EU Final Draft Technical Standards on Mitigating Money Laundering and Terrorist Financing in Third Countries

The Joint Committee of the European Supervisory Authorities has published a final Report and final draft joint Regulatory Technical Standards on the measures that financial institutions should take to mitigate the risks of money laundering and terrorist financing where a third country's laws do not permit the application of group-wide policies and procedures. The Fourth Money Laundering Directive, which entered into force on June 26, 2015, requires a financial institution to put policies and procedures in place to mitigate and manage the money laundering and terrorist financing risks to which it is exposed. Where a financial institution is part of a group, the policies and procedures must be implemented at group level. Additional policies and procedures must be implemented where a financial institution has a branch or majority-owned subsidiary in a third country whose laws do not allow the implementation of group-wide policies.

The final draft RTS set out the minimum steps that a financial institution within a group that has entities in a third country should take, such as assessing the risk to the group, ensuring the risk is reflected in group policies and procedures and providing training to relevant staff in the third country establishments.

Where the third country's laws limit an institution's ability to identify and assess money laundering or terrorist financing risks associated with a business relationship or transaction due to restrictions on access to customer and beneficial ownership information, or prohibit or restrict sharing or processing of customer data or the disclosure of information related to suspicious transactions or the keeping of records, a financial institution should inform its national regulator and take steps to obtain legal consent from its customers to overcome those restrictions. The RTS set out additional measures that must be taken by a financial institution where that is not feasible. These include measures, such as restricting the nature and type of financial products and services provided in the third country to those that present only a low ML or TF risk and ensuring that other entities in the same group do not rely on the customer due diligence carried out by the group entities situated in the third country.

Finally, where an institution cannot effectively manage the risks by applying the minimum steps and additional measures, it must, depending on the specific circumstances, terminate the business relationship or not proceed with the transaction or close down some or all of the operations provided by the group entities in the third country. However, the extent to which such measures need to be taken can be determined on a risk-sensitive basis. Financial institutions will need to demonstrate to their national regulator that the measures are appropriate in view of the specific ML or TF risks.

The final draft RTS have been submitted to the European Commission for endorsement, following which they will be published in the Official Journal of the European Union. It is proposed that the RTS would apply three months after the RTS entered into force to allow financial institutions to adjust their policies and procedures.

View the final Report and final draft RTS.