Takeaways

The new list of high-risk third countries takes effect on 1st October 2020, by which time affected companies are required to have appropriate policies and procedures in place.
The new list of high-risk third countries aligns with the Financial Action Task Force.
The move marks a step by the EU towards greater focus on the eradication of anti-money laundering and terrorist financing from the bloc. Further measures and reviews are also underway to strengthen the EU’s AML and CFT powers.

The EU’s revised list of high-risk third countries takes effect on 1 October 2020. On 7 May, the European Commission (EC) announced a revised list of high-risk third countries to align with the Financial Action Task Force (FATF). The new third countries listed by the EU have been identified as having strategic deficiencies in their AML/CFT regimes.

The amendments to the list are as follows:

  • Countries which have been newly listed: The Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Panama and Zimbabwe.
  • Countries which have been delisted: Bosnia-Herzegovina, Ethiopia, Guyana, Lao People's Democratic Republic, Sri Lanka and Tunisia.
  • Countries which remain on the list: Afghanistan, Iraq, Vanuatu, Pakistan, Syria, Yemen, Uganda, Trinidad and Tobago, Iran and North Korea.

Obliged entities in Member States must provide for enhanced customer due diligence (CDD) measures when dealing individual and entities from listed high-risk third countries. 

Legislative background

Pursuant to Article 9 of Directive (EU) 2015/849 (the 4th Anti-Money Laundering Directive), there is a legal requirement to identify “third-country jurisdictions which have strategic deficiencies in their national AML/CFT regimes that pose significant threats to the financial system of the Union (‘high-risk third countries’)”. 

On 7 May 2020, the EC adopted Delegated Regulation (EU) 2020/855 (the Regulation) which amends Delegated Regulation (EU) 2016/1675 supplementing the 4th Anti-Money Laundering Directive. The Regulation sets out the amendments to the EU’s existing list of high-risk third countries with reference to jurisdictions that have been identified by the FATF as having strategic AML/CFT deficiencies for which the relevant jurisdiction has developed an action plan with the FATF. 

Implications for companies

Pursuant to Article 18 of the 4th Anti-Money Laundering Directive, countries that appear on the list are subject to enhanced customer due diligence (CDD) checks by banks, financial institutions and other “obliged entities” under the EU’s AML regulations. Affected companies must therefore ensure that their AML processes and procedures are up-to-date and fit for purpose. In relation to any qualifying transaction, an “obliged entity” will need to take appropriate steps to identify and assess the risks of money laundering on its business, before establishing and maintaining policies and procedures to manage and mitigate those risks effectively.

Due to the ongoing coronavirus pandemic, the Regulation provides for a transition period to give the stakeholders sufficient time to prepare for enhanced CDD procedures in relation to the newly listed jurisdictions. This transition period is coming to an end and companies must now have systems in place to address these amendments. 

Brexit

The timing for the implementation of the new listings means that the list will be adopted by the UK, whose AML regulations define a “high-risk third country” by reference to EU law. However, it is unlikely that the other elements from the EC’s Action Plan (see below) will extend to the UK. Whilst currently in a transition period, the UK is due to finalise its exit from the EU at the end of the year. Many of the outcomes from the Action Plan are due to be tabled in 2021. Therefore, the assumption is that the UK would be excluded. 

Revised EU methodology for the identification of high-risk third countries and measures to strengthen its AML/CFT powers

In addition to the revisions to the high-risk third country list, the EC also unveiled a new transparent methodology to identify high-risk third countries that pose a threat to the EU’s financial system. 

It is hoped that the refined methodology will bolster the EU’s engagement with third countries and the FATF. The methodology will ensure greater cooperation with the FATF and its listing process, in addition to requiring consultation with experts from Member States. 

The revised methodology was introduced as a part of a “comprehensive and far-reaching” Action Plan for a Comprehensive EU Policy on Preventing Money Laundering and Terrorist Financing (Action Plan). The Action Plan sets out steps that the EC will take over the coming months to clamp down on money laundering and terrorist financing in the bloc. The Action Plan is built of six pillars, which includes a requirement for the EU to position itself as a leader in the fight against AML/CFT activities, which is based on ensuring better alignment with the FATF and updates to its methodology.

The EC has tabled further reviews to its processes and exploring additional measures to strengthen its AML/CFT powers in the period from 2018 to 2025. Various high-profile cases have exposed vulnerabilities in the EU’s AML/CFT systems, and these moves represent the EU’s commitment to eradicating these activities from the bloc.

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