The future of EU policy on preventing money laundering and terrorist financing

Robert CaringtonOn 27 January 2021, Paolo Panico TEP, the Chair of STEP Europe, moderated a webinar hosted by Anti-Money Laundering Europe (AME) on the future of the European Union’s policy on preventing money laundering and terrorist financing.

The panel included Steve Ryan, deputy head of the financial crime unit in the Directorate-General (DG) Internal Market and Services of the European Commission (EC); Eero Heinäluoma, Member of the European Parliament (EP); and Roger Kaiser, Senior Policy Advisor, European Banking Federation.

The EC stated that it planned to unveil its consultation feedback and a new legislative package in the near future following the May 2020 action plan.

The consultation feedback had reportedly showed support for EU action in this area as well as significant support for further harmonisation in all areas, particularly for obliged entities and beneficial ownership registers.

The proposed legislative package will focus on only three out of the six pillars of the action plan, which are a harmonised rulebook; EU level supervision; and a coordination and support mechanism for financial intelligence units (FIUs). The plan is for the package to be adopted in spring 2021.

The main proposals of the package for each pillar are:

  • to put in place a more integrated framework;
  • to establish a new AML authority at the centre of an EU AML supervisory system. This should have direct supervisory powers over financial institutions and oversight/coordination powers in the non-financial sector;
  • to set up a mechanism to coordinate and support FIU work, fully integrated in the new AML authority. It will provide technical support and assistance to analysis produced by FIUs, including joint work.

The EP representative called for an updated rulebook to keep up with new developments like crypto-assets, and noted that supervisors should be supported with appropriate tools and resources. It stressed that reform is needed and was looking forward to receive the EC proposal.

Industry representatives called for a single EU rulebook and supervisory convergence and stressed the need to avoid a ‘tick the box’ approach, or any regulatory or supervisory fragmentation. It also called for guidance to help balance out GDPR and AML requirements.

 

Robert Carington is Policy Executive at STEP

The OECD reviews the Common Reporting Standard

Emily Deane TEPHM Revenue & Customs (HMRC) invited some of the UK’s financial industry experts, including STEP, to join an overview of the OECD’s current review of the Common Reporting Standard (CRS).

The OECD will launch a consultation later this year, but has requested early input from industry experts on the improvements and changes that they would like to see. The purpose of the review is to enhance the general efficiency and operation of the CRS, and especially the quality and usability of its data.

In recent years there has been increasing use of innovative financial products that were not envisaged when the CRS was originally implemented. Some gaps and ambiguities in the legislation have been identified, and the OECD believes the time is now right to review and consolidate it. HMRC intends to consult the crypto-asset industry on technical changes and improvements and e-money industry experts, an area which was previously excluded, but some countries have called for it to be included in order to reach a single and consistent view.

HMRC also discussed some trust related issues for consultation, including:

Rules on reporting of joint accounts

While each joint account holder is required to report specific information, the schema does not recognise the number of account holders. HMRC suggests developing an indicator or flag to identify each individual account holder.

Controlling persons of passive non-financial entities (NFEs)

The schema is currently unable to assess the identity of the controlling person (ie settlor, protector) making the data less useful for tax risk purposes. HMRC suggests introducing  a mandatory field to specify the role of the controlling person.

Account holder where a trust is a financial institution (FI)

HMRC suggests the schema should be able to identify the type of equity interest the account holder has for risk assessment purposes.

Other trust-related issues that will be addressed in more detail include:

  • the treatment of reporting in relation to trustees, protectors and controllers;
  • inconsistent value reporting on the value of trust accounts;
  • reporting of trust loans as payments and potential avoidance issues;
  • consistency over reporting of issues on protectors and other ‘controllers’ who have no financial interests in the trust;
  • cross-over issues on reporting controllers – AML principles and FATF guidance;
  • reporting on ownership of corporate trustees in the context of controlling persons/equity interest holders;
  • relevance of cash as an asset in the context of classifying entities, particularly in the financial institution/passive NFE distinction.

HMRC has confirmed that it will form a focus group to look at the CRS and specific trust aspects, and we will keep members updated as the consultation progresses. In the meantime if members have any additional trust-related feedback please email the policy team at [email protected] by 1 February 2021.

Emily Deane TEP, STEP Technical Counsel

The UK replaces DAC6 with the OECD’s model Mandatory Disclosure Rules (MDR) post-Brexit

Emily Deane TEPThe disclosure of cross-border tax planning arrangements under Council Directive (EU) 2018/822 (DAC6) came into force on 1 July 2020 and requires reporting of any persons involved in cross-border arrangements, including loan agreements, payments from a resident of one country to a resident of another, or putting funds in an offshore trust, if one of the hallmarks apply.

Following the conclusion of negotiations between the UK and the EU on a Free Trade Agreement (FTA), HMRC confirms that only arrangements that meet hallmarks under category D of DAC6 need to be reported in the UK, in accordance with the OECD’s Mandatory Disclosure Rules (MDR).

The regulations have been amended and laid before Parliament to ensure the rules work correctly post-Brexit, including ensuring that references to EU member States refer to the UK or an EU member State after the end of the transition period. The rules will now only apply to two types of arrangements captured within the category D hallmarks:

  • Hallmark D1 is any ‘arrangement which may have the effect of undermining the reporting obligation under the laws implementing Union legislation or any equivalent agreements on the automatic exchange of Financial Account information, including agreements with third countries, or which takes advantage of the absence of such legislation or agreements’.
  • Hallmark D2 applies to an arrangement involving a ‘non-transparent legal or beneficial ownership chain’ with the use of persons, legal arrangements or structures:
    • that do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises; and
    • are incorporated, managed, resident, controlled or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets held by such persons, legal arrangements or structures;
    • where the beneficial owners of such persons, legal arrangements or structures, as defined in Directive (EU) 2015/849, are made unidentifiable.

The replacement of DAC6 will significantly reduce reporting requirements although the disclosure of tax avoidance schemes (DOTAS) will continue to apply in the UK. It is also clear that under the terms of the FTA, the UK must not reduce the level of protection in its legislation below the level of protection afforded by the OECD’s MDR. While the UK has not implemented MDR in its domestic legislation the rules provide a ‘level of protection’ which in certain respects is equivalent to that in the OECD’s MDR, and in other respects goes beyond it.

The government will begin to repeal the legislation implementing DAC6 in the UK and will implement the OECD’s MDR as soon as practicable, in order to replace DAC6 and transition from European to international standards on tax transparency. The government intends to consult on draft legislation to introduce MDR, and STEP will keep members apprised of the situation accordingly.

Update 6 January 2021: HMRC has confirmed to STEP that only arrangements which meet the hallmarks under Category D will now need to be reported, therefore historic reporting (for arrangements up to 31 December 2020) in respect of the other hallmarks will no longer be required.

Emily Deane TEP, STEP Technical Counsel