Even If You Sit on the Stream Bottom, You Cannot Be a Fish

On July 5, 2016, the European Commission published a document-proposal with amendments to the Fourth EU Directive on the prevention of the use of the financial system for money laundering or terrorism financing purposes¹, known as 4AML. These amendments became a continuation of the February statement of the European Commission that even more severe restrictions are required for an effective fight against terrorism financing.

In addition to the steps aimed directly at combating terrorism financing, measures to increase the level of transparency to prevent money laundering and tax evasion were also proposed. Among such proposals is the provision of full public access to the registers of the beneficial ownership of companies and trusts associated with the business. Information about all the other trusts, according to the proposal of the European Commission, should be included in national registers.

On December 6, 2016, the European Council adopted a directive, which provides tax authorities access to information (including about the beneficial ownership of companies), which is available to authorities responsible for anti-money laundering. This will allow tax authorities to obtain access to such information at monitoring the proper implementation of the rules on the automatic exchange of tax information.

The directive will apply from January 1, 2018. It is one of the measures adopted by the European Commission in July 2016 after the disclosure of Panama archives in April the same year.

The amendments are aimed at implementing the EU Action Plan on strengthening measures against terrorism financing. Changes to the Fourth EU Directive are introduced in part of:

1. The use of measures for enhanced inspection of customers and in-depth monitoring of customers’ transactions from “high-risk third countries”, as well as the responsibilities of the EU Member States to fix on the legislative level a list of such measures, subject to their maximum harmonization (however, the European Commission points that, in respect of customers outside the jurisdictions included in the list of high-risk third countries, the enhanced customer due diligence should be applied, but not penalties or restrictions in the form of termination of business relations).
2. Extension of provisions of the Fourth Directive on the “virtual platform” for the exchange of virtual currencies.
3. In respect of prepaid financial instruments issued in the EU Member States:

• reduction of the threshold value for the purposes of identification of the purchaser from EUR 250 to EUR 150;
• strengthening requirements for information reliability confirmation of such customers;
• a ban on the use of prepaid financial instruments for the implementation of anonymous transactions on the Internet.

4. Introduction of the banks’ obligations to refuse to make payments with the use of anonymous prepaid financial instruments issued in the countries outside the EU, the regime of anti-money laundering or terrorism financing, which is not very reliable.
5. Ensuring public access to certain essential information about the beneficial owners of legal entities and trusts (except for “family”).
6. Extension of powers of financial intelligence units in the part of requests for information from financial institutions in order to strengthen the exchange of information between financial intelligence units for the detection of financial flows related to terrorism.
7. Provision to financial intelligence units of quick access to information about the owners of the accounts through centralized registries and electronic data retrieval systems (these mechanisms will enable to identify all the accounts of a certain person in all banks of EU member countries).

In addition, the European Commission has informed about the beginning of work on the supra-national assessment of money laundering and terrorism financing risks, as a result of which the new proposals for the improvement of national legislation and practices in “anti-legalization” field to reduce the identified risks of money laundering or terrorism financing will be prepared.

The following problems, which are to be solved in the future, should be noted:

1. Basic information about the registration of the company in some countries is not always sufficiently precise and available.
2. Requirements for reliability screening of customers are usually well performed by banks, but the case is worse with other providers of financial services. This problem is compounded by the fact that their activities are much more difficult to control than that of the banking sector.
3. Information about shareholders and members of the company is not always accurate and up to date, as companies collect information, but do not verify it.
4. At the same time, companies are often not subject to any sanctions for failure to comply with the requirements for the storage of accurate and relevant information.
5. Another obstacle to the exchange of information is the laws on data protection and privacy. They often prevent the competent authorities from obtaining timely access to adequate, accurate and current information on beneficial ownership. For example, even on the national level, the tax authorities are often unable to share information with law enforcement agencies. And in the context of information exchange at the international level these problems are only compounded.
6. Even if the exchange of information on beneficial ownership is carried out in a timely manner (within the country or with foreign competent authorities), such exchange does not really matter, if the information is not accurate and current.

In the background of the movement of automatic tax information exchange in Europe, the European banks continue tightening, and offshore companies have come under their impact. The first tightening began with the simple requirement “to confirm a beneficiary”, which, in fact, meant to provide additional documentation of income of a person who will manage the bank account. Now banks massively refuse to service offshore companies, offering beneficiaries to change the jurisdiction or close the account within 30-40 days.

A harsh change in the rhetoric began in spring of 2016, when the Baltic and Cypriot banks began to demand the provision by customers of their financial statements at the opening of corporate accounts (or from the existing corporate customers). Thus, any privacy began to evaporate before our eyes, putting a lot of freedom-loving customers in a difficult position. Let me remind you that the absence of such requirements was an advantage of working in an offshore jurisdiction.

An additional difficulty was the fact that the banks have no uniform system of requirements for the compilation of financial statements. Thus, a number of banks request the provision of financial statements in accordance with the standards of internal management accounts, other banks at the same time require to prepare statements in accordance with IFRS standards.

A number of legislative changes have caused new requirements. For example, in Latvia, paragraph 31.7 “Regulatory Rules for In-depth Screening of the Customer” of the Latvian Financial and Capital Market Commission stated that the lack of accountability is one of the signs that such customer imposes a risk for the bank. In Cyprus, national legislation amended namely paragraph 76A of AML Directive on the fact that the bank may require reports from its customers.

Banks will not stop on the requirements for the reporting provision, and, apparently, this field of business will change.

As for Russia’s participation in the struggle, in 2018 a new round of FATF inspections (Financial Action Task Force) will be held in our country. The organization that monitors that the countries limit financing of terrorism and money laundering, will start the 4th stage, in the course of which it shall determine how effective “anti-money laundering” laws are.

At the end of 2018, BRICS countries (including Russia) will be again in the focus of the FATF group.

FATF plans to analyze dozens of parameters, such as the exchange and coordination with financial intelligence services of third countries, or the availability of information about the beneficial owners. Each point is calculated and checked for effectiveness.

Until 2018, Russia and BRICS partners have time to prepare. Officials expect that the introduced changes, as well as those planned in the near future, will help. Alternatively, the introduction of criminal liability for the executives of banks, which are almost always aware of everything that happens in the bank when dealing with customers, is planned. Another area of hope is the exchange of information with foreign counterparts (in particular, under the OECD standard, which is planned in the Russian Federation since 2018).

1. The Directive (EU) N 2015/849 of the European Parliament and of the EU Council on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing, on amendment of Regulation (EU) 648/2012 of the European Parliament and the EU Council on the abolition of the Directive 2005/60/EU of the European Parliament and the EU Council and Directive 2006/70/EU of the European Commission.

Anna Senchenko, LL. M.

Leading Lawyer

Tax and Legal Practice

Korpus Prava (Russia)