4.1 History of the European Union Anti-Money Laundering and Financing of Terrorism Directives
The escalation in money laundering and terrorist financing has led to heightened awareness of the potential effects of money laundering. This also led the European Union to enact its First Directive to combat money laundering in 1991 (Council Directive 91/308/EEC).
However, it was not until recently that these measures impacted upon lawyers, through the Third Anti-Money Laundering and Financing of Terrorism Directive (Commission Directive 2006/70/EC).
The European Union Anti-Money Laundering and Financing of Terrorism Directives are designed to protect the financial system and other vulnerable professions, such as lawyers, from being misused for money laundering and financing of terrorism purposes. Also, the creation of the Single Market assists, not only to legitimate business, but it also provides increased opportunities for money laundering and the funding of further crime.
4.1.1 First Directive
Council Directive of 10 June 1991 on the prevention of the use of the financial system for the purpose of money laundering (91/308/EEC) .
As will be noted from the title of the First Directive, the initial concern of the Council Directive was that credit and financial institutions could and would be used to launder the proceeds of criminal activities, jeopardising the whole financial system. The Directive was enacted in response to growing concerns that the developing financial system could be used for criminal purposes and it recognised the possible susceptibility of professionals to money laundering activities..
The First Directive provided the initial framework for the subsequent Second and Third Directives. It established key preventative measures such as customer/client identification, record-keeping and central methods of reporting suspicious transactions. It was passed to ensure a universal approach was adopted by Member States to combat the problem of money laundering, thus protecting the EU Single Market.
The First Directive requirements stated that:
- Due diligence checks must be carried out by all credit and financial institutions before entering into any business relationship or before conducting any transaction over a certain threshold;
- All collated identification documents, evidence and existing records collected as part of the due diligence checks must be kept for at least five years by credit and financial institutions;
- There must be close international co-operation and harmonisation between credit and financial institutions and their supervisory authorities and the establishment of a mandatory central system of reporting;
- The confidentiality rules regarding customer information should be toned down in relation to disclosing suspected money laundering offences to the authorities; and
- Special protection should be afforded to credit and financial institutions, their employees and their directors who have to breach confidentiality rules in order to make the disclosure.
However, the First Directive failed to extend the provisions of the Directive to combat this possible threat.
4.1.2 Second Directive
Directive 2001/97/EC of the European Parliament and of the Council of the European Union of 4 December 2001 .
The Second Directive amended and updated the First Directive on the prevention of the use of the financial system for the purpose of money laundering. The aim of the Second Directive was to refine the existing provisions created by the First Directive and to plug the gaps in the legislation highlighted by the 40 recommendations, suggested by the Financial Action Task Force (FATF). Such provisions were consequently adopted.
The European Council felt this was a necessary step to take as the First Directive did not adequately establish which Member State’s authorities should receive details of suspicious transactions where the credit or financial institution had branches in various jurisdictions.
The Second Directive adopted a broader definition of money laundering, taking into account underlying offences such as corruption and thus expanding the predicate offences . The Second Directive also clarified that currency exchange offices, money transmitters and investment firms were included within the scope of the directive as they were susceptible to money laundering transactions. In addition, the Second Directive added the authority to identify, trace, freeze, seize and confiscate any property and proceeds linked to criminal activities.
Moving on from the First Directive, the Second Directive touched upon the possibility of the Directive becoming applicable to lawyers participating in financial or corporate transactions. The proposition to extend the provisions of the Directive to the legal profession was met with fierce opposition by the European Parliament. It was due to fears that it would encroach on client confidentiality rules and could potentially violate the integrity of court proceedings.
A compromise was reached and the scope of the Second Directive was not extended to cover professionals, such as lawyers. Thus, lawyers were exempt from reporting information received in the course of defending or representing a client.
4.2 Current European Union Anti-Money Laundering and Financing of Terrorism Directive
4.2.1 Third Directive
Commission Directive 2006/70/EC of 1 August 2006.
The Third Directive took into account the FATF’s revised anti-money laundering and counter terrorist financing standards of 2003. Its introduction can be seen as a culmination of the sudden realisation of the susceptibility of Designated Non-Financial Businesses and Professions such as lawyers to the furtherance of money laundering transactions and the changing political and economic circumstances in the wake of September 11 and the Madrid Bombings.
Since its implementation, the Third Directive has tightened the European Union’s anti-money laundering regime. Professionals such as lawyers were finally included within the scope of the Directive. In fact, the Third Directive makes the regime applicable to lawyers, notaries, accountants, real estate agents, casinos and encompassing trust and company services, exceeding €15,000. It also included measures against the financing of terrorism.
The Third Directive implements:
- The application of the Directive in relation to non-financial businesses and professions including lawyers;
- Enhanced customer due diligence measures for politically exposed persons (persons holding a public office such as judges) and their immediate families or close associates;
- Simplified customer due diligence procedures for low-risk transactions (Member State assessed) involving public authorities or public bodies if their identity and activities are publicly available, transparent and certain and on-going monitoring of such transactions.
The deadline for transposing the Third Directive into national law was 15 December 2007. The information contained on this website details which jurisdictions have transposed the Directive, and to what extent.
4.3 Consequences of non-implementation
Under European Union Law, each Member State is responsible for the implementation of European Community law within its own legal system. The European Commission has the responsibility of ensuring that all Member States correctly apply Community law. The Commission has various powers to combat non-compliance. The Commission may take whatever action it deems appropriate.
There is a first phase, the pre-litigation administrative phase. Here the Member State is given the opportunity to voluntarily conform to the requirements of the legislation before the Commission sends a formal letter of notice, requiring the Member State to comply with the application of Community law within a given time limit. The second phase involves a reasoned opinion by the Commission setting out the Commission’s position on the infringement, how and why it feels that the Member State has failed to fulfil one or more Community law obligations and to determine the subject matter of any action, once again requiring the Member State to stop the infringing act or omission within a given time limit.
Where a Member State proceeds to fail to comply with Community law or its obligations hereunder, the Commission has the power to refer the matter to the European Court of Justice (ECJ) (Article 226 of the EC Treaty). This is regarded as the final phase, and is generally only used as a last resort. It is a discretionary power; the Commission has the power to decide whether or not to proceed/ commence with infringement proceedings and to refer the matter to the ECJ.
In October 2008, the Commission decided to refer Belgium, Ireland, Spain and Sweden to the ECJ for their continuing failure to implement the Third Directive. Rulings by the ECJ are binding on all EU Member States. Interestingly, if Belgium, Ireland, Spain and Sweden do not comply with any judgment passed down by the ECJ, the Commission has the power to refer the matter, once again to the ECJ (Article 228 of the EC Treaty). This referral will also contain a recommendation for a financial penalty to be imposed on the Member State, based on the seriousness of the infringement, the duration of the infringement and the need to ensure that the penalty itself will be a deterrent to further infringements (see application guidance of Article 228).
The Commission stated that:
[T]he basic object of the whole infringement procedure is to secure compliance as rapidly as possible... 
The financial penalty is imposed on a case-by-case basis and must reflect the principle of proportionality and equal treatment among the Member States. Guidance on the calculation of financial penalties is available here.
- Official Journal L 166 of 28.06.1991 at page 77;
- Official Journal L 344 of 28.12.2001 at page 76;
- Predicate offences, such as drugs trafficking, illegal arms smuggling, etc. are the criminal activity from which the proceeds of the crime are generated. Therefore, money laundering is a derivative crime i.e. the offence of money laundering can only be committed if the original predicate offence is committed;
- Official Journal C 242, 21/08/1996; pg. 0006 - 0008.
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