EU in fight against money laundering and terrorist financing

Given the economic crisis it is crucial that money laundering and terrorist financing are tackled, explains Stefano Manservisi.

By Stefano Manservisi

07 Feb 2014

The fight against money laundering and terrorist financing has become crucial in the current context of a severe economic crisis, and as EU governments require significant efforts from citizens and companies to consolidate the EU financial system.

The International Monetary Fund (IMF) has historically estimated the quantity of money laundering to fall within a 'consensus' range of between two and five per cent of global GDP. This means that, extrapolated to the EU 27 GDP of €13.122 trillion in 2013, the quantity of money laundering would amount to between €262-€356bn. Meanwhile, as stated by European commission president José Manuel Barroso, putting an end to tax fraud and tax evasion could add extra billions to public finances across Europe.

Massive money laundering contributes to the blossoming of drug trafficking, human smuggling, corruption, or terrorism. But it is not only a matter of security; it is also a major threat to the integrity of our financial system and to the reputation of our internal market. On the other hand, we need to be careful that measures taken against money laundering and terrorist financing do not harm the licit economy, and stifle growth.

The EU favours a holistic approach on the subject. In 2012, the commission contributed to the update of international standards set out by the financial action task force (FATF), a global 'policymaking body' which works to generate the necessary political will to bring legislative and regulatory reforms in this area.

"Measures designed to prevent money laundering also contribute to preventing terrorist financing"

The commission has long been active in the field of prevention, already issuing three directives to prevent money laundering and terrorist financing and encouraging better cooperation at EU level between EU financial intelligence units (FIU), to whom transactions suspected to be related to money laundering and terrorist financing are transmitted at national level.

As a founding member of the FATF, the EU naturally intended to promptly integrate the new recommendations of the organisation into EU law: it published two legislative proposals in February 2013, which are now in negotiations in the European parliament and in the council.

The main proposal consists of an update of the last preventive directive, also called the fourth anti-money laundering directive, which introduces a risk-based component in the anti-money laundering approach. Whereas in the past obliged entities (mainly the financial sector) had the obligation to report transactions suspected of being related to money laundering or terrorist financing on the basis of objective criteria, in the future obliged entities will have to adapt their diligence to the actual risks, based among other things on national risk assessments as well as transnational risk assessments. The directive also reinforces transparency of the beneficial owner of a company or a trust and vigilance towards politically exposed persons; it also strengthens administrative sanctions and ensures more convergence of the sanctions across the EU. The other proposal is a regulation on information accompanying transfer of funds, providing for better traceability of transfers.

Measures designed to prevent money laundering also contribute to preventing terrorist financing. Nevertheless, recent events have shown that terrorism was not necessarily costly. Most terrorist activities don't require very sophisticated and expensive means, and a lot of them are also financed through 'legal' channels – own funding, micro-financing by peers. Consequently, tools adapted to detect money laundering may not be capable of discovering terrorist financing. Tackling terrorist financing therefore requires specific, more precise tools, such as the terrorist financing tracking programme (TFTP), which enables identification and tracking of terrorists and their support networks through targeted searches run on financial data. The TFTP, which was developed by the US in the aftermath of the 11 September terrorist attacks, has since been delivering very important value for the counter terrorism efforts on both sides of the Atlantic. Under the framework of the EU-US TFTP agreement concluded in 2010, the EU and its member states have access to the TFTP for their own counter-terrorism investigations.

Finally, and in order to complement preventive aspects of the fight against money laundering and terrorist financing, the commission services examine the possibility of harmonised criminal law provisions on money laundering. The treaty on the functioning of the EU lists a number of "eurocrimes", and among them, money laundering, for which the EU can propose minimum rules in terms of definition and sanctions.

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