Tackling terrorism financing, tax avoidance and money laundering

October 01, 2019 by Mark Dunn

While money from illegal activities is a primary source of revenue for terrorist organisations, detecting and disrupting the financing of terrorist networks is complex.  On 5 July 2016, the EU Commission proposed amendments to the Fourth Anti-Money Laundering Directive that aim to improve oversight over many of the financial methods used by terrorists, from cash and cultural artefacts to virtual currencies and anonymous pre-paid cards.

On 5 July 2016 the European Union (EU) Commission adopted a proposal aimed at reinforcing EU rules on anti-money laundering (AML) and counter terrorist financing.  The proposal details amendments to the Fourth Anti-Money Laundering Directive (4AMLD), which was adopted on 20 May 2015, and also aims to increase transparency around ultimate beneficial ownership (UBO).

It is the first step towards implementation of the 'Action Plan for strengthening the fight against terrorist financing', which was released by the Commission in February 2016 following the Paris terror attacks.  The plan also forms part of the wider drive to increase financial transparency and combat tax evasion in the EU.

The Action Plan focuses on identifying and tracing terrorists through financial movements and preventing them from moving funds or other assets.  It also aims to disrupt the sources of revenue used by terrorist organisations – by targeting their capacity to raise funds – and curb what the Commission's impact assessment calls "certain deficiencies in the worldwide financial system".

Tackling financial crime

Adopted in May 2015, the 4AMLD represented a significant step in improving the effectiveness of EU efforts to combat the flow of illicit finances.  To further counter the financing of terrorist activities the Commission has issued several amendments to the 4AMLD to help tackle abuse of the financial system for terrorist financing purposes.

Amendments to the EU fourth anti-money laundering directive include:

  • Companies must carry out enhanced due   diligence when dealing with third parties in 'high risk countries'.  The changes will harmonise the list of   checks applicable to countries with anti-money laundering and countering   terrorist financing regimes that do not meet EU standards.  Financial institutions will need to carry   out additional checks on transactions from these countries.
  • Inclusion of virtual currency platforms such   as Bitcoin to AML regulations.  Currency   exchange platforms and virtual currency 'wallet' providers will need to be   licensed or registered and apply customer due diligence controls when   exchanging virtual for real currencies.
  • Lowering the know your customer (KYC)   threshold for pre-paid cards from €250 to €150.  Amendments also require compulsory due   diligence for face-to-face card purchases and identity verification for   online purchases.
  • Enhancement   of financial intelligence unit (FIU) powers, including better access to   beneficial ownership information and co-operation between organisations.  The Commission also aims to impliment a centralised   register or an electronic data retrieval system.  Member States will need to identify and   maintain information on the holders of bank and payment accounts for FIU   access.

Co-operation is key

The Commission has stated it will explore automating the exchange of beneficial ownership information between Member States. Věra Jourová, EU Commissioner for Justice, Consumers and Gender Equality, explained the importance of cooperation between countries, enforcement agencies and the private sector in executing the new rules:

"The update of the Fourth Anti-Money Laundering Directive will prevent any loopholes in Europe for terrorists, criminals or anyone trying to play with taxation rules to finance their activities.  Better cooperation to fight these issues will make the difference."

Member States have committed to implement the directive sooner than initially planned, by the end of 2016.

What does this mean in practice?

The 4AMLD represents a major tightening of money laundering regulations across the EU.  Businesses will need to implement new internal controls to combat money laundering and activities that could provide finance to terrorist networks.  Implementation of the directive will likely require amended domestic legislation in the UK, and while associated guidance will be available for companies it will be the responsibility of UK businesses to ensure they have the due diligence processes in place to meet the new requirements.

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