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5MLD: High Risk Third Countries

5MLD: New Methodology Considered for identifying high-risk third countries

24th June 2019

During a meeting in Brussels on 5th June 2019, a revised approach for the methodology used to identify high-risk third countries was proposed by the European Commission. This follows a rejection by the Council of the EU earlier this year of a draft list of 23 high-risk countries under 5MLD – the fifth anti money laundering directive – as had been proposed by the European Commission on the prevention of the use of the financial system for the purposes of money laundering and terrorist financing.

The most recent proposals look to strengthen the criteria on the basis of which the Commission is required to identify high-risk third countries, by applying requirements going over and beyond the criteria set out by FATF, the Financial Action Task Force.

The criteria set out looks to take into account “strategic deficiencies” of a third country in three broad areas:

• The legal and institutional AML/CFT framework of a third country;
• The powers and procedures of the third country’s competent authorities for the purposes of combating money laundering and terrorist financing;
• The effectiveness of the third country’s AML/CFT system in addressing these risks.

What is a high-risk third country?

Under Article 9 of the Fourth Money Laundering Directive, the European Commission is mandated to identify high-risk third countries, the aim of which is to protect the integrity of the EU financial system.

A high-risk third country are those countries identified as having strategic deficiencies in their safeguarding against money laundering and countering terrorist financing.

And in accordance with regulations, you must “apply enhanced due diligence (EDD) measures to mitigate the risks arising in any business relationship or transaction with a person established in a high-risk third country identified by the European Commission.” (33(1)(b) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017)

Whilst the draft list of High Risk Third Countries published by the Commission  earlier this year proposed to detail 23 countries, at present there are 16 countries which have been identified as 'high risk third countries'. These being:

• Afghanistan
• Bosnia and Herzegovina
• Guyana
• Iraq
• Lao PDR
• Syria
• Uganda
• Vanuatu
• Yemen
• Ethiopia
• Sri Lanka
• Trinidad and Tobago
• Tunisia
• Pakistan
• Iran
• Democratic People's Republic of Korea

Of course, given the proposals so far, we should look to see an increase in the number of high risk third countries going forwards.

Initial Proposal Rejected:

As said, the revised approach now put forward by the European Commission follows on from the rejection in March of that initially proposed. In a statement issued at that time, Member States publically stressed the supposed lack of transparency and resiliency of the process – which included a lack of measures for “affected countries to take decisive action while also respecting their right to be heard.”

The European Commission now looks to consult broadly with EU Member States on the preparation of the revised methodology, as well as engage with FATF at the same time.

In principle, the Financial Action Task Force’s list of high-risk third countries will be considered a baseline for the Commission’s assessment.

And, to help improve transparency of the process, as well as engagement with third countries concerned, the European Commission is now considering a staggered approach whereby the Commission would:

In order to improve transparency of the process and engagement with third countries concerned throughout, the Commission is considering a staged approach whereby it would:

1. Consult third countries concerned on preliminary findings;

2. Draft country-specific benchmarks to address each country’s shortcomings; and

3. Seek third-countries’ commitments to implement specific corrective measures before issuing a finalised listing.

It is now expected that the new methodology will be finalised and a revised list of high-risk third countries will be published in either Q3 or Q4 of this year.

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