What is Money Laundering Risk?

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07

 

We’re reading lately that football has been added to the EU’s watchlist of money laundering risks! This might come as unexpected news for some of you: football, of all industries!The European Union has one of the most comprehensive frameworks for fighting Money Laundering in the world, yet even so there have been concerns about the effectiveness of regulators, their ability to co-operate with their equivalents in other Member States and lacking due diligence procedures in some banks.

So we thought it would be a good opportunity to go over what makes the cut when it comes to assessing money laundering or terrorist financing risk. 

Lack of transparency

The European Commission was pretty damning about football: “Professional football’s complex organisation and lack of transparency have created fertile ground for the use of illegal resources. Questionable sums of money with no apparent or explicable financial return or gain are being invested in the sport.” 

This follows a massive investigation and charges against key figures in Belgian football focusing on suspicious financial operations around transfers: tax evasion, money laundering, private corruption – during the inquiry, investigators also found evidence of match-fixing. Activists and footballers have also identified a link with human trafficking, which we have previously covered as a crime closely related to money laundering.

Lack of regulation: free ports

Lack of clarity about the applicability of regulations can also be conducive to greater Money Laundering risk, as is demonstrated by the European Commission’s current concern with free ports. 

At the same time as some in the Brexit debate might be extolling the virtues of free ports – tax- and customs-free zones that can be designated by a Member State – the European Commission warns about the risk of intellectual property rights being infringed in such spaces, VAT fraud, corruption and money laundering: ‘In most EU free ports or customs warehouses (with the exception of the Luxembourg Freeport), precise information on the beneficial owners is not available.’ That means that goods can be imported and re-exported from such a zone while completely bypassing customs intervention, and this is what raises fears of the abuse of the system.

Free ports are now also seen as obliged entities under the EU AML Fifth Directive, which means they are also subject to customer due diligence requirements

Lack of enforcement? Golden visas

Schemes by which countries attract investment by granting investors citizenship are a growing concern for the EU, but these concerns have hopefully been adequately addressed in the EU AML Fifth Directive as well which requires enhanced due diligence for third-country nationals applying for residence or citizenship.

A recent case from Cyprus has put the spotlight on these problematic revenue-generating schemes again: the anti-corruption activist Bill Browder accuses Cypriot authorities of enabling money laundering through the local property market. The Cyprus interior ministry approved the purchase of a Cyprus property by Dmitry Klyuev, a Russian under sanctions for organised crime in the US, Canada, Lithuania, Latvia and Estonia, also convicted for fraud in Russia.

While this case is being investigated by Cyprus, it does seem like it will be adding further fuel to worries in European capitals over the long-term safety of citizenship schemes that are massively popular in places like Cyprus and Malta. The key issue is the seemingly lax approach to enforcement of due diligence. Will the answer be a new international regulatory body on Money Laundering? Or perhaps implementation of the Fifth EU AML Directive can go some way towards improving the European financial system’s integrity?  

Conclusions

Free ports and the golden visa schemes pose relatively ‘straightforward’ challenges to European authorities tackling money laundering: they are included as ‘obliged entities’ under the Fifth AML EU Directive meaning that once this Directive is enforced throughout the EU, they are subject to the same customer due diligence requirements that most of the financial services has so far been subject to as well. While not necessarily a perfect tool, it certainly constitutes a solid inclusion of these into the regulatory regime. 

Professional football, however, seems to pose a whole new set of challenges for the EU. For now, the European Commission’s report has left it up to Member States to decide on what the best course of action is: 

Member States should consider which actors should be covered by the obligation to report suspicious transactions and what requirements should apply to the control and registration of the origin of the account holders and the beneficiaries of money.

As the new commission will be taking over from Mr Juncker’s commission in November 2019, further decisions on how the EU will proceed on this regulatory matter rest with them. Certainly, however, the sentiment which brought about the Fifth and Sixth AML Directives and their drive towards regional co-operation and knocking down barriers between Member States, seems to be living on.  

 

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