Incoming EU-level reforms to anti-money laundering laws are set to take legal effect on January 10, introducing new requirements for banks handling transactions linked to high-risk countries.

EU member states are expected to write the 5th Anti-Money Laundering Directive (5AMLD) into national law by the end of this week, tightening controls around the illicit movement of funds. The UK and Germany are among those set to introduce the new rules on time.

The 5AMLD was initially constructed as emergency amendment to the previous directive, finalised in May 2015, after concerns in Brussels about opaque financial flows exposed by the Panama Papers scandal, as well as a string of terrorist attacks across Europe.

Attempting to stop the movement of illicit funds across international borders is one of the new text’s priorities, and banks – considered “obliged entities” and so covered by the 5AMLD – will face more stringent demands when executing transactions linked to countries deemed to pose a high risk of financial crime.

“Trade finance lenders will have to obtain additional information on the customer and on the beneficial owner, on the intended nature of the business relationship, on the source of funds and source of wealth of the customer and of the beneficial owner as well as on the reasons for the intended or performed transactions,” Johannes Wirtz, a senior associate at Bird & Bird’s banking and finance practice in Frankfurt, tells GTR.

“In addition, they will need the approval of senior management for establishing or continuing the business relationship and to conduct enhanced monitoring of the business relationship by increasing the number and timing of controls applied, and selecting patterns of transactions that need further examination.”

The demand for greater scrutiny over high-risk international transactions is not new for banks in the EU. In the trade finance sector, legally binding guidelines have been in place since March 2018 – prior to the introduction of 5AMLD – that flesh out how enhanced due diligence should be carried out.

Those guidelines, drafted by the European Banking Authority, acknowledge banks can sometimes have little oversight of an underlying trade when executing a transaction. They suggest financial institutions use company registries and third-party intelligence sources to obtain information on their clients, and use their professional judgement to decide whether ongoing pricing makes commercial sense, particularly for commodities trading.


EU blacklist dispute

However, the water is being muddied by a dispute between the European Commission and Council over which countries are considered high risk in terms of money laundering.

The first European Commission blacklist was produced in July 2016 and amended regularly over the following two years.

The current list – still legally binding across the EU – includes Afghanistan, Bosnia and Herzegovina, Ethiopia, Guyana, Iran, Iraq, Lao, North Korea, Pakistan, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, Uganda, Vanuatu and Yemen.

In February 2018, however, the European Council criticised the list for too closely following a register maintained by the Financial Action Task Force, a worldwide standards-setter for anti-money laundering. The group of EU finance ministers that comprise the European Council argued the methodology used should be more transparent and better tailored to the specific threats facing Europe.

The commission responded by tabling a significantly amended list in February last year.

That would have seen eight countries added – The Bahamas, Botswana, Ghana, Libya, Nigeria, Panama, Samoa and Saudi Arabia – as well as US territories American Samoa, Guam, Puerto Rico and the US Virgin Islands.

Five nations would have been removed: Bosnia and Herzegovina, Guyana, Lao, Uganda and Vanuatu.

The updated list was rejected by the European Council, however, in March 2019 after ministers again claimed it “was not established in a transparent and resilient process that actively incentivises affected countries to take decisive action”.

European Parliament representatives had also previously questioned the wisdom of including important EU trade allies on the list, given the possibility banks could become more risk-averse to clients operating in those jurisdictions.

Cristian Dan Preda, then a Romanian MEP, said in February 2018 the inclusion of Tunisia was “incomprehensible”, adding: “If we tell these people that we want to help them and that they are our partners, [then] blacklist them ourselves, they will not understand anything.”

Simon Cook, a trade and export finance partner at law firm Sullivan in London, tells GTR that if countries that remain listed despite efforts to remove them are likely destinations for the trade finance market “then it’s a potential issue”.

“Certain institutions would be put off looking at transactions there merely by the fact that they’re on a list, even if they shouldn’t be, while others may be put off because the extra due diligence they have to carry out means extra costs,” he says.

The European Commission is now due to produce a new proposed blacklist using an updated methodology, but there is so far little indication of when that work is likely to be completed.


Relief over registration of trusts

More positive for the UK’s trade finance sector is that HM Treasury decided last month to remove a potentially problematic provision around the registration of trusts in its domestic implementation of the new rules.

“In theory, any pre-existing trust would have to be registered, which would be a phenomenal number,” says Sullivan’s Cook. It would be inconceivable come January 10 for everybody to be able to register every single trust in the prescribed time.

“HM Treasury appears to have realised this might be an issue at least on a retrospective basis, so the statutory instrument issued in December to implement the 5AMLD on Friday does not actually references the expansion of the trust registration scheme at all.”

The lawyer adds that HM Treasury is expected to revisit the issue, but it is not yet known whether a carve-out could be created for trusts used only for financing techniques, whether a revised scheme would be produced, or whether that requirement will be scrapped entirely.