Opinion of the European Economic and Social Committee on 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 (COM(2004) 448 final)
Date: 2005-05-11
Institutions: European Economic and Social Committee
Subjects: drafting of EU law, fight against crime, financial legislation, law of banking, money laundering, provision of services, terrorism

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Official Journal of the European Union

27.10.2005

Opinion of the European Economic and Social Committee on a directive of the European Parlia-
ment and of the Council on the prevention of the use of the financial system for the purpose of
money laundering, including terrorist financing

(COM(2004) 448 final)

(2005/C 267/05)

On 21 October 2004, the European Council decided to consult the European Economic and Social
Committee, under Article 262 of the Treaty establishing the European Community, on the abovementioned
proposal.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible
for preparing the Committee's work on the subject, adopted its opinion on 15 April 2005. The rapporteur
was Mr Simpson.

At its 417th plenary session on 11 and 12 May 2005 (meeting of 11 May 2005), the Economic and Social
Committee adopted the following opinion by 107 votes in favour and one abstention.

1. Summary

i. The inclusion of specific reference to terrorist financing and

further detail as regards ‘serious offences’.

This draft directive will be the third in connection with
in

1.1
the prevention of money laundering,
1991 (91/308/EEC) and the second in 2001 (2001/97/EC).

following the first

The key drivers for this draft directive are: 1) the inclu-
1.2
sion of a specific reference to terrorist financing, although this
was agreed by Member States under the previous directive to
be include within the concept of serious offences, and 2) to
take account of the revised Forty Recommendations of the
Financial Action Task Force on Money Laundering (FATF) (1)
published in June 2003.

ii. Increased coverage regarding trust and company service
providers and high value dealers in goods and services.

iii. Considerable expansion of details concerning customer due
including beneficial

diligence and verification of identity,
ownership.

iv. Provision regarding protection of

employees making

money-laundering reports.

2. General comments

The key groups affected by obligations that would be

2.1
imposed under the draft directive are:

v. A prohibition against informing a client that a report has

been made.

vi. A requirement

to apply EU standards in branches and

a) businesses in those sectors required to comply with the

subsidiaries outside the EU.

provisions of the directive (‘the regulated sector’);

b) users of services provided by the regulated sector (i.e. their

customers and clients);

c) persons making reports of knowledge or suspicion of

money laundering;

2.4
The draft directive allows for further convergence with
countries where the recommendations of the Financial Action
Task Force on Money Laundering (FATF) of the Organisation
for Economic Cooperation and Development
(OECD) have
been, or will be, applied.

d) law enforcement agencies and the Financial

Intelligence
Units (‘FIUs’) who receive and use the intelligence contained
in money-laundering reports; and

e) elements of the criminal community — those committing
‘serious crimes’ (defined in Article 3 (7) of the draft direc-
tive) where those crimes result in proceeds, or involve hand-
ling funds, relating to criminal activity.

The draft directive is intended to replace the existing

2.2
directives, which will be repealed.

The key changes, compared with the first and second

2.3
directives, are:

(1) The FATF is an inter-governmental body which sets standards, and
develops and promotes policies to combat money laundering and
terrorist financing. Website: www.fatf-gafi.org

2.5
The consolidation in the new directive of the require-
ments of the first and second directives is also an aide to
clarity.

2.6
However, the third directive follows very closely on the
heels of the second directive, which itself had greatly expanded
the scope of anti-money laundering provisions, and the range
of sectors affected. There has only been a short period to eval-
uate the impact of the 2001 Directive, and the Committee
notes that, as yet, there has been no comprehensive study has
been made of the effectiveness of the existing regime, or its
proportionality, including whether Member States' government
investment
is in balance with that made by the regulated
sector.

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2.7
The EESC welcomes measures that will make money
laundering and terrorist financing more difficult. In support of
the EU-wide application of preventative measures, the EESC
recognises that money launderers will attempt to exploit weak-
nesses in the monitoring systems and that the money will be
moved to the weakest points in the supervisory system. For
this reason, Member States need to establish rigorous standards
across the European Union and encourage their establishment
in other countries.

3.1.5
Consideration should be given to limiting Member
States' choice in this regard to promote an even application of
the anti-money laundering regulation and accordingly, provide
a level playing field for the regulated sector across the EU. If
Member States wish to apply the draft directive on a wider
basis, the ESC recommends that consideration is given to a
regime where reporting is compulsory only in respect of
serious crimes (the minimum standard), but with a facility to
make voluntary reports, afforded the same protection by law as
the compulsory reports, in respect of other crimes.

This opinion comments in more detail on specific

2.8
aspects of the draft directive.

3. Comments on specific areas of key change

3.1 Terrorism and serious crimes

3.1.6
An ‘all crimes’ compulsory regime, particularly where
linked to an extra territorial requirement for reporting, risks
diverting valuable private sector and law enforcement resources
to no good effect. The need for the UK ‘limited intelligence
value’ reporting system, designed in an attempt to minimise
effort, by both the regulated sector and law enforcement autho-
rities in dealing with matters of no or very little value to law
enforcement (and those matters already reported to the relevant
authority), illustrates well some of the pitfalls of a compulsory
‘all crimes’ regime.

3.1.1
within the draft directive.

The ESC endorses the inclusion of terrorist financing

3.1.7
The Committee considers that the fixed monetary de
minimis limit laid down in Article 6 (b) (EUR 15 000) is reason-
able, given that this limit can be reached through one or
several transactions that appear to be interlinked in some way.

3.1.2
As regards the definition of serious crimes and money
laundering, further clarification would help those affected to
have a better comprehension of the precise intentions of the
directive and, accordingly, help to ensure consistent and effec-
tive implementation of the law.

3.1.8
A further worthwhile clarification, to promote consis-
tency, would be to make explicit that the definition of money
laundering, from Article 1.1(c) of the second directive (repeated
in Article 1.2(c) of the draft directive), includes the possession
of the proceeds of a criminal's own crime, without any further
transaction having been necessary.

law that

It is important to bring clarity to the level of knowl-
3.1.3
edge of criminal
is actually required of persons
working in the regulated sector, the great majority of whom
have little or no expertise in this area. Article 3(7) of the draft
directive contains a detailed definition of ‘serious crimes’ but
we recommend that this definition is qualified to make clear
that,
in determining whether to make a money-laundering
report, a person in the regulated sector is only required to
apply the knowledge and skill concerning criminal law that a
person carrying out that function would be expected to have.
To do otherwise would put a disproportionate burden on the
regulated sector (both in terms of
training their staff and
controlling their actions) with all the risks of increased costs,
and undue disruption for customers and clients, related to it. It
could also bring unnecessary risks to persons working in the
regulated sector.

Article 2.1(3)b sets out five categories of transaction
3.1.9
conducted by independent
legal professionals to which the
Directive would apply. The Committee recommend the addi-
tion of a sixth category: (vi) tax advice.

3.2 Trust and company service providers and dealers in high value

transactions

3.1.4
‘Serious crime’ (defined to include ‘at least’ the activ-
ities listed in Article 3(7)) appears to be framed as a minimum
the existing directives
standard.
shows that Member States have taken different approaches
resulting in regimes either encompassing all crimes, or alterna-
tively encompassing only serious crimes.

Implementation to date of

3.2.1
Article 3 (9) defines ‘trust and company service provi-
ders’ and Article 2.1(3)(f) defines ‘high value dealers’. The clari-
fication in the definitions is welcomed and particularly the
inclusion of ‘services’ within Article 2.1(3)(f). Money laundering
can be carried out by the manipulation of large transactions for
services in cash, just as it can be carried out by the manipula-
tion of large transactions for goods in cash.

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3.3 Customer due diligence and verification of

identity,

including

3.3.4 Cu stome r du e di li g e nce a nd i de nti fi c a ti on

beneficial ownership

3.3.1
The Articles concerning these subjects must be clear,
and capable of being applied on a risk-based system. Dealing
with these aspects of the money laundering regulation is a
major contributor to the cost of compliance, and also has a
direct impact on customers and clients.

3.3.2 De fi ni ti on of b e n e fi ci a l ow ne r

3.3.4.1
‘Customer due diligence’ is an area of the draft direc-
tive where more precise definition of terms is required to bring
clarity. Terms such as ‘due diligence’, ‘scrutiny’ and ‘verification’
may be open to varying interpretations across different parts of
the regulated sector, and across different Member States, and
accordingly they should be defined more precisely to enable a
common understanding.

Article 3 (8) refers to a beneficial owner as being a
3.3.2.1
natural person who ultimately, directly or indirectly, owns or
controls 10 % or more of the shares or the voting rights of a
legal person or the property of a foundation, a trust or a
similar legal arrangement or who otherwise exercises compar-
able influence, for instance over management. The Committee
considers this to be too low a threshold, when taken together
with Article 7.1 (b), and the reference to risk-based measures in
Article 7.2.

3.3.2.2
The draft directive should refer to the principles
regarding requirements for identification and impose a require-
ment on Member States to provide guidance, either directly or
by allowing representative professional bodies to produce it, on
a risk-based system of identification allowing varying levels of
identification of beneficial owners depending on circumstances.

requirements,

3.3.2.3 Whilst we can understand the motivation for strin-
gent
in practice their universal application
without regard to risk tends to penalise legitimate customers
and clients through additional cost, effort and potential loss of
commercial confidentiality as regards transactions planned to
be undertaken, whilst having little or no effect on illegal activ-
ities.

The Committee recommends that

3.3.2.4
the minimum
requirement to identify ownership or control should be 25 %
either by an individual or by a group acting as a ‘concert party’.

3.3.3 Poli t i ca lly e x p ose d p e r sons

3.3.3.1
The Committee considers that the proposed defini-
tion of politically exposed persons, as in Article 3 (10), is unne-
cessarily wide ranging and should be amended to introduce the
phrase ‘who are not citizens of the EU’ after the phrase ‘natural
persons’. PEPs within the European Union (though not necessa-
rily immune to the temptations of corruption) are subject to
assured democratic controls which make the enhanced due dili-
gence requirements envisaged in Article 11.1 unnecessary.

As

in relation to identification,

3.3.4.2
the Committee
recommends that the draft directive should require Member
States to provide for clear risk-based guidance within their own
territories.

regardless of

any derogation,

Article 6 (c) requires the application of customer
3.3.4.3
due diligence procedures when there is a suspicion of money
laundering,
exemption or
threshold. This may not be practicable, as performing such
procedures when prompted by suspicion might put
the
suspected party or parties on notice. The stipulations in Article
6 (c) should be qualified to indicate that such procedures
should be performed only to the extent possible without
alerting the suspected parties.

In respect of the simplified customer due diligence
3.3.4.4
procedures as specified in Article 10.3 (c),
the Committee
recommends modifying the latter part as follows, by adding the
words in italics: ‘a pension, superannuation or similar scheme
that provides retirement benefits to employees, where contribu-
tions are made by way of deduction from wages and/or from
employers ...’.

3.3.4.4.1
Article 11.2 proposes to prohibit credit institu-
tions from entering into a relationship with a correspondent
bank which permits its accounts to be used by shell banks. It
may not always be easy for a credit institution to discover
when a correspondent bank does so. It should be clear that
institutions will only be expected to take reasonable precau-
tions in relation to their respondent banks, to assess the latter's
policy in relation to shell banks.

3.3.4.5
In Article 11.1 (a), the reference to documentary
evidence does not need to be qualified by the word ‘additional’
which could be deleted.

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3.3.4.6
Article 12 permits reliance on third parties for the
performance of customer due diligence procedures but indi-
cates that
the ultimate responsibility for such procedures
remains with the institutions or persons covered by the
proposed Directive. The Committee recommends removal of
the latter part of Article 12, related to ‘the ultimate responsibility
shall remain with the institution or person covered by this Directive
which relies on the third party’ and its replacement by the prin-
ciple included in recital (20) on page 11 of the proposed Direc-
tive (avoiding duplication of work by relying on customer-iden-
tification procedures performed by third parties that are regu-
lated). Unless reliance is permitted, once reasonable measures
have been undertaken to establish the bona fidae nature of the
third party, this provision will not avoid duplication of work.

Article 13.2 seeking the reporting of suspicions
3.3.4.7
might usefully be extended to add an extra sentence:
‘The
Commission should investigate such referrals and inform Member
States of the conclusions reached.’

3.3.4.8
To remove doubts about the compatibility of the
provisions of Article 14 with the privacy regulations in certain
Member States, the term ‘immediate’ should be removed from
Article 14 and the third party must be permitted to seek
consent from the persons whose information is being disclosed.
The word ‘immediately’ might be replaced by ‘promptly’.

3.4 Prohibition on informing

3.4.1
The Committee recommends a more closely defined
meaning of ‘prohibition’ as regards the first part of Article 25.
It is required in some Member States that regulated sector
personnel report to certain regulators or parts of the judiciary
as well as the FIU [Financial intelligence unit], and also in prac-
tice the fight against money laundering may be facilitated by
careful exchanges of information between parties not complicit
in the money laundering. To allow for these positive forms of
disclosure, we recommend altering the Article to make explicit
the fact that disclosure is prohibited only where this may tip
off a suspect, or prejudice a money laundering investigation.

effectively and competitively in countries where money-laun-
dering laws are not of a standard comparable to those in the
EU. Therefore, the application of EU or comparable standards
should be encouraged but an absolute requirement for applica-
tion overseas may be premature. It would be preferable,
in
these situations, for institutions to inform the competent autho-
rities in other countries, with a view to assistance being
provided to them to improve their controls in relation to
money laundering and terrorist finance.

3.5.3
It would be more appropriate for the EU to reinforce
the application of good and relevant globally recognised stan-
dards by replacing the references to the application of EU
requirements with the application of the FATF 40 recommen-
dations. This would remove any implications that the EU is
trying to enforce its requirements with extra-territorial effect,
where there are global standards with broadly equivalent effec-
tiveness.

3.6 Employee protection

the reporting systems. Not only employees, but

3.6.1
The Committee applauds the inclusion in Article 24 of
this protection and urge the Commission to extend this further
to include a reference to judicial processes and the role of
police authorities in providing protection. Clarity over protec-
tion of the confidentiality of the source of the money-laun-
dering report is critical to the smooth and complete operation
of
their
employee organisations should be covered by Article 24 which
should also specifically refer to the obligation of Member States
to keep the identity of reporters confidential to the fullest
extent permitted by Member State criminal and civil law. The
Directive should specifically provide that the identity of repor-
ters should be kept strictly confidential, unless they have given
consent to its disclosure, or it is essential for a fair judicial
process in criminal proceedings.

Article 24 should be amended to ensure that

the
3.6.2
protection provisions extend to sole practitioners and small
businesses.

3.5 Fair competition in overseas businesses

3.7 Other comments

3.5.1
In recital (23) on page 11, as well as in Article 27, it is
suggested that Community standards should be applied in third
countries where Community credit and financial
institutions
have branches and majority owned subsidiaries and where
legislation in the area of money laundering and terrorist finan-
cing is found to be deficient.

The Committee has a concern that such an application
3.5.2
may render Community credit and financial
institutions
branches and majority-owned subsidiaries unable to operate

3.7.1 Se c t or a l a p p li ca t i on of th e p r op ose d Di r e c ti ve

3.7.1.1
Unless otherwise defined, all the systems' require-
ments included in the draft directive are applicable to all insti-
tutions and persons as defined in Article 2. As the regulated
sector is now diverse, consideration needs to be given to the
situation of institutions or professions whose activities are only
partly covered by the draft directive as they need clarification
as to how they are to apply the provisions to relevant parts,
and not other parts, of their business.

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3.7.1.2
It is unclear why Article 2 restricts the applicability
of the draft directive to notaries and other independent legal
professionals only when carrying out certain activities, while
other liberal professions, with equivalently high standards of
ethical and competence standards enforced on their member-
ship, have all their services included. The Committee under-
stands that there are certain activities reserved to notaries and
other legal professionals in some Member States (usually linked
to their role as advocates in formal legal proceedings), and that
within those areas legal professionals can be validly distin-
guished from the members of other liberal professions, and
thus that an argument exists for their exclusion from the scope
of the Directive. However, the Committee believes that they
should be included within the scope of the Directive wherever
the activities in which they are engaged are not reserved to
legal professionals, and the services would be included within
the scope of the Directive if carried out by any other appropri-
ately regulated professional firm.

3.7.2 R e p or t i ng ob li g a ti ons

3.7.2.1
Article 17 requires that the institutions and persons
covered by the draft directive examine with special attention
any activity which is likely to be related to money laundering.

This requirement could result in the performance of
3.7.2.2
substantial additional procedures by the
institutions and
persons covered by the draft directive and also raise the risk of
a subject being ‘tipped off’ by the conduct of special proce-
dures.

The Committee believes that it should not be the
3.7.2.3
task of the regulated sector to perform investigations in the
sense apparently meant in Article 17, but to be alert to the
need to form suspicions on the basis of information which
came to them during the normal course of business and to
report on such information for investigation by law-enforce-
ment authorities.

3.7.3 M e mb e r S ta t e s' op ti on for str i c te r p r ovi si ons

The Committee recommends

3.7.3.3
the provision
allowing local variation is limited to those areas where such
variation (if it is to be imposed by Member States on a compul-
sory rather than voluntary basis) is necessary to reflect specific
local conditions.

that

3.7.4 Comme n ts on sp e c i fi c p a r a g r a p h s

3.7.4.1
The Committee welcomes the responsibility placed
on Member States to provide feedback (Article 31.3) and
recommends that this is specifically made the responsibility of
the FIU. Feedback is useful as it promotes better and more
effective future compliance in applying the legislation.

3.7.4.2
Article 19. 1 (b) requires that the institutions and
persons covered by the proposed Directive to furnish the Finan-
cial Intelligence Unit with all necessary further information in
accordance with applicable legislation. The Committee would
like to point out that the law enforcement perception of ‘all
necessary further information’ might be very far reaching and
indeed it may not be possible for the regulated sector to
comply with such a requirement. We recommend the term ‘all
necessary’ is replaced with wording which allows the Member
States to confirm with their regulated sectors the additional
information that can be required to be provided, without
becoming unnecessarily burdensome and safeguards to ensure
that this is not exceeded by the FIU.

should be exempted from the suspicions

3.7.4.3
Article 20.2 should provide that suspicions formed
in the course of providing legal advice (by notaries, indepen-
dent legal advisers, auditors, external accountants or tax advi-
sers)
reporting
requirements. The current wording of this paragraph is more
restrictive, suggesting that the exemption may only be limited
to advice given when ascertaining the legal position of their
client preceding legal proceedings. This would be an unjustifi-
able restriction on the human rights of clients to obtain legal
advice in confidence.

3.7.3.1
Article 4 allows Member States to adopt or retain in
force stricter provisions than those contained in the draft direc-
tive.

3.7.3.2 Material differences in the toughness of provisions
from one Member State to another may harm the principle of
the single market, result in a disruption of fair competition,
and may encourage criminals to migrate their money-laun-
dering activities to less stringent Member States.

3.7.4.4
The provision of Article 23 that disclosure in
accordance with the draft directive shall not constitute a breach
of any restriction on disclosure of information has omitted that
such disclosure needs to be made ‘in good faith’ to qualify for
this protection. This was stipulated in the second directive. This
qualification should be reinstated to emphasise that the regu-
lated sector must be required to act responsibly and in good
faith in order to benefit from the necessarily wide-ranging stat-
utory protection. To specify otherwise risks distorting the
balance of rights of persons and their access to justice.

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4. Conclusions

4.1
Though the Committee support the twofold objective of
ensuring the comprehensive application by the EU of global
standards, as set out in the FATF 40 Recommendations, and
the clear inclusion of terrorist financing, the Committee regrets
that this 3rd Money Laundering Directive has been prepared
before there has been an opportunity to fully evaluate the
merits of the 2nd.Directive approved in 2001. Embarking on
the preparation of a 3rd Directive, so soon after the second,
and without a significant period for reflection to consider the
lessons to be learnt from the application of the 2nd Directive
may be somewhat precipitous.

To justify the preparation of a 3rd Directive at this
4.1.1
time, it is essential that it is also used to improve upon the 2nd
Directive and its implementation in further ways. In particular,
we note, with approval, some provisions that have been
included:

— to remove certain unduly burdensome aspects of the 2nd
Directive, where requirements imposed are not reflected by
equivalent benefits in terms of law enforcement and the
fight against crime;

— to reduce inconsistencies in anti-money laundering require-
ments and practices both within the EU (in terms of both
different Member States and different parts of the regulated
sector or other sectors vulnerable to money laundering) and
between it and third countries (this necessarily implies a
reduction of Member State options under the Directive for
their own discretionary variations); and

— to introduce clearer protections for

the employees of

reporting institutions

Brussels, 11 May 2005.

4.2
The suggestions made in this opinion are intended to
improve the Directive in ways that would contribute to these
complimentary but not
inconsistent objectives. Any further
changes introduced during the final stages of the negotiation of
the Directive should bear these over-riding principles in mind.

the 2nd Directive,

In view of the short period from the coming into force
4.3
of
in many Member States, a relatively
generous period should be allowed, for the implementation of
the 3rd Directive.

4.4
As experience is gained of the administration of the
Directives to prevent money laundering and terrorist financing,
the European Union will probably need to consider some links
and policy synergies with other aspects of criminal behaviour
and its deterrence. The Committee has noted suggestions for:

— comparison of the draft Directive with the work of the

Council of Europe on criminal law;

— clarification of arrangements for the confiscation of crim-

inal funds;

— more on helping 3rd Countries with problems of organised

crime;

— specific vulnerable areas, such as cross border tax evasion

4.5
The Committee welcomes the further development of
the rules to prevent money laundering and terrorist financing
as a symbol of a European Union that is ensuring high stan-
dards of probity and conduct in public and private behaviour.
The Directive is both a practical step in the management of
financial affairs and also a means of strengthening the Euro-
pean Union.

The President

of theEuropean Economic and Social Committee

Anne-Marie SIGMUND