European money laundering rules strengthened to undermine terrorist financing

The new directive and regulation will make Europe more consistent with the approach followed internationally on information accompanying the transfer of funds, the Council of the European Union said in a statement.

The EU rules follow and expand on recommendations by the Financial Action Task Force (FATF), which is considered a "global reference for rules against money laundering and terrorist financing", the Council said.

The main changes include a reduction of the cash payment threshold from €15,000 (£11,000) to €10,000. This means that those trading in cash for goods, services or gambling services will be subject to the Directive when the amounts reach €10,000. A risk-based approach, using evidence-based decision making, has been introduced to better target risks, and 'obliged entities' that must comply with the rules, such as banks, will now take stronger measures for high risk customers, and simplified measures when the risk is lower.

A central register will be set up to store 'beneficial ownership' information on companies and tax-liable trusts within the EU. This register should be accessible to 'competent authorities', financial intelligence units, obliged entities and "persons who can demonstrate a legitimate interest to access the information".

High-risk gambling services will have to do due diligence on transactions over €2,000, while low-risk services can be exempt from some or all of the requirements.

Member states have two years to incorporate the directive into their national law.

The right measures have to be in place to prevent money launderers and terrorists from taking advantage of the freedom of capital movement in the EU , the regulation and directive text said.

"The soundness, integrity and stability of the system of transfers of funds and confidence in the financial system as a whole could be seriously jeopardised by the efforts of criminals…to disguise the origin of criminal proceeds or to transfer funds for criminal activities or terrorist purposes," it said.

"The obligation placed upon EU member states to maintain central registers listing information on the ultimate beneficial owners of corporate and other legal entities, as well as trusts, will enable greater transparency in financial transactions," said financial services litigation and compliance expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, when the draft rules were first published in December. "This will no doubt make it more difficult for transactions to mask money laundering activity."

This obligation will also make it easier for regulators and prosecutors to identify potential wrongdoing, and to identify those businesses who are either intentionally or unknowingly caught up in illicit activity, Ruck said.

However, he said that there are data protection concerns that must be taken into account when facilitating access to the register data to those pursuing a 'legitimate interest'.

"The wider availability of information including an individual’s name, month and year of birth, nationality, residency and details on ownership raise significant risks regarding inappropriate access or use of such personal data, in particular, due to the provision that this information will be accessible to people or organisations who can demonstrate a 'legitimate interest', such as investigative journalists and other concerned citizens," Ruck said.

"Only time will tell if these provisions extend to anyone placing their private residence in trust for their children upon their death being required to provide a range of personal data for storage on a central register. A balance must be found between addressing the risks of money laundering with the protection of each individual’s personal data and right to privacy," he said.

The expert said that financial services firms involved in transactions can expect to come under "significant scrutiny to identify the beneficial owners of those involved" and should expect to be on the end of "swift and significant action from prosecutors and regulators should they fail to meet the requirements".