Commission Takes Haphazard, Problematic Approach to Money Laundering

Commission Takes Haphazard, Problematic Approach to Money Laundering

For the European Commission (EC), pursuing regulatory priorities during the COVID-19 pandemic has proven to be a historic challenge. Commission officials, together with their colleagues in the European Parliament (EP) and the other European institutions, had to move the delicate processes of consensus-building and legislation among 27 EU member states – difficult enough under normal circumstances – to videoconferencing tools like Zoom. While the pandemic is now slowly abating and Commission staff are gradually returning to work, the challenges of lawmaking under confinement may have produced problems European officials will be dealing with for months to come.

While the Commission itself admits the crisis jumbled its calendar, with major policy initiatives like the Farm to Fork (F2F) strategy pushed back by months before its final release in May, the EC’s unveiling of its money laundering blacklist early last month might be the most egregious example of poor planning and chaotic execution.

On May 7th, the Commission published its delegated regulation detailing a list of 12 countries it considers “high risk” in terms of their potential use for money laundering and terrorist financing, in line with the 5th Anti-Money Laundering Directive (AMLD) published in 2018. The EC’s list of twelve countries included some holdovers from 2019, while also adding new countries and removing others like Bosnia-Herzegovina, Ethiopia, Sri Lanka, and Tunisia.

Inexplicably, however, the Commission waited until the same day to publish its methodology for defining that list. Even though the institution’s stated aim was to “provide more clarity and transparency in the process of identifying these third countries,” waiting until the list was already finalized and published to do so effectively did the opposite. The EP and the Council of the European Union now have until June 7th to approve the EC’s listing decisions.

A long-running issue

The blacklist has been a source of tension between the EC, the EP, and the Council since well before the crisis. On February 13th, 2019, the then-Juncker Commission announced it had submitted its list of 23 countries for review by the EP and the Council, drawing heavily on the work of the Paris-based Financial Action Task Force (FATF). The FATF, a global financial transparency watchdog, is responsible for maintaining so-called black lists but also ‘grey lists’ of jurisdictions that are actively working with the organization to address their anti-money laundering (AML) and countering financing of terrorism (CFT) frameworks.

That list of 23 jurisdictions quickly turned out to be a dud, with the Council unanimously rejecting the Commission’s proposition less than a month later. One of the Council’s main sticking points: transparency. A majority of the delegates found “the act was not established in a sufficiently transparent way,” likely motivating the EC’s decision to focus on publicizing its methodology so intently this year.

Critically, however, the move to release both the 2020 list and the methodology simultaneously flies in the face of the Council’s most stinging piece of feedback from 2019, namely that “the Council cannot support the current proposal that was not established in a transparent and resilient process that actively incentivises affected countries to take decisive action while also respecting their right to be heard.”

The European Parliament, for its part, seemingly remained skeptical of the extent of the Commission’s reliance on the work of the FATF, making clear it expected the EC to be able to do the job of identifying high-risk jurisdictions for itself. On March 14th, 2019, the EP’s resolution on the proposed blacklist reminded the Commission that it had rejected delegated regulations in 2016 and 2017 because the Parliament considered the Commission’s process “not sufficiently autonomous,” even as the EP commended the work the EC had done on developing a “self-standing list based on strict criteria.”

Criticisms left unaddressed

With its 2020 delegated regulation, the Commission does not appear to have properly considered either of these key pieces of feedback from the other key European institutions. By rendering judgment before telling any of these “affected countries” how they were being judged, the EC seems to have completely ignored the Council’s primary objection to its initial proposal last year. With its list of additions and subtractions to the EU blacklist, meanwhile, the EC appears to have betrayed its own (mis)use of the FATF’s work, cribbing off the independent agency’s list of jurisdictions under review while ignoring the subtleties distinguishing the FATF’s ‘grey’ and ‘black’ lists – or between countries that are on a pathway to compliance with AML rules and those that aren’t.

The EC, in its defense, is quite open about the extent of its reliance on the FATF, plainly stating that the 12 countries on its list are all already working with the FATF to address the strategic deficiencies leaving their financial systems open to misuse. Whereas the FATF is engaging constructively with these ‘grey-listed’ countries to improve their legal frameworks, the Commission’s approach uses the fact of their cooperation with the body as a justification to blacklist them.

The EC blames this discrepancy on the AMLD, claiming that the legislation only “provides for one single list” and that its hands are thus tied. Then again, that is far from the only technical shortcoming of the regulatory framework surrounding this blacklist. The supposedly comprehensive EU approach automatically omits all EU member states and also excludes the bloc’s most powerful partners, meaning that known money laundering hotspots like the Latvia and Cyprus and non-EU countries like the United States, Saudi Arabia, Russia and China all get off scot-free.

For all its flaws, the Commission’s list is now in the hands of the Council and the Parliament. The countries newly added to the list will need to see whether key MEPs like LIBE committee chair Juan Fernando López Aguilar or ECON committee leads Irene Tinagli and Stéphanie Yon-Courtin will pick up on the enduring issues with the EC’s approach. If not, the list will go into effect this October.

Image credit: Marco Verch/Flickr (Creative Commons 2.0)

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