Article 9.2 of the Fourth EU Money Laundering Directive empowers the European Commission to identify 'high risk third countries' with strategic deficiencies in their national anti-money laundering and counter financing of terrorism regimes that pose significant threats to the financial system of the European Union.
In accordance with regulation 33(1)(b) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 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.
For more guidance on appropriate EDD measures, refer to Chapter 4.12 of the Legal Sector Affinity Group AML guidance, which has been formally approved by HM Treasury.
Who is on the list?
At present there are 16 countries that have been identified as 'high risk third countries'. They are:
- Bosnia and Herzegovina
- Lao PDR
- Sri Lanka
- Trinidad and Tobago
- Democratic People's Republic of Korea
View the original link
It has been amended by two subsequent delegate regulations which can be accessed here, here and here.
The Fifth EU Money Laundering Directive, which was published in the Official Journal on 19 June 2018, has broadened the criteria for the European Commission in assessing high risk third countries.
As such, it is likely that the current list will be expanded in future.
What should firms do?
You must apply EDD measures when entering into a transaction with a person or entity based in one of the high risk third countries listed above.
There is, however, an exception where:
- the client established in a high risk third country is a branch or majority owned subsidiary of an entity established in an EEA state; and
- The entity is an obliged entity subject to national legislation implementing the fourth money laundering directive; and
- The entity is supervised for compliance with those requirements.
Even where a client is not based in a high risk third country you must still consider the individual money laundering and terrorist financing risks posed by that particular client and matter.
In determining whether it is appropriate to apply EDD you should take into account geographic risk factors, such as whether the country in which the client or transaction is based:
- has deficient anti-money laundering legislation;
- has high levels of acquisitive crime or corruption;
- is considered to be an offshore financial centre or tax havens; and/or
- permits nominee shareholders to appear on the share certificate or register of owners.
In addition, to effectively manage the money laundering risks that your firm faces you should:
- be aware of which jurisdictions are on the European Commission list and the sanctions list maintained by the Office for Financial Sanctions Implementation;
- be alert to unexpected instructions to undertake transactions relating to one of those jurisdictions where this is outside of your normal practice;
- be alert to unexpected increases in instructions to undertake transactions relating to one of those jurisdictions or where the instructions are unusual given your understanding of normal practice in those jurisdictions;
- be alert to large asset transfers out of those jurisdictions;
- consider undertaking further due diligence checks if you are not sure who you are dealing with and ask more questions about the source of funds and purpose of the transaction; and
- have a process for checking clients against the sanctions lists where they have a connection with a jurisdiction which is on the sanctions list
Other useful resources
In addition to the European Commission's list of high risk third countries, you may wish to consult the following useful resources when considering geographic money laundering risk factors: