15 Jun 2020
As the UK and the EU exchange expressions of disappointment with each other’s alleged inflexibility after every round of Brexit trade negotiations, the usual areas of disagreement are raised: access to Britain’s fishing grounds, the requirements of a level playing field agreement, regulations over state aid and other issues that – for the most part – have no impact on those focused on the future of European anti-financial crime efforts.
So we can be excused for believing that all is well in this domain. For, after all, how could there not be agreement on something as simple as fighting financial crime? The EU has plenty of its own problems to fix in this realm as revealed by the scandals and responses that have emerged over the past few years. Everyone has an incentive to reach a deal on this topic fairly quickly.
Yet, in each of his update speeches following the completion of successive rounds of negotiation over the conclusion of a trade agreement with the UK, Michel Barnier – the EU’s lead negotiator – raises the question of anti-money laundering and counter-terror finance. And this is not done with an air of optimism. In his most recent speech, Michel Barnier noted that ‘Prime Minister Johnson agreed … that our agreement should cover anti-money laundering and counter terrorism financing’, but also pointed out that ‘We are very far from this objective’.
This followed Barnier’s previous sigh of disappointment after the completion of the third round of negotiations with the UK in May, where he observed that his team was ‘disappointed by the UK’s lack of ambition in a number of areas that may not be central to the negotiation, but which are nonetheless important and symbolic’, for example, ‘the fight against money laundering’.
WHAT IS GOING ON?
Before answering that question, it is important to step back and understand the architecture that governs the international and EU response to financial crime. Generally speaking, international standards for combatting money laundering, the financing of terrorism and the funding of the proliferation of weapons of mass destruction are set by the Financial Action Task Force (FATF). The FATF then assesses countries on their implementation and effective use of these standards. The UK was most recently evaluated in 2018. In what was seen by many as a surprising result given the centrality of the UK to global money laundering, the UK fared well.
Separately – although entirely connected – the EU has produced a series of Directives aimed at tackling financial crime across its member states. Put simply, these Directives echo the standards set by the FATF but also address issues that are particular to EU member states. These include, for example, stringent controls on prepaid cards, a source of funding for the November 2015 Paris terrorist attacks.
The EU’s most recent Anti-Money Laundering Directive (AMLD), which member states should have implemented by 10 January 2020, is its fifth. A sixth is in the works.
The UK previously committed to implementing the fifth AMLD, as the implementation date was expected to be within the post-Brexit transition period where – broadly put – EU regulations and directives would continue to apply. Furthermore, as HM Treasury noted in its April 2019 consultation on the Transposition of the Fifth Money Laundering Directive, ‘The UK played a significant role in the negotiation of 5MLD and shares the objectives which it seeks to achieve on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing’. Consistent with this commitment, HM Treasury published updated UK Money Laundering Regulations in January this year.
Yet now, at least as far as the EU is concerned, the UK’s ambition on anti-money laundering is being brought into question.
WHERE DOES THIS ISSUE FIT IN WITH THE BREXIT NEGOTIATIONS?
Although the lion’s share of the stormy parliamentary debates which took place in the UK over Brexit concerned the text of the Withdrawal Agreement, the legal document which formally terminated the UK’s membership in the EU and specified the transitional arrangements, a Political Declaration (PD) was agreed at the same time, although that elicited less controversy. The PD sets out the agreed framework for the future relationship between the EU and the UK. And as part of this framework’s section on law enforcement and judicial cooperation in criminal matters, the parties agreed that the future relationship should cover three areas of cooperation, including supporting ‘international efforts to prevent and fight against money laundering and terrorist financing’.
So far, so uncontroversial, one might think.
Reflecting the commitments made in the PD, the EU has included a chapter on anti-money laundering and counter-terrorism financing, in its draft legal text for a New Partnership with the UK, published in March 2020.
This text includes a chapter on AML which commits the UK and the EU to ‘make their best endeavours to ensure that internationally agreed standards in the financial services sector for regulation and supervision, for the fight against money laundering and terrorist financing and for the fight against tax evasion and avoidance, are implemented and applied in their territory’.
And here in – most likely – lies the reason for the UK’s apparent intransigence. This chapter cements not only the status quo as represented by the Fifth AMLD and the importance of complying with the FATF’s standards, but also provides for arrangements that go beyond the FATF standards, perhaps in areas the EU views as being highly relevant to the UK, for example, ensuring high standards on transparency and on entities subject to anti-financial crime frameworks such as art dealers and freeports. This might not seem particularly controversial given the UK is leading the global conversation on company registry transparency and is a leading voice at the FATF, but it – seemingly – crosses a red line in the UK’s negotiation stance which is that the UK must be free to act in the future as it wishes. Furthermore, failings to implement previous AMLDs has led the European Commission to refer members states to the European Court of Justice, anathema to Brexit supporters. Do not forget, Brexit was all about taking back control of borders, money and laws.
Furthermore, the UK can legitimately argue that including provisions on AML in this legal text is – despite the commitments made by its government in the PD – redundant as international cooperation on AML is already covered via the FATF.
Yet the FATF is a consensus organisation and necessarily sets a baseline standard that is – as the UK itself has demonstrated – easily achieved even if money laundering remains a significant problem. Perhaps therefore, as one of the two largest financial centres in the world, with an unenviable reputation for being a facilitator of global money laundering, the EU fears that regulatory divergence or ‘backsliding’ on AML might threaten the EU in an area where it is acutely focused after the scandals of recent years.
However this mainly diversionary saga ends, there are two, bigger considerations that will cement the effectiveness of future EU/UK responses to money laundering.
The first is also covered by the PD, namely the future relationship on law enforcement and judicial cooperation and data exchange, an area where the approach in the UK and the EU is often divergent.
The second is equally fundamental. Divergence between regulatory environments raises inefficiencies and operating costs for the private sector. Given the importance of financial services to the UK and the centrality of financial relationships to the future of trade relations between the EU and the UK (whatever form they ultimately take), any future divergence in regulatory obligations will bring costs and inefficiencies to all.
By Tom Keatinge, RUSI, 11 June 2020
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