Six months and a few days have passed since Directive 2005/60/EC entered into force (December 15, 2005) and its implementation process has already caused a lot of controversy among EU member states' financial institutions and operators.

Clearly the value of its scope, namely the prevention of the use of the financial system for money laundering and terrorist financing purposes, is undeniable.  However, the impact of its measures on fundamental rights gives banks, brokers, lawyers and consumers more than one reason to worry.  

In short, the Directive aims at avoiding money launderers and terrorist financiers to take advantage of the freedom to move capital and supply financial services in the EU internal market. To this aim, it provides the obligation to carry out customers’ identity checks and report suspect financial transactions for credit and financial institutions, auditors, external accountants, tax auditors, real estate agents, casinos, as well as for independent legal professionals when acting for, and on behalf of, their clients in i) buying and selling of real properties or business entities, ii) managing client money, securities and other assets, iii) opening or managing bank, savings or securities accounts, and in iv) organising contribution necessary for the creation, operation or management of management companies, trusts and similar structures...

Actually, the obligation for financial institutions to establish customer’s identity checks and report  suspicious transactions was already provided by directive 1991/308/EEC, as amended in 2001, which, limiting its scope to the fight against money laundering, had incorporated the original 40 recommendations of the Financial Action Task Force (FATF).

However, it is in December 2004 that, in the frame work of EU anti-terrorism policy in place since the 2001 US attacks, and as a response to the July 2004 bombings in Madrid, the EU Council decided to adopt specific measures to combat terrorism, including terrorist financing. Following the suicide bombing attacks on London in July 2005, EU interior ministers held an extraordinary meeting and agreed that all the anti-terrorism measures already decided by the Council in December 2004, should have had to be implemented as a matter of priority.

In this scenario the Directive was adopted to ensure a coherent application in all EU member states of the 40 Recommendations adopted by FATF as revised in June 2003 and to provide for the application of its measures to terrorist crimes and to any financial transactions which may be associated to terrorist activities. The institutions and persons covered by the Directive will have to put in place customer identity checks, proportionally to the concrete risks involved -which may differ depending on the types of customers, countries and transactions (so called “Risk-based Approach”)- whenever establishing a business relationship, when selling goods against payment in cash of € 15,000 or more, when there is a suspicion of terrorist financing or there are doubts on the consistency of previously obtained customer identification data. 

To identify the persons who materially benefit from a certain transaction, the Directive sets out the definition of “beneficial owner” who is the natural person who ultimately, directly or indirectly, owns or controls the customer and/or the natural person on whose behalf a transaction or activity is being conducted. In case of corporate entities it includes the natural person holding 25 per cent or more of the shares or of the voting rights of a legal person. Consumers and banks will be strongly affected by the provisions on identity checks, and in particular, on the approach taken on beneficial ownership. On the one hand consumers, since the degree of their privacy protection will be seriously reduced, on the other banks since the obligation to identify and verify the identity of the beneficial owners is rather though as banks usually do not have access to reliable information enabling them to carry out such identification.

When the persons to which the Directive applies suspect or have reasonable grounds to suspect that terrorist financing is being or has been committed or attempted, they will have to inform their national financial intelligence unit. Penalties for not compliance with the obligation to report suspicious transactions will apply.The Council of the Bars and Law Societies of Europe (CCBE) has already highlighted that the reporting provisions are a threat for the independence of lawyers and consequently for the fundamental right to legal advice and representation.

Should EU legislation go so far? It is clear that in the name of security, client-attorney privileged relationship and market confidentiality are considerably sacrificed. It must also be noted that bank employees may be under direct threat after having reported a suspicious transaction. Besides the fact that this is an intolerable situation for bank employees, it could also lead to counter-productive effects in the fight against terrorist financing as bank staff may become reluctant to report suspicious transactions. Furthermore, according to the Directive, no correspondent banking relationship with a shell bank is allowed.

A remaining problem for the European banking industry is the prohibition of an indirect relationship: thus the requirement to take appropriate measures to ensure that no correspondent relationship is engaged with a bank known to permit its account to be used by a shell bank. It is generally difficult for banks to verify whether their correspondents have relations with shell banks. This obligation to know "the customer's customer" is generally not workable, regardless of whether the customer is another credit institution, legal entity or natural person.

Unfortunately, the conclusion of this brief analysis cannot be positive. It seems in fact that the Directive is simply adding burden of regulation on financial institutions, independent lawyers and professionals involved in financial transactions, and jeopardising fundamental rights, without posing a real threat to international terrorism which may rely on non-EU financial centres to support its activities. Paradoxically, the combination of over-regulation and reduction of privacy protection might have a boomerang effect on the volume of legitimate financial transactions to the “joy” of terrorist organizations, which would have an additional reason to celebrate the terror indirectly posed on the stability of the European markets.

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Sorrow Written by Guest on 2006-07-01 04:05:22 Re: Sorrow Written by Guest on 2006-07-17 11:48:48

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