One of the pillars of the European Union's legislation to combat money laundering and terrorist financing is Directive (EU) 2015/849. According to this Directive, banks and other gatekeepers are required to apply enhanced vigilance in business relationships and transactions involving high-risk third countries. The types of enhanced vigilance requirements are basically extra checks and control measures which are defined in article 18a of the Directive.
EU Methodology for the identification of High-Risk Third Countries
The Commission worked on a methodology in order to identify high-risk third countries. This methodology ensures that a robust, objective and transparent process is applied. The objective is to identify jurisdictions which have strategic deficiencies in their national AML/CFT regimes which pose significant threats to the financial system of the Union and hence the proper functioning of the internal market. Once identified, the Commission adopts delegated acts listing these jurisdictions.
This methodology was based following the adoption of a Roadmap.
The methodology describes the main steps, assessment criteria and follow-up.
The methodology provides that the Commission will consider FATF lists as a starting point and complement this by an autonomous assessment of additional countries using the following approach:
- identify the risk profile and the level of threat to which the country is exposed
- assess the legal framework and its effective application in 8 key areas – by analysing the countries measures on
- criminalisation of money laundering and terrorist financing;
- customer due diligence requirements, record keeping and reporting of suspicious transactions in the financial sector;
- the same requirements in the non-financial sector;
- the existence of dissuasive, proportionate and effective sanctions in case of breaches;
- the powers and procedures of competent authorities;
- their practice in international cooperation;
- the availability and exchange of information on beneficial ownership of legal persons and legal arrangements;
- implementation of targeted financial sanctions.
Step-by-step implementation of the methodology to identify high-risk third countries
The following timeline displays the implementation of the methodology to identify high-risk third countries.
Stage 1: Designing Phase
- Preparation of a new methodology
- International engagement
- Engagement with the European Parliament and the Member States
Adoption of the Methodology for identifying high risk third countries
Stage 2: Initial scoping/selection phase
- Pre-assessment of all 3rd countries based on economic and socio-political criteria
- Identification of Priority 1 (to be assessed by end of 2018) and Priority 2 (to be assessed progressively by 2025) countries
- Publication of results of selection phase on 13.11.2018
Stage 3: Assessment Phase – Priority 1 countries
- Assessment of countries that have been identified as Priority 1 countries based on listing criteria using various information sources
- Feb 2019
Adoption of new EU Delegated Act on high-risk third countries (based on new methodology) - rejected
Stage 4: Assessment Phase – Priority 2 countries and follow up
- Gradual assessment of remaining countries
- Follow-up of countries listed following stage 3
- Monitoring of reviewed countries
Objectives of the list on high-risk third countries
The objectives of the list can be subdivided into three principle goals:
The listing process
The listing process follows a staged approach that can be divided into four parts:
Planning of assessment
The Commission carried out a pre-assessment to determine relevant countries to be assessed and the level of priority, in addition to those already listed by the Financial Action Task Force. Countries are considered relevant for the EU financial system in case they meet any of the following non-cumulative criteria:
- a country is identified by the European External Action Service or by Europol as having a systemic impact on the integrity of the EU financial system;
- a country was reviewed as an international offshore financial centres by the International Monetary Fund;
- a country is considered as economically relevant based on the strength of the economic ties with the EU and the magnitude of its financial sector.
On this basis, the Commission identified 132 jurisdictions so far that will be further analyzed according to its methodology over the period 2018-2025. The list of 132 countries included in the scope.
With regard to the level of priority:
- the Commission already reviewed a first group of 54 jurisdiction by end of 2018 (Priority 1 countries). The assessment is an ongoing exercise; hence any country will be reassessed when new relevant information sources become available;
- the other jurisdictions (Priority 2 countries) will be assessed successively between 2019 and 2025.
The 2019 planning will be made available soon.
Evolution of the EU list on high-risk third countries
Based on Directive (EU) 2015/849 and the Commission’s power of adopting delegated acts regarding high-risk third countries, the Commission adopted the following delegated acts:
First EU list– based on FATF lists (Delegated Regulation (EU) 1675/2016). Delegated Regulation 1675/2016
Delegated Regulation (EU) 2018/105 amending the first EU list. Delegated Regulation (EU) 2018/105
Delegated Regulation (EU) 2018/212 amending the first EU list. Delegated Regulation (EU) 2018/212
Delegated Regulation (EU) 2018/1467 amending the first EU list. Delegated Regulation (EU) 2018/1467
New methodology for identifying high risk third countries:
- FATF lists as a baseline
- additional countries based on EU own assessment