently protected from criminal or terrorist abuse. In particular, systems which fail to prevent money laundering and terrorist financing expose themselves to:

· societal risk, stemming from the feedback of criminal and terrorist funds into criminal and terrorist activities;

· negative economic impacts, arising from disruptions to international capital flows, reduced investment and lower economic growth;

· financial market instability, resulting from reluctance of other financial intermediaries to engage in business, loss of reputation, drop in confidence and prudential risks.

III.2. Overview of legislative framework

EU legislators have put in place a preventative framework to combat money laundering and terrorist financing. The rules are to a large extent based on international standards, adapted to fit into an EU context. They are completed by rules adopted at national level:

Box 2: Overview of the main legal instruments in the field of AML/CFT

Directive 2005/60/EC (the "Third AMLD"):

· Prohibits money laundering and terrorist financing, and defines the types of conduct which are considered to constitute such offences. The Directive also defines the types of underlying criminal activity (i.e. the "predicate offence") which gives rise to the offences of money laundering or terrorist financing;

· Imposes an obligation on the "obliged entities"[17] to conduct "customer due diligence, (i.e. to carry out checks on customers in order to verify their identity, the identity of the beneficial owner[18], to understand the nature of the business relationship and to ensure that it is monitored on an ongoing basis). Should the obliged entity or person have knowledge or suspicion that money laundering or terrorist financing is being or has been committed, or attempted, they must promptly inform the Financial Intelligence Unit;

· Permits certain derogations from customer due diligence[19], by allowing for simplified procedure in certain listed cases[20]. Obliged entities must at least gather sufficient information to establish if the customer qualifies for Simplified Customer Due Diligence (SDD);

· Requires enhanced customer due diligence measures, for situations where there is a higher risk of money laundering or terrorist financing, such as where the customer has not been physically present for identification purposes, in the case of cross-border correspondent banking relationships with respondent institutions from third countries, and in the case of politically exposed persons residing in another Member State or a third country.

Directive 2006/70/EC (the "implementing Directive") lays down implementing measures for Directive 2005/60/EC as regards the definition of politically exposed person and the technical criteria for simplified customer due diligence procedures and for exemption on grounds of a financial activity conducted on an occasional or very limited basis.

Regulation 1781/2006 on information on the payer accompanying transfers of funds: requires information on the payer to accompany transfers of funds, with the objective of ensuring prevention, investigation and detection of money laundering and terrorist financing. The Regulation covers all types of fund transfers carried out by electronic means in any currency, from a payer to a payee, which are sent or received by a Payment Service Provider (PSP) established in the EU (Art. 3.1). This is in order to make it easier for law enforcement authorities to track funds transferred electronically by terrorists and criminals.

A number of additional instruments which complete the framework are described in Annex II.

III.3. Problem definition III.3.1. Quantification of Money Laundering and Terrorist Financing

Given the illicit and hidden nature of money laundering and terrorist financing activities, no definitive figure can be provided which would accurately quantify the amounts processed by criminals for these purposes. As definitions differ as to which criminal activities (e.g. tax evasion) are considered "predicate offences" for money laundering purposes, comparison across countries can also be very difficult.

In recognition of the importance of providing policy-makers with better intelligence about the dimension of the problem, there have been efforts by international organisations to conduct research attempting to quantify the total amounts laundered across the globe. While any estimate must of course be treated with an appropriate degree of caution, there is general agreement that the amounts involved are very considerable.

The most widely quoted research dates back to the 1990s, when the International Monetary Fund (IMF), published a broad ranging estimate which quantified money laundering to be in the region of 2-5% of global GDP. In an EU context, if this range were extrapolated to the present day, with total EU GDP amounting to € 12.27 trillion, it could be assumed that the amount of money laundered funds was somewhere between € 245-613 billion (assuming an even distribution of money laundering globally).

More recent research has been published by the United Nations Office on Drugs and Crime[21]. The findings, which are broadly in line with the earlier IMF estimates, suggest that all criminal proceeds are likely to have amounted to some 3.6% of GDP or around US$ 2.1 trillion in 2009, with an estimated amount available for money laundering equivalent to some 2.7 % of global GDP, amounting to some US$ 1.6 trillion. With similar assumptions as above, the amount of money laundered annually in the EU could be estimated at around € 330 billion.

While the complex research methods used to calculate global amounts of money laundering can be contested and should not constitute a sole nor definitive basis for policy responses, more concrete illustrations of the vast sums at stake can be found in real life cases where money laundering has actually been detected, and where the facts are not open to dispute. Cases are many and varied, ranging from small scale operations, to huge schemes involving multi million or even multi billion euro amounts. The scale of money laundering uncovered in the case of Wachovia[22] (to date, the largest case of money laundering ever detected - see Annex V.1), serves as an important warning of the consequences that can arise in the event of a breakdown of AML defence mechanisms.

With respect to Terrorist Financing, no equivalent estimates of the overall amount of terrorist financing exist. According to a report of the UK House of Lords in 2009, however, the mounting of terrorist operations appears – in contrast to the sums of money involved in money laundering – to involve much smaller amounts[23], while the detrimental impact they cause on society, on the economy and on security can be enormous, far exceeding the costs of mounting operations.

Box 3: Estimating the costs of mounting terrorist attacks[24]

Maintaining a terrorist network, or a specific cell, to provide for recruitment, planning, and procurement between attacks represents a significant drain on resources. A significant infrastructure is required to sustain international terrorist networks and promote their goals over time.

Nevertheless the direct costs of mounting individual attacks have been low relative to the damage they can yield, both financial and in terms of their societal impact. The only costs involved in domestic terrorism are those incurred in training and recruitment and the commission of the attacks.

For example, the 2005 London bombings were estimated to have cost just £8.000 (€ 10,000) sterling and Madrid train bombings costs were estimated to be $10.000 (€ 8,050).

Although the CIA estimated that Al-Qaeda had an annual budget of $30 million (€ 24 million) prior to 9/11 attacks in New York City, the total cost related to the preparation and execution of the attacks themselves was estimated to be no more than $500.000. (€ 400,000)

The vastly different sums of money implicated in money laundering and terrorist financing pose a particular challenge for regulators, financial institutions and gatekeepers of the financial system – on the one hand, vigilance is called for to keep the system safe against the possibility that it is used for the laundering of massive amounts of criminal proceeds, whilst on the other hand, mechanisms are needed to detect even the smallest amounts which might be used for terrorist purposes.

III.3.2. Areas most affected by Money Laundering and Terrorist Financing

The fight against money laundering has evolved over time. While the initial focus targeted the illicit proceeds of the drugs trade, the scope of crimes targeted by the AML/CFT framework has been progressively broadened to include the proceeds of fraud, corruption, and other crimes. The current EU framework takes an "all serious crimes" approach, and includes within its scope all other criminal offences which carry a punishment of imprisonment based on a mixture of maximum and minimum thresholds[25].

Similarly, while the framework initially included only credit and financial institutions, it has since been broadened to reflect the fact that other "gatekeepers" have an important role to play in preventing the system from being abused by criminals and terrorists. Money laundering can take many different forms, and beyond the banking sector, money laundering schemes have been detected involving lawyers, the real estate sector, the gambling sector, the insurance business – indeed all the sectors targeted by the legislative framework. Examples of money laundering according to each sector have been included in Annex V.

While it is difficult to provide estimates of the extent to which the various sectors are affected by money laundering, for the reasons described in the previous section, information is available about the extent to which the different sectors are filing reports. As with all data in this area, the figures must be treated with caution: the concept of a "suspicious transaction or activity report" can differ substantially across jurisdictions, as do the types of crime which give rise to a money laundering offence; the nature of the business relationship with a customer will also have an impact on the likelihood of reports being generated (each day, banks may be monitoring millions of transactions, while a lawyer or an accountant may only deal with a handful of clients); and given that financial institutions have been covered by the framework for considerably longer than other obliged entities, they have had more time to develop the experience and the systems to detect suspicious cases.

The following table is taken from the Commission's publication Money Laundering in Europe[26] and indicates the number of suspicious reports generated per sector in 2008. By far the largest number of filings are made by credit institutions and money transfer institutions. Reports from the non-financial sector are on the other hand much smaller by comparison, although there can be substantial variations across Member States.

Table 2 Suspicious transaction reports according to sector

III.4. Problem Drivers

The challenge for the AML/CFT framework is to ensure that the EU rules – and their enforcement – keep pace with evolving trends, developments in technology and the seemingly limitless ingenuity of criminals to exploit any gaps or loopholes in the system. The EU has in the past been at the forefront of the fight against money laundering and has set high standards for its framework. However, while that framework is designed to keep the system safe from criminal infiltration, there are unfortunately still many cases of money laundering (both in the EU and across the globe) which provide evidence that the problem of money laundering continues to plague the financial system[27]: it is a fair assumption that the cases identified represent only the tip of a very large iceberg. According to the October 2011 United Nations Office on Drugs and Crime (UNODC) study[28], the amount of funds intercepted by law enforcement is estimated to amount to less than 1% of the total funds laundered, and actual seizures amounted to less than 0.2%[29].

Assessing the extent to which countries' AML/CFT regimes may or may not be effective in safeguarding the system from money laundering or terrorist financing is complex. Some systems may encounter very low levels of corruption, and thus face reduced pressures to combat the problem. Other countries may be effective in facing up to ML/TF threats by having in place robust preventive and dissuasive measures which ensure that the number of cases of money laundering remains low. On the other hand, it may also be the case that countries faced with high risks of money laundering, but which have in place and weak preventive and enforcement systems, will be less able to identify and catch money laundering activity. Such considerations mean that any attempt to establish a link between non- or poor compliance with AML rules and higher incidences of recorded ML/TF cases will always remain problematic and can be misleading.

III.4.1. Problem Driver 1: the existing rules are inconsistent with the recently revised international AML/CFT standards

AML/CFT standards are agreed internationally and all EU Member States undergo a rigorous assessment process to ensure that their national legislation is in compliance[30].

In February 2012, new international standards were adopted by the FATF which are intended to enable national authorities to take more effective action against money laundering and terrorist financing at all levels – from the identification of bank customers opening an account through to investigation, prosecution and forfeiture of assets. They also better address the laundering of the proceeds of corruption and tax crimes and strengthen the requirements for higher risk situations and allow countries to take a more targeted risk-based approach.[31]

Box 4: Main Changes to the International Standards to combat Money Laundering and Terrorist Financing

There are many detailed changes resulting from the revision of the FATF standards which will require careful and detailed implementation into EU and national legal frameworks. The most significant changes for the purposes of this impact assessment are as follows:

Strengthening the risk-based approach: countries more at risk of money laundering or terrorist financing will need to do more than those less at risk. Countries need first to clearly understand the money laundering and terrorist financing risks which affect them, and adapt their Anti Money Laundering/Counter Financing of Terrorism (AML/CFT) system to the nature of these risks – with enhanced measures where the risks are higher and the option of simplified measures where the risks are lower.

Improving Transparency measures: the new standards have strengthened transparency requirements, requiring that there is reliable information available about the ownership and control of companies, trusts, and other legal persons or legal arrangements. More rigorous requirements on the information which must accompany electronic funds transfers will also be required. Measures to improve transparency, implemented on a global basis, will make it harder for criminals and terrorists to conceal their activities.

Towards more effective International Cooperation: With the increasing globalisation of money laundering and terrorist financing threats, the FATF has also enhanced the scope of international cooperation between government agencies (e.g. simplified extradition mechanisms), and between financial groups. The revised Recommendations will allow more effective exchanges of information, tracing, freezing, confiscation and repatriation of illegal assets.

Identification of clear Operational Standards: the FATF Recommendations concerned with law enforcement and Financial Intelligence Units have been expanded significantly. The revisions clarify the role and functions of the operational agencies responsible for combating money laundering and terrorist financing; and set out the range of investigative techniques and powers which should be available to them.

New threats & new priorities to be covered: The FATF also addresses new and aggravated threats and responds to the priorities set out by the international community, e.g. through the G20, in particular:

· Corruption & Politically Exposed Persons - i.e. people who may represent a higher risk of corruption by virtue of the positions they hold. The requirement to apply enhanced due diligence to foreign politically exposed persons has been expanded with new recommendations also applying to domestic politically exposed persons and international organisations.

· Tax Crimes - The list of predicate offences for money laundering has been expanded to include tax crimes. Tax crimes are brought within the scope of the powers and authorities used to combat money laundering.

· Terrorist Financing – the FATF recommendations strengthen the requirements for tracking wire transfers, notably through the inclusion of information on the beneficiary in addition to the payer with the wire transfer. The scope for exemptions from the rules has been reduced.

There is a strong incentive on jurisdictions to correct inconsistencies with the international standards. Full compliance can send an important reputational signal which is vital for countries seeking to attract foreign investment. Non-compliance, on the other hand, is subject to an attentive follow-up process by the FATF or Moneyval. Persistent non-compliance can lead to inclusion in one of the FATF’s Public Statements, which identify:

· Jurisdictions that have strategic AML/CFT deficiencies and to which counter-measures (e.g. entailing a need to apply enhanced customer due diligence to persons and institutions situated in those jurisdictions, etc…) apply and;

· Jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies.

Inclusion in the FATF public statement can entail political and reputational damage for a country's financial sector leading to consequential economic costs resulting from loss of business, and can prove costly to remedy[32].

It is therefore essential to swiftly proceed with a revision of the EU framework to take account of the recent changes to the international standards. In particular, the EU framework is not, or is no longer compliant in the following key areas:

· Risk-based approach: the risk-based approach allows countries and obliged entities and persons to adopt a more flexible set of measures in order to comply with certain Recommendations. This helps them to target their resources more effectively and apply preventive measures that are commensurate to the nature of risks, in order to focus their efforts in the most effective way. Although the Third AMLD already includes some elements of a risk-based approach (e.g. in the case of CDD and risk-based supervision), the new FATF standards will broaden its application. In future, countries will be obliged, via a national risk assessment, to identify, assess and understand ML/TF risks, and to apply resources to mitigate those risks. There is also an acknowledgement that AML/CFT risk assessments at a supranational level should be taken into account, and that supervisors should apply a risk-based approach to supervision, based on their understanding of the ML/FT risks present in the country and within the entities they supervise.

· Scope: The new FATF standards have included “tax crimes (related to direct taxes and indirect taxes)” as a predicate offence[33], meaning that (at least serious) cases of tax evasion should in the future give rise to a money laundering offence, with a view to facilitating international cooperation and criminal prosecution. Although the Third AMLD[34] already sets out a range of “serious crimes” that are considered to be criminal activities, it does not specifically mention tax crimes[35].

· Customer Due Diligence (CDD): the application of the risk-based approach in the new FATF standards will require a more nuanced approach to the way in which situations requiring different levels of CDD are assessed. The current EU framework is based on a more prescriptive approach with respect to those areas to which enhanced due diligence (EDD) and simplified due diligence (SDD) must be applied. The increased emphasis on the risk-based approach in the revised standards reinforces arguments that the current EU approach needs to be changed.

· Politically Exposed Persons (PEPs): PEPs[36], under the new international standards, are persons who have been entrusted with prominent public functions by foreign countries, or domestically, or by an international organisation. The current approach in the Third AMLD is to require EDD measures in the case of PEPs residing in another Member State or in a third country. The new international standards now introduce risk-based requirements for domestic PEPs, so that in future the new standards will apply different levels of obligation in respect of foreign and domestic PEPs, both as customers and beneficial owners of customers.

· Beneficial Owners (BO): Under the Third AMLD, the BO means the natural person(s) who ultimately owns or controls the customer and/or the natural person on whose behalf a transaction or activity is being conducted. Private stakeholders have expressed concerns that the existing EU rules[37] are in practice difficult to apply, and have called for further clarity and better access to information. The revisions to the international standards provide some additional clarity by setting out an approach for identifying and verifying beneficial ownership. The Commission’s EU Internal Security Strategy (ISS)[38] also emphasises that understanding the criminal source of finances and their movements depends on information about the owner of the companies, as well as the trusts that those finances pass through. The ISS therefore proposes that the EU should consider, in the light of discussions with its international partners in the FATF, revising the EU AML/CFT legislation to enhance the transparency of legal persons and legal arrangements.

· Third Country Equivalence: The Third AMLD allows lighter CDD measures to be applied in the case of credit and financial institutions situated in EU/EEA countries. These lighter measures are extended to institutions situated in third countries which impose AML requirements considered to be "equivalent" to those laid down in the Directive. In order to co-ordinate their approach on equivalence, Member States have agreed on a regularly updated list of "equivalent third countries" in accordance with a Common Understanding on the Procedures and Criteria for the Recognition of Third Countries' Equivalence[39]. However the increased importance of the risk-based approach in the revised FATF Recommendations calls into question whether, going forward, the equivalence regime will remain appropriate at EU level. Given that country risk in the revised FATF Standards is only one of a number of factors[40], the continued relevance and usefulness of the equivalence list has been questioned.

· Cross-border wire transfers: the EU has fully implemented the existing FATF standards via a separate Regulation (1781/2006). This Regulation has the objective of making it easier for law enforcement authorities to track funds transferred electronically by terrorists or criminals by imposing obligations on ordering, intermediary and beneficiary financial institutions. The new FATF standards in particular include a requirement to include information about the beneficiary in wire transfers, and limit the possibility for exemptions from the information requirements (e.g. in the case of E-Money and mobile telephony fund transfers) There are specific obligations on money or value transfer service providers (MVTS), in particular a requirement to file a Suspicious Transaction Report (STR) in any country affected by the suspicious wire transfer, and make relevant transaction information available to the Financial Intelligence Unit.

Table 3 Summary of the main inconsistencies between the new FATF standards and current EU legislation

Drivers || New FATF standards || Current EU legislation

Risk-based approach || Introducing national risk assessments and tailoring national approaches to the different types of risks faced. Greater emphasis on risk-based supervision. Greater emphasis on risk-based approaches for obliged entities. || · No requirement for national risk assessments, nor for coordination among EU Member States, nor for the development of supranational risk assessments · EU legislation will need to be adapted to more broadly apply risk-based approaches

Scope || Tax crimes now explicitly give rise to money laundering offence. || · EU legislation does not explicitly list tax crimes as a money laundering offence.

Customer Due Diligence || A more nuanced approach to the way in which situations requiring different levels of CDD are assessed is required. Need to consider a range of risk factors (e.g. customer risk, geographical risk, and product, service or delivery channel risk factors). || · EU legislation is currently prescriptive with respect to situations requiring/permitting SDD or EDD. · EU legislation currently lists possible exemptions from SDD.

Politically Exposed Persons || New risk-based requirements to identify domestic PEPs and PEPs working for an international organisation. The new standards will require obliged entities to ascertain whether the beneficiary of a life insurance policy is a PEP || · EU legislation currently only addresses foreign PEPs · EU legislation requires application of EDD measures for PEPs residing in another MS or a third country (not in conformity with standards) · EU legislation imposes a one year time limit after which persons who have ceased to be entrusted with a prominent function are no longer considered PEPs (not in conformity with standards), · EU legislation stipulates that “senior management approval” means the immediate higher level of the hierarchy of the person seeking the approval – this may not be appropriate in all cases.

Beneficial Owners || The new international standards set out an approach for identifying and verifying beneficial ownership, with measures aimed at finding a natural person with a controlling ownership interest, or (if none can be found or if there are doubts that the person with the controlling ownership interest is the beneficial owner) the natural person exercising control through other means. || · EU legislation requires identification by the obliged entity of the beneficial owner, but does not specify a means by which such information should be made available.

Third country equivalence || The risk-based approach in the new international standards calls into question the appropriateness of the equivalence regime of the EU - country risk is only one of a number of factors that obliged entities need to take into account. || · EU legislation allows lighter CDD measures to be applied in the case of credit and financial institutions situated in EU/EEA countries, which can be extended to institutions situated in third countries which impose AML requirements considered to be "equivalent" to those laid down in the Directive. · Member States have agreed on a regularly updated list of "equivalent third countries".

Cross-border wire transfers || The new international standards contain additional requirements for tracking transfers of funds, including information about the beneficiary of wire transfers. There are enhanced requirements with respect to verifying information. The new international standards limit possible exemptions from the requirements There are specific obligations on money or value transfer service providers (MVTS), in particular a requirement to file a Suspicious Transaction Report (STR) in any country affected by the suspicious wire transfer, and make relevant transaction information available to the Financial Intelligence Unit || EU legislation requires information only on the payer to accompany electronic fund transfers. EU legislation exempts fund transfers using E-Money and mobile phones below specific thresholds. EU legislation provides a possibility to exempt electronic money and fund transfers using mobile telephones below certain thresholds EU legislation requires filing of an STR to the FIU in whose territory the institution or person forwarding the information is situated.

III.4.2. Problem Driver 2: the existing EU rules are differently applied across Member States leading to reduced legal certainty.

In addition to the issues identified under Problem Driver 1, a number of areas have been identified[41] during the Commission's review process where the current EU rules result in inconsistent implementation. Such deficiencies cause uncertainties for businesses – especially those needing to ensure compliance in a cross-border context – and may impact on the effectiveness of the overall system to combat AML/CFT risks:

· Some concern has been expressed as to the consistency of statistical data relating to the effectiveness of AML/CFT systems[42]. Eurostat has collected a considerable amount of information relating to key indicators from FIUs[43], however there is recognition that significant definitional and systemic differences (e.g. different notions of what constitutes a "report", different processing of reports, different approaches towards prosecution of cases) considerably undermine comparability across countries and complicate effectiveness assessments of AML/CFT systems. As these differences between are the consequence of the different national approaches followed (e.g. what needs to be filed, when and how), it is impossible to rely on such information to draw any meaningful conclusions about the effectiveness of the system. Information received from Member States is therefore not sufficiently illustrative of the effectiveness of national AML/CFT systems.

· Article 3(6) of the Third AMLD defines “beneficial owner” as the natural person(s) who ultimately owns or controls the customer and/or the natural person on whose behalf a transaction or activity is being conducted. The Directive stipulates a 25% threshold of ownership or voting rights or, in the case of administered funds, the beneficiary of 25% or more of the property, for the identification of a “beneficial owner”, for AML/CFT purposes. A report by the European Supervisory Authorities[44] has found that the way in which Member States determine how the Beneficial Ownership threshold should be calculated differs[45]. These differences may pose difficulties and increase costs at group level when designing customer identification procedures and assessing customer risk. They may also affect the level playing field for FIs and Designated Non-Financial Businesses and Professionals (DNFBPs) across Member States. Effective implementation has also been hindered by uncertainty amongst private sector stakeholders as to how to understand how far the obligation to “take adequate measures” to identify the beneficial owner needs to go in practice[46].

Box 5: Different approaches to the calculation of the 25% beneficial ownership threshold in EU Member States

According to the ESA's study, 13 MS broadly followed a “top down” approach with respect to the calculation of the beneficial ownership threshold, which means that in cases of indirect ownership, the percentage/share is determined by reference to the customer only. Some MS require institutions to determine whether a natural person at grandparent level (or beyond) holds 25% plus one share of the customer or more, e.g. a 30% share (grandparent level) of a 60% percent share (parent level) in the customer is considered an indirect 18% share in the customer and is not normally considered an ultimate beneficial owner. Other MS following the “top-down” approach, seeking to determine whether a natural person at grandparent level (or beyond) exercises control or owns at least 25% plus one share of the customer (de jure or de facto).

11 MS take the “bottom up” approach that ownership at any layer has to be counted in full, e.g. a 30% share (grandparent level) of a 60% percent share (parent level) in the customer is considered an indirect 30% share in the customer and thus a person who owns more than 25% of such entity is considered the ultimate beneficial owner.

· Supervision: Article 37 of the Third AMLD obliges Member States to require competent authorities to ensure compliance with the requirements of the Directive by all institutions and persons covered and to ensure that competent authorities have adequate powers – including to compel production of any information relevant to monitoring compliance and perform checks, and have adequate resources to perform their functions. Public stakeholders, especially supervisory authorities, have in particular expressed concerns about the lack of legal certainty in the current legislative texts about their ability to ensure correct compliance with host state AML/CFT obligations in the case of payment service providers, operating on the basis of a single EU passport via branches or agencies. Such uncertainties have the potential to create gaps in compliance and might undermine the effectiveness of the framework[47].

· Article 39(2) of the Third AMLD obliges Member States to impose appropriate administrative measures or sanctions against credit and financial institutions for infringements of national provisions which stem from the Directive. The measures and sanctions must be effective, proportionate and dissuasive. While all Member States have been found to have implemented a national sanctioning regime applicable in cases of non-compliance with the provisions of the Directive, and that such sanctions are applied in practice, the Deloitte study concludes that “the variety in national penalty regimes is so large that it is not possible to compare penalties through all Member States”[48]. Different levels of sanctions can significantly impact the readiness of obliged stakeholders to comply with the Directive and to report suspicious transactions to the authorities, which can in turn impact the effectiveness of AML systems[49].

Table 4 Summary of the main differences across Member States and their Internal Market consequences

Rules differently applied by Member States || Description || Consequences

Consistency of statistical data on suspicious transaction reports || Significant definitional and systemic differences (e.g. different notions of what constitutes a "report", different processing of reports, different approaches towards prosecution of cases) || Reduced comparability of statistical data, difficulties to evaluate and monitor effectiveness.

Beneficial Ownership || Differences on how the beneficial ownership threshold should be calculated || Difficulties and costs for group AML compliance Negative impact on level playing field Uncertainty risks undermining effectiveness of group-wide AML

Supervision || Lack of legal certainty about supervisors' ability on host state obligations for branches and agencies || Gaps in compliance, reduced effectiveness of AML supervision Uncertainties for cross-border business

Administrative measures or sanctions || Differences in administrative measures and sanctions || Different incentives for obliged entities to comply with the AMLD via reporting, as a result, reduced effectiveness

Box 6: Different levels of compliance with the international standards across EU Member States

The results of evaluations carried out by the FATF and Moneyval reveal some differences in the way that Member States have interpreted provisions in the Directive. For example, the requirements relating to Simplified Due Diligence in the Directive have generally been found to be overly permissive in evaluation reports. Within this, the provisions of the Directive have been interpreted differently, with some Member States considering the provisions to be an outright exemption, but others requiring at least some level of customer identification or ongoing monitoring.

III.4.3. Problem Driver 3: Inadequacies and loopholes with respect to the current EU rules.

Both the Commission's review process, and the revised FATF standards have identified inadequacies in the current framework. Under Problem Driver 3, the focus is on vulnerabilities or inadequacies which extend beyond those addressed by the revision of the international standards, but which appear important to address in an EU context:

· Sports betting and other forms of gambling: The Third AMLD includes “casinos” within its scope, but without providing any definition. The Directive also covers activities “performed on the Internet” (recital 14), thus covering on-line casinos. However as the Directive is based on minimum harmonization, national laws have addressed the broader risks associated with other forms of gambling in very different ways[50]. Private stakeholders have expressed concerns that some of the sectors most vulnerable to AML/CFT risks have not been covered by the legislation. In particular, increasing evidence is coming to light about money laundering risks linked to corruption in sport, and in particular match fixing. The FATF has published a Typology on the Football Sector[51] in which risks in betting activity related to the football sector have been identified.

· Dealers in high value goods: Dealers in high value goods fall within the scope of the Directive where the amount of the transaction exceeds €15,000 in cash, and are required by the Directive[52] to conduct customer due diligence for occasional transactions equal to or above that amount. Some Member States (see table) have taken a stricter approach towards the requirement for such persons to conduct CDD and either apply identification requirements as of a lower threshold, or else impose an outright ban on payments in cash above certain thresholds. The diversity of thresholds across Member States is at best confusing in an Internal Market context, but there is also a risk that such differences can lead to vulnerabilities in the borderless Schengen environment: the Commission has, for example, received complaints[53] that the proceeds of robberies and thefts committed in one Member State can be anonymously converted into cash in another Member State without any requirement to identify the customer if the amount of the transaction is less than €15,000.

Table 5 Member States with thresholds other than €15,000 for cash transactions, or imposing stricter requirements

BE || The following cash transactions are prohibited[54]: · Cash payment exceeding 5.000 EUR when purchasing one or more goods.

BG || CDD for cash transactions amounting to10.000 BGN or more (approximately 5.113 EUR) and a reporting obligation for any cash payment exceeding 30.000 BGN (approximately 15.339 EUR)[55].

DK || Retailers and auctioneers may not receive cash payments of DKK 100,000 (approximately 13.417 EUR) or more irrespective of whether payment is effected in one instance or as several payments that seem to be mutually connected[56].

FR || The following cash transactions are prohibited[57]: · Transactions over 3.000 EUR when the debtor has his place of residence in France or acting in a professional capacity; · Transactions over 15.000 EUR when the debtor does not have his place of residence in France or acting in a professional capacity and is not acting in a professional capacity.

IT || It is forbidden[58] to transfer cash, in euro or foreign currency between different persons when the value of the transaction, even if subdivided, is 1.000 EUR or more in total.

LV || Merchants dealing with precious metals, precious stones and articles thereof must report when a client pays cash in the amount of 10.000 Lats (approximately 14.100 EUR) and more.

RO || Payment operations between legal entities shall be made only by non-cash payment[59].

SI || Persons selling goods shall not accept cash payments exceeding 15.000 EUR from their customers or third persons when selling individual goods. This includes legal entities and natural persons who organise or conduct auctions, deal in works of art, precious metals or stones or products thereof, and other legal entities and natural persons who accept cash payments for goods.[60]

Source: Study by consultants Deloitte on the Application of the Anti-Money Laundering Directive

· Financial Intelligence Units (FIUs) – the Third AMLD requires each Member State to establish a Financial Intelligence Unit, to serve as a national centre for receiving, analysing and disseminating to the competent authorities suspicious transaction reports and other information regarding potential money laundering or terrorist financing. The manner in which this goal is achieved is not stipulated in the Directive, with the result that the organisational nature of FIUs differs across Member States (they can be administrative, judicial, or police structures). The current framework for FIU Cooperation is based around a Council Decision dating back to 2000 ('the Decision')[61]. Discussions at the FIU platform[62] have revealed a number of shortcomings with the existing arrangements. Practical experience has demonstrated the types of problems that result from different interpretations about the legal basis granted by the Decision to undertake specific types of cooperation, such as the automatic exchange of information when links are found with another Member State. Some of the problems in exchanging information stem from the different powers that FIUs have at national level, including the possibility to access information, with consequences for the effectiveness of cooperation.

· Group compliance/data protection: Both public and private stakeholders have pointed to a number of difficulties as regards their compliance with AML/CFT requirements while ensuring a high level of protection of personal data. Under AML legislation, private stakeholders need to collect and process data (e.g. to monitor transactions and customer relations against sanctions lists, to apply an AML policy at group level, to identify beneficial owners, to maintain records for criminal investigation purposes, etc.). There is a lack of clarity about how these requirements are to be reconciled with rules on data protection, in particular at national level, which is leading to incoherent approaches across Member States. In 2009 a Commission Staff Working Paper[63] found evidence of problems relating to sharing of data across the group, including difficulties to organise identification/verification of clients centrally, difficulties to monitor cross-border activities of customers across the group, and difficulties to share information on suspicious transactions[64]. Clarification is therefore needed in order to enhance effectiveness of AML/CFT prevention, especially for businesses operating across borders, while ensuring a high level of protection of personal data. In 2011, European Data Protection Authorities issued recommendations providing guidance as to the application of data protection rules in the context of AML/CFT[65], some of which could already be helpful in clarifying AML legislation. In addition, the Commission is revising the European framework on data protection and published a set of proposals in January 2012[66].

III.5. Baseline scenario – How will the problem evolve without action?

Under the baseline scenario, the preventive system applied by financial institutions and designated non-financial businesses and professionals would remain in place, but would not be adapted in light of changes to the international framework nor in light of the findings of the Commission's own review process. In the short run, these would mean that no additional costs would be incurred by private stakeholders or public authorities. However in the medium to longer term, failure to adapt the rules would mean that:

a) the EU framework would not be in line with international standards (see Table 3), EU Member States would receive negative ratings for compliance by the FATF and their financial markets and institutions would suffer reputational damage. There would be a risk that, in the absence of new EU rules, any remedial actions taken individually by Member States at national level would result in fragmentation of the EU framework, uncoordinated regulatory responses and complications in particular for cross-border AML/CFT compliance by obliged entities;

b) The EU framework would remain predominantly rules-based, and would not take account of new emerging risks and threats. Difficulties for cross-border compliance resulting from different national rules would persist and undermine the Internal Market (see Table 4).

c) Failure to upgrade the AML/CFT system – and in particular failure to make better use of resources by strengthening the risk-based approach and placing more emphasis on the effectiveness of the framework – would leave the EU vulnerable to evolving threats arising from new business models and technologies. Deficiencies identified with the current rules as a result of the Commission's review process would not be corrected.

The consequences of the above shortcomings would lead to reduced effectiveness of the AML/CFT regime as well as negative reputational impacts[67], which would in turn:

a) Impair the Internal Market: in particular, the lack of coherence between national rules would make the organisation of EU cross-border business models more complex and burdensome;

b) Negatively impact the stability of financial institutions and markets: the reputational damage to the EU financial markets and financial institutions resulting from negative listings by the FATF would impair the ability of EU financial institutions to operate with other global counterparts – who would require evidence that the specific EU financial institutions had robust AML regimes in place despite poor FATF ratings of the EU framework.

c) Negatively impact the EU economic situation: reduced interconnectivity of the financial system would harm business interests – especially internationally;

d) Generate societal risks through increased ease of access by criminals and terrorists into the EU financial system: a system which, through lax controls, permits money laundering and terrorist financing is at risk that the proceeds of crimes are fed back into the system in order to fund additional criminal or terrorist activities.

These impacts are illustrated in the following problem tree.

III.6. Problem Tree

Problem Drivers

Consequences

General Problems

III.7. The EU's right to act and justification

The Treaty on the Functioning of the European Union empowers the European Commission to act in the area of the Internal Market. In particular Articles 26 and 114 stipulate that "the Union shall adopt measures with the aim of establishing or ensuring the functioning of the internal market" and "adopt the measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market".

Member States have already recognized this need for action at EU level by adopting legislative measures in this area (see section III.2 and Annex II). Recital 2 of the Third AMLD states: "The soundness, integrity and stability of credit and financial institutions and confidence in the financial system as a whole could be seriously jeopardised by the efforts of criminals and their associates either to disguise the origin of criminal proceeds or to channel lawful or unlawful money for terrorist purposes. In order to avoid Member States' adopting measures to protect their financial systems which could be inconsistent with the functioning of the internal market and with the prescriptions of the rule of law and Community public policy, Community action in this area is necessary."

Furthermore, according to the subsidiarity principle, the EU should act where it can provide better results than could be achieved by a response at Member State level. Recital 46 of the Third AMLD states that "since the objective of this Directive […] cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale and effects of the action, be better achieved at Community level, the Community may adopt measures, in accordance with the principle of subsidiarity".

As massive flows of dirty money and terrorist financing can damage the stability and reputation of the financial sector and threaten the internal market, any measures adopted solely at national level could have adverse effects on the EU Single Market: an absence of coordinated rules across Member States aimed at protecting their financial systems could be inconsistent with the functioning of the internal market and result in fragmentation. EU action is also justified in order to maintain a level playing field across the EU – with entities in all Member States subject to a consistent set of AML/CFT obligations[68].

The evaluation of the new international standards will begin in the fourth quarter of 2013. Unless the Commission provides clear and early indications of the desired EU approach to their implementation, there is a risk that those EU Member States who will be evaluated first will opt for solutions which may not coincide with the proposed EU approach, thus rendering agreement of common EU rules more difficult.

EU action should be limited only to what is necessary in order to attain the objectives, and must comply with the principle of proportionality. Several policy options are considered in Chapter V and in Annex III. The proportionality of each option has been analysed with regard to its effectiveness. In all cases, the measures considered do not exceed what is necessary for the effective prevention of money laundering and terrorist financing.

The EU's right to act also needs to be examined in the light of the Charter of Fundamental Rights of the European Union ('the Charter'). The potential impacts of the proposal on Articles 2, 7 and 8 of the Charter (right to life, right of privacy and protection of personal data) are explained in detail in section VII.1 of this report.

Finally, with the adoption of revised international standards, commitments have been taken by the Commission as well as all EU Member States (either directly or via their membership of FATF or Moneyval) to ensure their implementation.

IV. Objectives

The overarching objectives for the revision of the AML framework are identical to those enshrined in the Third AML Directive and the Fund Transfers Regulation: protecting the financial system and the single market from abuse by criminals seeking to launder illicit proceeds, or from terrorists seeking to fund terrorist activities or groups.

The following general objectives, which in part reflect the objectives expressed in the recitals of the Third AMLD, are aimed at addressing the general problems identified in the problem tree:

1 || Strengthen the Internal Market by reducing complexity across borders.

2 || Safeguard the interests of society from criminality and terrorist acts.

3 || Safeguard the economic prosperity of the European Union by ensuring an efficient business environment.

4 || Contribute to financial stability by protecting the soundness, proper functioning and integrity of the financial system.

The specific objectives are linked more directly to the specific nature of the policy intervention:

1 || Ensure that the AML/CFT framework meets high standards in order to safeguard the EU financial system.

2 || Improve the effectiveness of AML/CFT regimes and thus protect the financial system and the single market from money laundering and terrorist financing.

The operational objectives are more specifically aimed at addressing the problem drivers identified in the problem tree:

Table 6 Operational Objectives

Problem Driver 1 || Operational objective

Inconsistency with international standards · Assessment of the international standards have identified inconsistencies with the EU legal framework · The revision of the international standards in February 2012 requires that the EU framework be aligned to the new standards || Ensure that the EU approach is consistent with the approach followed at international level by extending the scope of application, strengthening and clarifying current requirements.

Problem Driver 2 || Operational objective

· Existing rules of the Third AMLD are applied differently by Member States leading to reduced legal certainty || Ensure consistency between national rules and where appropriate flexibility in their implementation by strengthening and clarifying current requirements.

Problem Driver 3 || Operational objective

· There are inadequacies and loopholes associated with the current EU rules. || Ensure that the rules are risk-focused and adjusted to address new emerging threats, by strengthening and clarifying current requirements.

V. Policy Options: Description, Comparison and Impacts

This section presents the policy options and their impacts for each policy area individually. Impacts are measured in terms of effectiveness (i.e. the extent to which they achieve the objective of the proposal), efficiency (notably cost-effectiveness) and coherence with other overarching objectives of EU policy.

V.1. Summary Description, Assessment and Comparison of the Main Policy Options

An important general issue to be addressed is the level of harmonisation to be achieved in order to meet policy objectives. Two approaches have been considered, with the preferred option being the one which would most appropriately fit to all the dimensions analysed in Table 7.

1. Fully harmonise the framework:

A number of stakeholders have called for a full harmonisation approach, which would entail the application of a single set of rules across the EU. Full harmonisation would represent the best way of achieving a consistent approach across the Internal Market, while implementing international standards. However, it would fail to ensure an appropriate degree of flexibility across Member States so that they can address the risks which are specific to their jurisdiction. This option would not therefore fully satisfy Operational Objective 2. Furthermore, by denying an appropriate degree of flexible implementation, a fully harmonised framework may also run counter to the risk-based approach, potentially leading to EU Member States being found non-compliant with the international standards. Although there would be cost advantages for cross-border businesses, there would most likely be significant adjustment costs needed for businesses operating only in domestic markets, who would gain no additional benefits from the single market. Full harmonisation across the board would therefore not be appropriate.

2. Introduce additional elements of harmonisation in selected areas:

This approach would allow Member States to maintain a necessary degree of flexibility in appropriate circumstances at national level, in recognition that this is the most effective way to address crime prevention and to ensure a tailored approach in certain areas. Targeted harmonisation can ensure that Member States are able to retain flexible approaches in certain areas (e.g. in the cases which call for the implementation of risked-based procedures), thus recognising that certain risks may be different across Member States. The harmonising approach also brings convergence of rules in other areas (e.g. modifying the scope in order to ensure a level playing field and to enhance the Internal Market, converging approaches to identify the beneficial owner, improving comparability of statistical data, etc.).

When adjusting the existing framework, each separate dimension under consideration needs to be assessed in light of how effectively it strikes an appropriate balance between flexibility and convergence. In the event that the balance is too far weighted in favour of a flexible approach, further consideration is needed with respect to mitigating elements, such as putting in place processes to ensure further convergence (e.g. by mandating European supervisors to publish guidance, or by including the possibility for elements of risk assessments to be conducted at EU level).

Thus framed, targeted measures to promote convergence should achieve a correct balance between promoting consistency while at the same time maintaining an appropriate degree of flexibility. The policy options corresponding to each dimension under Table 7 have been assessed with a view to achieving that correct balance, while – to the extent possible – meeting the operational objectives.

V.2. Main Policy Options Relating to the Operational Objectives

The assessment of policy options in this section represents a summary of the more detailed analysis of policy options contained in Annex III. The views of different stakeholders groups are systematically presented in the same Annex, when comparing the identified policy options. For reasons of simplicity, the policy options have been segregated according to the three different operational objectives. It is however clear that there are overlaps between the problem drivers and objectives and that certain of the changes under consideration could be viewed from various angles (e.g. adapting a risk-based approach in order to adhere to the international standards, while finding the right solutions from an Internal Market perspective). The "no change option" has been assessed in detail under the baseline scenario, and the analysis is not repeated here[69]. In most cases, the status quo would not be a realistic alternative, due to the consequences associated with non-implementation of the international standards.

The assessment of options is made extensively in Annex III to this Impact Assessment. Table 7 presents the results of that analysis in the form of each preferred option, as well as the alternative option that was assessed.

Table 7 Description, assessment and comparison of the main policy options

DIMENSIONS || Policy Options relating to Operational Objective 1 (Ensure that the EU approach is consistent with the approach followed at international level by extending the scope of application, strengthening and clarifying current requirements).

|| Preferred Options || Alternative Options

1. Inclusion of tax crimes in the scope || DESCRIPTION: include an explicit reference to tax crimes as a predicate offence. It would not provide a precise definition, but use the existing threshold approach applied in the case of serious crimes. || DESCRIPTION: include tax crimes as a specific predicate offence, and design detailed rules for the circumstances in which the offence is committed.

ASSESSMENT: This option would achieve, in terms of effectiveness, efficiency and coherence, the objective set. It would bring about a degree of consistency across Member States, although some differences across jurisdictions would still remain. It would comply with the international standards and send a clear signal with respect to tax crimes. || ASSESSMENT: This would be the optimal option to achieve Internal Market goals. In terms of effectiveness it would ensure coherence across the EU, while sending a clear signal with respect to tax crimes. It would facilitate a more efficient environment for cross-border businesses and would be in line with international standards. It would however entail substantial delays due to political difficulties in agreeing a common list of types of tax evasion. This would result in delaying the agreement on the whole AML/CFT package and for these reasons it should not be retained.

COMPARISON: Effectiveness Efficiency Coherence || +++ 0 + || +++ 0 0

2. National Risk Assessments || DESCRIPTION: introduce a requirement for Member States to carry out a risk assessment at national level and take measures to mitigate risks. An option would also be introduced for supranational risk assessments to be undertaken in areas to be determined. || DESCRIPTION: treat the EU as a single jurisdiction and require a risk assessment to be carried out at EU level, prescribing actions to mitigate risks at EU level.

ASSESSMENT: This option would meet the objective of strengthening the requirement to carry out national risk assessments. The approach would be fully in line with international standards, while recognising the specific supranational character of the European Union. It would give flexibility for Member States to recognise national differences. || ASSESSMENT: This option would result in greater convergence between Member States' approaches. It would bring about more legal certainty for obliged entities operating across borders. However a supranational risk assessment may be very costly and resource intensive. In terms of efficiency and coherence, such prescriptive rules may lead to less flexibility and adaptability, impairing effectiveness of AML regimes.

COMPARISON: Effectiveness Efficiency Coherence || ++ + 0 || 0 - - 0

3a. Customer Due Diligence || DESCRIPTION: Member States to ensure that EDD must be conducted in certain situations of high risk, while allowing them to permit SDD in lower risk situations. Determination of the level of risk would be based on examples of the factors to be considered (such as geography, customer type, delivery channel, etc.). Guidance on its application would be provided by EU bodies (e.g. ESAs and other appropriate EU bodies/agencies/committees). || DESCRIPTION: introduce prescriptive provisions into the Directive setting the conditions for applying EDD and SDD.

ASSESSMENT: This option would facilitate a targeted approach to risk, resulting in better mitigation. Publication of guidance would ensure coherence of approach across EU Member States. It would be in line with the revised FATF standards. There could be short-term costs to implement systems, and differences of interpretation would still remain. However, the benefits appear to outweigh the disadvantages. || ASSESSMENT: This option would ensure a consistent approach and a level of certainty. The current rules already include – to a certain extent – prescriptive rules for the application of EDD and SDD, in some cases left to Member State discretion. However this option would not be sufficiently flexible to deal with the changing nature of ML/TF risks. Moreover, it would require a resource-intensive EU-wide risk assessment in order to determine appropriate prescriptive provisions and would not allow Member States any flexibility to respond to specific risks that they might be facing.

COMPARISON: Effectiveness Efficiency Coherence || + + 0 || 0 - - 0

3b. Equivalence of third country regimes || DESCRIPTION: Remove the "white list" process. Countries deemed to have AML systems not equivalent to those in the EU are treated as a factor/example to be taken into account by obliged entities when considering geographical risk. || DESCRIPTION: completely remove the "equivalence" process, leaving Member States and obliged entities to make their own decisions about risks associated with third country regimes.

ASSESSMENT: This option would ensure consistency of treatment of third countries across the EU, while recognising that some third countries do not meet high EU standards. It would allow the use of a risk-sensitive approach. However, different applications across EU Member States may remain. || ASSESSMENT: This option would arguably be the most risk-sensitive approach; it would avoid the concentration on one risk factor (i.e. geography). In contrast, in terms of coherence it would result in the least convergence of approaches across EU Member States.

COMPARISON: Effectiveness Efficiency Coherence || ++ 0 0 || 0 0 -

4. Risk-Sensitive Approach to supervision || DESCRIPTION: specific recognition in the Directive that supervision can be carried out on a risk-sensitive basis, with a role given to ESAs to develop more detailed measures. || DESCRIPTION: allow full discretion for supervisors to apply a risk-sensitive approach to supervision, without any additional measures at EU level.

ASSESSMENT: This option would allow supervisors to adopt approaches which are more targeted towards risk. The concept would be appropriate in developed sectors (such as banking, securities and insurance supervision), and less so in certain DNFBP sectors where a sectorial approach at EU level might not be viable at present. || ASSESSMENT: This option would maximise flexibility for all supervisors, but would potentially lead to a lack of convergence as each sector in each Member State would be supervised according to different risks and principles.

COMPARISON: Effectiveness Efficiency Coherence || + + + 0 || + 0 0

5. Treatment of Politically Exposed Persons || DESCRIPTION: introduce new requirements for domestic PEPs/PEPs working in international organisations, with risk-sensitive measures to be taken. As not all such PEPs are automatically higher risk, a risk sensitive element would be introduced to allow obliged entities to assess the risks that they pose and to apply appropriate mitigating measures. || DESCRIPTION: require EDD for all types of PEPs (not just foreign PEPs).

ASSESSMENT: This option would continue to address highest risks (foreign PEPs) and allow a graduated approach to other PEPs. However, the differential approach might cause some confusion for obliged entities, who would need to apply different standards to different categories of PEP. The approach is consistent with the international standard. || ASSESSMENT: By requiring a certain level of enhanced due diligence to be conducted for each category of PEP this option would give greater clarity and more consistency to the provisions, while placing the EU ahead of the international standard. It would however come with a high cost for industry, without a corresponding benefit.

COMPARISON: Effectiveness Efficiency Coherence || + + 0 + || + 0 -

6. Availability of beneficial owner (BO)information || DESCRIPTION: require all companies to hold information on their BO. This would need to be made available to competent public authorities and entities/ persons covered by the Directive. || DESCRIPTION: require Member States to set up public registries on shareholders, beneficial owners and nominees.

ASSESSMENT: This option would allow greater transparency of information on the ultimate beneficial owner of companies. It would ensure coherence with Commission's policy and the international standards. Nonetheless, some cost would be necessary for recording and maintaining this information, and making it available upon request. It would meet the demands of the European Parliament and civil society, and assist entities and persons covered by the Directive in carrying out CDD. || ASSESSMENT: If properly implemented, this option would increase the level of transparency and would meet the demand from civil society and European Parliament. It would assist obliged entities. However, it would be a challenge to maintain up-to-date information and it would entail substantial costs for Member States.

COMPARISON: Effectiveness Efficiency Coherence || + + ++ || + 0 0

7. Electronic fund transfers || DESCRIPTION: amend the Fund Transfers Regulation to reflect the new international standard by introducing a requirement to include information on the beneficiary to accompany the fund transfer, as well as limit exemptions from scope. || DESCRIPTION: require beneficiary and payer information to accompany the payment as per the international standard, and require identity verification as of €0 (as opposed to the existing threshold of €1,000).

ASSESSMENT: Ensuring that beneficiary information is included in all electronic fund transfers would provide an effective tool for law enforcement and ensure full traceability of all transfers. However, it would imply (limited) additional costs for business to adapt the payment systems. || ASSESSMENT: This option would be the most effective way of ensuring full traceability of electronic fund transfers, while exceeding international standards. In contrast, in terms of efficiency, it would entail significant additional costs for non-account based payment service providers.

COMPARISON: Effectiveness Efficiency Coherence || + - + || - - +

|| Policy Options relating to Operational Objective 2 (Ensure consistency between national rules and where appropriate flexibility in their implementation by strengthening and clarifying current requirements).

|| Preferred Options || Alternative Options

8. Comparability of statistical data || DESCRIPTION: reinforce and make more precise the requirement under Art. 33 with respect to collecting and reporting statistical data in order to ensure more comprehensive and comparable statistics. || DESCRIPTION: provide further guidance on how reporting by Member States should be carried out with a view to achieving more coherence between data sets.

ASSESSMENT: This approach would enhance comparability of important effectiveness indicators across the EU. It would be consistent with the international standards and in general with our objective. However, comparability across Member States would possibly remain impaired as a result of underlying differences with respect to AML approaches. || ASSESSMENT: This option improves the ability to measure effectiveness of the EU framework. It would be in line with the international standards. However, comparability across the Member States would remain difficult. Thus it would not be the best means to achieve the pursued objective.

COMPARISON: Effectiveness Efficiency Coherence || + - + || + - 0

9. Identification of Beneficial Owner. || DESCRIPTION: maintain the approach which requires identification of the BO as of a 25% ownership threshold, but clarify what the "25% threshold" refers to, particularly in relation to holding companies, as well as question of indirect ownership. || DESCRIPTION: remove the existing 25% threshold and replace it with a stricter requirement to always find the natural person who owns/controls the company.

ASSESSMENT: This option would meet the objective of clarification. It would offer flexibility for guidance by ESAs. Nonetheless, the concentration on the threshold may not always find the ultimate beneficial owner. || ASSESSMENT: This option would target the potential risk (i.e. person who controls the company), with a potential positive outcome in terms of effectiveness. However, it would lead to greater expense for obliged entities and to a lack of clarity, unless detailed guidance is prepared. Moreover, the lack of appropriate guidance as to what was expected could lead to a lack of convergence across Member States (as to the interpretation of the person who "controls" a company).

COMPARISON: Effectiveness Efficiency Coherence || + ++ + || + 0 -

10. Home and host supervisory responsibilities for AML || DESCRIPTION: introduce new rules clarifying that branches and subsidiaries situated in other Member States than the head office apply host state AML rules and reinforce cooperation arrangements between home and host supervisors. || DESCRIPTION: baseline scenario - no change to the current framework, as the Commission has already published a staff working document which clarifies the articulation between the Payment Services Directive and the Third AMLD.

ASSESSMENT: It would establish a clear legal footing for supervisors. It would in addition increase clarity for businesses and coherence across the EU. On the other hand it could reduce flexibility for Member States. || ASSESSMENT: According to some stakeholders and public authorities the staff working document does not provide sufficient legal certainty for the notion of home host responsibilities. It would therefore not achieve the objective, as it would not provide supervisors and obliged entities with legal certainty.

COMPARISON: Effectiveness Efficiency Coherence || +++ 0 0 || 0 0 0

11. Sanctions regimes || DESCRIPTION: introduce a set of minimum principles-based rules to strengthen administrative sanctions, along the lines of the Commission's policy as outlined in its Communication "Reinforcing sanctioning regimes in the financial services sector". || DESCRIPTION: introduce a set of common prescriptive rules (e.g. setting the level of sanctions according to different offences).

ASSESSMENT: It would enhance compliance by obliged entities and comparability between Member States. It would allow for a more consistent approach across Member States thereby ensuring a greater level playing field and facilitating the business environment. || ASSESSMENT: It would fulfil to a certain extent the objective as it would create a more level playing field, while enhancing coherence across Member States. The Commission's policy outlined in its Communication "Reinforcing sanctioning regimes in the financial services sector" already partly advocates such an approach. However, in the field of AML, moving beyond the principles based approach would not allow for flexibility for Member States and it could prove to be difficult in practice to agree on a more detailed and prescriptive approach.

COMPARISON: Effectiveness Efficiency Coherence || ++ + + || - - + +

|| Policy Options relating to Operational Objective 3 (Ensure that the rules are risk-focused and adjusted to address new emerging threats, by strengthening and clarifying current requirements).

|| Preferred Options || Alternative Options

12. Broadening scope to cover gambling || DESCRIPTION: broaden the scope of the Directive beyond "casinos" to cover the gambling sector, based on a broad definition of gambling. The scope for exemptions from coverage would be limited only to circumstances where there is a very low risk of ML/TF. || DESCRIPTION: adapt the scope to cover gambling activities where there is a proven higher risk.

ASSESSMENT: This option would achieve our objective in terms of effectiveness, efficiency and coherence. It would enhance effectiveness of the fight against ML/TF and it would be simpler to apply. It would level the playing field within the gambling sector, given the fact that some Member States already apply AML rules across the gambling sector. In contrast, it would entail additional costs to sectors not currently covered by the framework and additional costs to supervise. || ASSESSMENT: This option would enhance the effectiveness of the fight against ML/TF, it would level the playing field with non-obliged gambling sector. At the same time, in terms of efficiency, it would not impose any costs on the gambling businesses which remained outside the scope of the Directive. However, it would be more complex to apply due to the need for identification of higher risk activities and it would entail additional costs to supervise.

COMPARISON: Effectiveness Efficiency Coherence || ++++ 0 + || + - - -

13. Data protection || DESCRIPTION: introduce new rules in the Directive to clarify the interaction between AML/CFT and data protection requirements, in particular relating to data sharing within groups. || DESCRIPTION: require Member States to clarify interaction between AML/CFT and data protection rules at national level.

ASSESSMENT: This option would enhance coherence across Member States, would help reduce legal uncertainties businesses are confronted with and would bring about cost savings for groups. It would be in line with the new international standards. || ASSESSMENT: It would help reduce legal uncertainties with which businesses are confronted and therefore enhance their compliance with AML rules. It would moreover ensure compliance with a high level of data protection. Nonetheless, it would not remove incoherence across Member States as a result of differing national interpretations.

COMPARISON: Effectiveness Efficiency Coherence || +++ 0 +++ || ++ + -

14. Thresholds for traders in high value goods || DESCRIPTION: reduction of the scope and CDD thresholds for traders in high value goods from €15,000 to €7,500[70] for cash transactions. CDD measures would need to be applied for cash transactions of €7,500 and above. || DESCRIPTION: reduction of the scope and CDD thresholds to zero for specified obliged entities (e.g. dealers in precious metals and stones, second hand car dealers, etc.).

ASSESSMENT: It would address risk of use of cash, while bringing the threshold more in line with the common practice in Member States. It would bring more obliged entities into the scope, with potential cost implications. || ASSESSMENT: On the one hand it would ensure firm controls on the use of cash, while a single threshold would promote certainty. Some Member States already apply lower thresholds or indeed even forbid use of cash for certain transactions above certain thresholds (see Table 5). On the other hand, such an approach could drive the use of cash underground, and impact on financial inclusion

COMPARISON: Effectiveness Efficiency Coherence || +++ 0 +++ || + - +

15. Cross-border cooperation between FIUs || DESCRIPTION: introduce new provisions into the Directive regarding FIU powers and cooperation, including an explicit legal basis for the matching of anonymous data between the EU FIUs and clarifying the circumstances under which exchange of information can take place . || DESCRIPTION: establish a single European FIU to receive and analyse and disseminate to the competent authorities disclosures of information from obliged entities operating within the EU.

ASSESSMENT: Introducing new requirements would strengthen FIU powers and cooperation. It would enhance effectiveness of the fight against ML/FT, as well as give legal clarity. However, some difficulties to exchange information may still remain. || ASSESSMENT: This option would enhance effectiveness of the fight against ML/TF; it would also bring about potential advantages in terms of economies of scale and efficiency. However, it would require substantial modifications to Member States' laws permitting cross-border cooperation and information sharing. In addition it could have a negative impact on the agreement of the Member States on the whole package.

COMPARISON: Effectiveness Efficiency Coherence || +++ 0 + || + 0 0

VI. Analysis and quantification of Impacts VI.1. Compliance costs of the existing framework

While the Third AMLD was not accompanied by an Impact Assessment at the time of the proposal, the cost implications of the current framework have nevertheless been evaluated on an ex post basis. In 2009 an external study[71] by consultants Europe Economics on behalf of the Commission assessed the costs of compliance with a number of Financial Services Action Plan measures (FSAP)[72], including the Third AMLD. The study concentrated on firms from four sectors within the financial services industry in the EU: banks and financial conglomerates, asset managers, investment banks and financial markets.

The study's findings indicated that the cost of compliance with AML requirements was not insignificant and had increased in recent years following the regulatory changes introduced in the EU, notably through the Third AMLD[73]. The focus was on the so-called ‘incremental compliance costs’ caused by the FSAP measures, rather than on the total costs of activities that contribute to regulatory compliance.

The study identified separately cost impacts that were of a one-off nature (i.e. those costs that only have to be incurred once in making the transition, such as IT investment and the re-shaping of business processes) from those that were recurring in nature (on-going costs as a result of regulation). The one-off costs of compliance with the AML Directive for banks, financial conglomerates and investment banks roughly accounted for 10% of all their financial services regulatory costs, while for on-going costs of compliance, the percentage increased to around 13% of all their financial services' regulatory costs.

The main source of AML-related compliance spending was on IT. In terms of one-off costs, this included projects designed to: (i) meet the “Know Your Customer” requirements; (ii) facilitate increased monitoring of suspicious transactions through increased automation of proces