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Money laundering: prevention of the use of the financial system

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Money laundering: prevention of the use of the financial system

This directive aims to prevent the use of the financial system for the purpose of money laundering and terrorist financing and overrides Directive 91/308/EEC. It applies to financial and credit institutions, as well as to certain legal and natural persons working in the financial sector, including providers of goods (when payments are made in cash in excess of 15 000 EUR). These entities and persons have to apply customer due diligence (CDD), taking into account the risk of money laundering and terrorist financing. National financial intelligence units (FIU) are set up to deal with suspicious transaction reports.

ACT

Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing [See amending act(s)].

SUMMARY

European Union (EU) countries must prohibit money laundering and the financing of terrorism. To this end, they may adopt or retain in force stricter provisions than provided for in this directive.

Definition of money laundering and the financing of terrorism

The directive describes money laundering as the following conduct, when committed intentionally:

  • the conversion or transfer of property derived from criminal activity to conceal or disguise its illicit origin;
  • the concealment or disguise of the true nature, source, location, disposition, movement or ownership of property known to have been derived from criminal activity;
  • the acquisition, possession or use of property known to have been derived from criminal activity;
  • the participation, or assistance, in the commission of any of the activities above.

Money laundering must be regarded as such even if the activities that generated the laundered property were carried out in another EU or non-EU country.

By terrorist financing the directive means the provision or collection of funds to carry out any of the offences defined in Council Framework Decision 2002/475/JAI on combating terrorism, such as hostage taking, the drawing-up of false administrative documents and the leadership of a terrorist group.

Obligations of covered entities and persons vis-à-vis their customers

The directive applies to credit and financial institutions, independent legal professions, notaries, accountants, auditors, tax advisors, real estate agents, casinos, trust and company service providers, and all providers of goods (when payments are made in cash in excess of 15 000 EUR). The entities and persons covered by the directive are required to apply customer due diligence measures when establishing a business relationship and when carrying out occasional transactions amounting to EUR 15 000 or more. Furthermore, they must file a suspicious transaction report when there is suspicion of money laundering or terrorist financing, regardless of any exemption or threshold.

These diligence measures involve identifying the customer and verifying his/her identity, obtaining information on the purpose and intended nature of the business relationship and, where appropriate, identifying and verifying the identity of the natural person owning or controlling the customer or on whose behalf the activity is carried out. The extent of such measures may be determined on a risk-based approach depending, for example, on the type of customer or business relationship. EU countries may allow the entities and persons covered by the directive to call on third parties to execute the customer due diligence measures. The directive also lists cases in which simplified customer due diligence measures may be used, such as in relation to national public authorities, customers with life insurance policies with an annual premium of no more than EUR 1 000 or electronic money holders.

Where there is a high risk of money laundering or terrorist financing, the entities and persons covered by the directive are required to apply enhanced customer due diligence. Enhanced customer due diligence involves supplementary measures to verify or certify, for example, the documents supplied when the customer has not been physically present for identification purposes.

Finally, credit and other financial institutions may not keep anonymous accounts or anonymous passbooks.

European countries are required to inform each other and the European Supervisory Authorities (ESA), namely the European Banking Authority (EBA), theEuropean Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) where they believe that a third country meets the equivalence conditions concerning the assessment of situations which represent a low risk of money laundering and terrorist financing.

Establishment of a financial intelligence unit (FIU) in the EU countries

Each EU country must set up a financial intelligence unit (FIU) in the form of a central national unit. These units are responsible for receiving, requesting, analysing and disseminating to the competent authorities information concerning potential money laundering or terrorist financing. EU countries must provide their FIU with adequate resources to fulfil its tasks and ensure that it has access to any necessary financial, administrative and law enforcement information.

The entities and persons covered by the directive must file a suspicious transaction report without delay to the FIU when they know or suspect that money laundering or terrorist financing is being or has been committed or attempted. In the meantime, they must refrain from carrying out transactions. At the FIU's request, these entities and persons must furnish all necessary information in accordance with the applicable legislation.

The entities and persons covered by this directive may not reveal to the customer or to other third persons that information has been transmitted to the FIU, except in very specific circumstances. They must keep documents and supporting or other evidence for at least five years from the end of the business relationship or the carrying-out of the transaction. The Commission promotes coordination between the EU countries' FIUs.

Member States are required to inform each other and the EAS where they believe that a third country meets the equivalence conditions concerning the prohibition of disclosure, professional secrecy and personal data protection.

The credit institutions and other financial institutions covered by this Directive shall apply in their branches and majority-owned subsidiaries located in third countries measures at least equivalent to those laid down in this Directive with regard to customer due diligence and record keeping. Member States, the EAS and the Commission are required to inform each other where the legislation of a third country does not permit the application of these measures and coordinated action could be taken to find a solution. In this case, the EAS have the option of drawing up draft regulatory technical standards to specify the type of additional measures and minimum action to be taken by credit and financial institutions.

Enforcement of the directive and imposition of sanctions

The entities and persons covered by the directive must establish appropriate measures and procedures for customer due diligence, reporting of information, record keeping, risk management and communication. They must ensure that the relevant employees are aware of the provisions in force.

EU countries must monitor compliance with the directive. The entities and persons concerned must be held liable for any failure to comply with the national provisions adopted pursuant to the directive. The penalties must be effective, proportionate and dissuasive.

REFERENCES

Act

Entry into force

Deadline for transposition in the Member States

Official Journal

Directive 2005/60/EC

15.12.2005

15.12.2007

OJ L 309, 25.11.2005

Amending act(s)

Entry into force

Deadline for transposition in the Member States

Official Journal

Directive 2007/64/EC

25.12.2007

1.11.2009

OJ L 319, 5.12.2007

Directive 2008/20/EC

20.3.2008

-

OJ L 76, 19.3.2007

Directive 2009/110/EC

30.10.2009

30.4.2011

OJ L 267, 10.10.2009

Directive 2010/78/EU

4.1.2011

31.12.2011

OJ L 331, 15.12.2010

The successive amendments and corrections to Directive 2005/60/EC have been incorporated into the original text. This consolidated version is of documentary value only.

RELATED ACTS

Commission Directive 2006/70/EC of 1 August 2006 laying down implementing measures for Directive 2005/60/EC of the European Parliament and of the Council as regards the definition of politically exposed person and the technical criteria for simplified customer due diligence procedures and for exemption on grounds of a financial activity conducted on an occasional or very limited basis [Official Journal L 214 of 4.8.2006].

This directive contains the technical aspects of the definitions given in Directive 2005/60/EC, including that of politically exposed person (heads of state, heads of government, ministers, members of parliament, etc.).

Proposed European Parliament and Council Directive of 5 February 2013 relating to preventing the use of the financial system for the purpose of money laundering and terrorist financing [ COM (2013) 45 final ].

This proposal includes and overrides Commission Directive 2006/70/EC of 1 August 2006 regarding implementation measures for Directive 2005/60/EC, in order to improve the accessibility and intelligibility of judicial framework relating to the fight against money laundering.

This fourth anti-money laundering Directive would primarily include the following modifications:

  • extension of the Directive's scope, which would consequently extend to gambling service providers and to cash payments larger than EUR 7,500 for persons trading high-value goods;
  • risk-based approach;
  • reinforcement of vigilance obligations with regard to clientele;
  • reinforcement of information relating to the beneficial owner;
  • an end to exemptions from vigilance obligations applying to certain third countries which have defensive systems against money laundering equivalent to those found in the EU (positive equivalence system);
  • reinforcement of administrative sanctions in accordance with Commission policy for the financial services sector;
  • reinforcement of cooperation between the financial intelligence units of the Member States;
  • reinforcement of the role of the European Supervisory Authority (ESA);
  • reinforcement of personal data protection.

Last updated: 10.03.2014

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