The EU’s Updated Draft AML/CFT List of High Risk Third Jurisdictions ‘Take Two’: A Critique

Alicia Nicholls

In the midst of the human and economic challenges wrought by the novel coronavirus (COVID-19) pandemic, another threat looms for three Caribbean countries. The European Commission (the Commission) last week released its draft updated List of High Risk Third Jurisdictions which have strategic deficiencies in their Anti-Money Laundering and Countering the financing of terrorism (AML/CFT) regimes that pose significant threats to the financial system of the 27-nation bloc. Barbados and Jamaica now join The Bahamas on the updated draft EU list.

Readers would recall that the Commission’s previous draft list of February 13, 2019 was ultimately rejected by the Council of the EU on March 5, 2019, sending the Commission back to the drawing board. Unfortunately, the Commission’s release of the revised draft list has occurred in the middle of the COVID-19 pandemic – widely acknowledged to be the worst economic shock to hit the global economy, including the economies of those Caribbean countries listed.

While the draft list still requires European Parliament and Council approval, and is set to apply only from October 1 2020, mere inclusion on such a list could still present reputational risks and other financial implications for those countries listed, particularly for Barbados and The Bahamas which are International Financial Centres (IFCs). This article briefly looks at the implications of the updated list for the countries named and possible next steps.

What is the EU’s AML/CFT List of High Risk Third Countries?

The EU’s draft AML/CFT List of High Risk Third Countries is completely distinct from its list of non-cooperative jurisdictions for tax purposes. Indeed, this draft list forms part of a suite of measures proposed by the European Commission designed “to further strengthen the EU’s framework to fight against money laundering and terrorist financing”. The EU’s stricter approach to AML/CFT supervision was prompted, in particular, by a number of high-profile money laundering scandals involving European banks over the past few years. The EU has also this week proposed the creation of a Pan-European AML/CFT authority.

However, despite these threats in its own backyard, the EU has chosen to focus a good part of its attention on purported AML/CFT risks posed by third States. According to the EU’s website, the list “aims to address risks to the EU’s financial system caused by third countries with deficiencies in their anti-money laundering and counter-terrorist financing regimes”. The first EU AML/CFT list of high risk third jurisdictions was drawn up in 2016 based on the Financial Action Task Force (FATF) lists and has been updated regularly by subsequent delegated regulations. In 2017, the EU commenced working on its own methodology for identifying third jurisdictions with strategic deficiencies in their AML/CFT regimes. This new EU methodology, which only uses the FATF lists as a starting point, was adopted in 2018. The now rejected February 13, 2019 list is the first to be drawn up according to this new methodology which was again revised in May 2020.

Under the EU’s Fourth Anti-Money Laundering Directive (4AMLD), banks and other ‘obliged entities’ in the EU are required to apply enhanced customer due diligence (ECDD) on transactions and business relationships involving those countries listed as high-risk third countries. In other words, transactions originating from or going to those countries will be subject to enhanced scrutiny, which could mean longer wait times for completion and more frequent risk assessment reviews of the relationship.

Who is included in the updated draft list?

The EU in its methodology for identifying high risk jurisdictions, indicated that its proposed AML/CFT blacklist would use the FATF lists as its starting point. As such, the Bahamas, which is on the FATF list of jurisdictions under increased monitoring (loosely referred to as the ‘grey list), remains on the updated Commission list. Barbados and Jamaica, which were added to the FATF grey list of February 21, 2020, were added to the new draft EU AML/CFT List of High Risk Third Jurisdictions. Like the other countries on the FATF grey list, The Bahamas, Barbados and Jamaica were identified as having strategic deficiencies in their regimes to counter money laundering, terrorist financing and proliferation financing but have undertaken a high-level political commitment to implement a FATF-agreed action plan to address these deficiencies.

The other countries included on the EU’s updated draft list are Botswana, Cambodia, Ghana, Mauritius, Mongolia, Myanmar/Burma, Nicaragua, Panama and Zimbabwe, which are also on the FATF grey list of February 2020. However, the draft list does not include Iceland, a non-EU Member Country but part of the European Economic Area, which was also added to the FATF’s grey list.

Issues with the List

First, it is unfortunate that the European Commission would release this updated list while these countries’ economies are already suffering the harsh impact from the COVID-19 pandemic and could be further impacted by the reputational fall-out from this unilateral action. Indeed, although this measure is not supposed to take effect until October 1, 2020, the mere mention of these countries’ inclusion could spook investors and clients at a time when these countries’ economies are in a tailspin from COVID-19.

Second,  like its failed list before, the EU is lumping jurisdictions which are on FATF’s grey list, that is, the list of monitored jurisdictions with an action plan with those which are on the actual FATF blacklist, that is, those countries for which there is a FATF call for action, namely North Korea and Iran. That poses additional reputational risks for named countries. It is incomprehensible to suggest that the AML/CFT risk posed by Barbados, The Bahamas or Jamaica is equivalent to that posed by those two countries for which a FATF call for action exists.  

Third, as with the list before, the listed countries have complained that they were not given any advance notice of the updated list or any opportunity to query or contest their inclusion. The EU has stated it will provide technical assistance to those countries listed, but what will such assistance involve and how is it different from the assistance offered by the Caribbean Financial Action Task Force, the FATF regional body for the Caribbean?

Fourth, the EU methodology only uses the FATF lists as the baseline for identification of countries with strategic deficiencies in their AML/CFT regimes. It begs the question why would the Commission, which is a full FATF member, see the need to create a separate list from FATF – the globally recognized standard-setting and monitoring body for AML/CFT matters. Moreover, unlike the FATF which provides detailed country-specific information through the mutual evaluation reports (MERs), the EU did not publish any detailed reasons for the inclusion of each jurisdiction.

Fifth, the level of due diligence imposed by the EU goes beyond what is expected by FATF for countries listed as having strategic deficiencies in their AML/CFT regimes with an action plan. The FATF does not call for the application of ECDD to jurisdictions with strategic AML/CFT deficiencies with an Action Plan, but encourages its members to take into account the information presented in its risk analysis.

Sixth, while the EU list does not impose sanctions or any other restrictions on trade, once a country has been listed as high-risk, European banks and other ‘obliged entities’ are required to apply ECDD on any transactions and relationships involving natural persons or legal entities based in such countries. Further, the EU’s Fifth Anti-Money Laundering Directive (5AMLD) provides additional guidance as to the type of ECDD required, which includes obtaining supplementary information on customers and beneficial owners.

Implications for the Countries Listed

There are already implications for the Bahamas, Barbados and Jamaica being on the FATF list but they increase with the EU list. The required ECDD on transactions  involving  clients  and  intermediaries from these countries could result in costlier and longer clearance times for transactions.

The EU says its list is not a “name and shame” exercise, but there are reputational implications of being blacklisted or the threat of being blacklisted, especially in the increased climate of bank de-risking. Many large global banks in their risk rating of countries rely on FATF and other countries’ lists to assess country risk. Increased perceived country risk has implications for a jurisdiction’s attractiveness as an IFC and for its foreign direct investment (FDI) attraction more broadly. Some financial institutions may simply decide the enhanced transaction and business relationship monitoring is too much work and choose to de-risk.

There are, of course, attendant implications for the ease of doing business, cross-border trade and financial transaction flows, which are the lifeblood of these countries’ economies.

Next Steps?

The updated draft list still requires approval by the European Parliament and the Council of the EU. So what can the named countries do in the interim? Since the EU has stated the FATF lists are its starting point, Barbados, The Bahamas and Jamaica have and should continue to prioritise addressing the outstanding issues highlighted by CFATF in order to exit the FATF grey list.

The Bahamas, Barbados and Jamaica should continue public awareness and outreach activities to local stakeholders, as well as to external stakeholders, on their commitment and progress toward technical and effective compliance with the FATF recommendations.

Lastly, whenever the EU unjustly and arbitrarily includes our countries on a list such as this, there is a chorus of indignation from our leaders about the morality reprehensibility of such lists. We need to go beyond emotional arguments and present sound empirical research on the impact of blacklisting or the threat of blacklisting on our economies. Perhaps that way we could truly empirically show the negative economic impact of these heavy-handed actions instead of simply appealing to moral suasion.  

Alicia Nicholls, B.Sc., M.Sc., LL.B is an international trade and development specialist. Read more of her commentaries here or follow her on Twitter @licylaw. All views expressed herein are her personal views and do not necessarily reflect the views of any institution or entity with which she may from time to time be affiliated.