Proposed 4th Anti-Money Laundering Directive -  Cross-border activity including online gambling

Presentation for the PayExpo, June 2014, London

European Law Firm

Peter Howitt

Director, Ramparts Law Firm & Chief Executive,

Gibraltar Betting & Gaming Association e: peterhowitt@ramparts.eu

w: www.ramparts.eu

Disclaimer: This presentation may contain information and guidance relating to a variety of legal, regulatory, corporate and tax matters. It is not intended to be and should not be relied upon as legal advice

Copyright: Ramparts & Ramparts Law, 2014

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Overview �  4AMLD covers all gambling operators (though Gibraltar and the UK apply the principles of

the 3rd Money Laundering Directive to online gambling) �  Requires multi-level risk based assessments and evidence driven Risk Based Approach

(“RBA”) at EU, national and operator levels �  Will impact national regulators, gambling operators, financial services firms and other

‘obliged entities’ (OE’s) �  Significant gear-change in compliance complexity and multi-level stakeholder participation �  On the issue of managing AML risk the Directive is a big improvement to the 3rd Directive –

requires risk matrices and decisions based on multiple factors rather than binary approaches �  In some respects is positive for the e-commerce industry - given evidential risk based

approach to AML risk management rather than box ticking or policy driven �  Overall 4AMLD = a missed opportunity to recognise the digital economy in this area of law

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Overview �  Purpose of 4AMLD is to:

�  reduce cross-border complexity �  safeguard from criminality and terrorism �  safeguard economic prosperity of EU by ensuring efficient business environment �  contribute to financial stability and soundness of the financial system �  ensure consistency between EU and international guidance (particularly the FATF

Recommendations) �  increase consistency (but not harmonisation) of national rules �  introduce harmonised criminal offence of money laundering across Europe (and make

certain that tax related crimes are in scope)

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Overview �  Who Will be covered?

�  very many people including all online gambling operators for the first time (previously only land based casinos were covered) (Article 2)

�  General Approach: �  sets some common standards but leaves Member States (MS), various regulatory bodies

and OE’s to assess risk and take adequate measures commensurate with risk for country, sectors, transactions and customers

�  less prescriptive than 3AMLD on what is considered high or low risk and the measures to be taken to manage risk

�  aimed at facilitation of cross-border information sharing and standards but minimum legal harmonisation in most respects

�  use of SDD is significantly reduced �  minimum set of principle based rules for administrative sanctions for breach �  all companies to hold and disclose information on beneficial owners

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Overview �  National Risk Assessments (NRA’s) required and nationals measures to be based on those

NRAs �  Closer cross-border co-operation between FIUs and with EBA and other supra-national

bodies (SNA’s) �  CDD: simplified, standard and enhanced continue to be allowed but much more evidence

and multi-variant risk-based focus �  3rd Country Equivalence White List Removed (now RBA) �  Extra-territoriality provisions for financial institution groups �  Increased PEP checking requirements for PEPs and their affiliates (domestic and

international) �  4AMLD still not fully harmonised - MS can gold-plate the Directive �  MS supported in RBA’s by supra-national EU supervisors bodies such as EBA and also

Europol and also should share RBA’s between each other

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Sanctions �  Civil, administrative and criminal fines permitted �  Directors and responsible persons of an OE can have measures applied to them directly �  Competent authorities will co-operate across-borders to allow effective supervision,

investigation and sanctions �  Minimum sanctions required - sanctions for systemic failings in CDD, STR’s, record

keeping and internal controls must include possible: �  public name and shame �  cease and desist �  withdrawal of authorisation �  suspension of manager or director �  fines of 10% total annual turnover (corporates and individuals) �  200% of profits gained/loss due to the breaches

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Compliance Impact �  OEs will need to know much more about their customer base and their commercial

partners businesses and beneficial owners �  OEs will need to document their risk assessed approach and findings even more �  Independent audit of the same will be required in many cases (for larger OEs) �  The work of the EBA and other SNA’s will be crucial in dealing with lack of

harmonisation, cross-border issues, technical standards for defining and evidencing RBA �  We are likely to see significant differences in interpretation between MS as to what sectors,

transactions and typologies represent higher or lower risk for due diligence purposes �  We should expect:

�  even more cross-border legal confusion and fragmentation �  increased compliance costs �  the possibility of misuse of 4AMLD to restrict cross-border supplies

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Treatment of online gambling �  The passage of the Directive has been instructive in the way in which it has sought to

incorporate online gambling �  online gambling appears to be very little understood or liked in Brussels and this means

that assertions with little evidence have influenced the tone of much of the discussions �  at one point an amendment was sought to include the supply of gambling services without

a local licence as an AML offence �  the latest EP draft is very confused on the circumstances where customer due diligence is

required (Art 10) - it could be interpreted as meaning that for online gambling only DD is always required with no allowance for the €2,000 SDD threshold

�  Experience in the electronic money sector suggests that some MS may seek to use the new laws to restrict cross-border trade (e.g. transposition of 2nd e-money Directive)

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AML - the e-money experience

�  1st e-money Directive (2000) intended to open up certain stored value payment products wider than just banking sector

�  Very poor uptake in Europe with some exceptions (e.g. UK private sector products and Italy public sector products)

�  Many countries did not support/understand the industry or approve operators for the sector

�  Legislation was poorly drafted and had many unnecessary commercial restrictions �  New Directive introduced in 2009 (2EMD) to encourage greater use of e-money �  Germany transposed the Directive but at the same time amended its AML laws for the

sector �  German AML law is based on country of establishment – therefore they focused on

imposition of severe AML restrictions for any local partners or distribution (e.g. POS) and refused to recognise non-German agents

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Impact on online gambling �  It is all about cross-border issues for online operators

�  Home State AML usually applies but in 7- 9 States the AML of the country of the customer may also be applicable

�  Home State AML might also apply for operators with local agents, group companies and even commercial partners (see, e.g. e-money sector debacle)

�  PEP checking is a major issue where you have customers in multiple territories who you need to check for local or foreign or international political exposure

�  Confusion over which laws apply and which FIU's to report to will increase

�  Online gambling is new to many AML structures in Europe - likely to mean that it does not work well, is not evidence based or is subject to further gold-plating during transposition

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Impact on online gambling �  Gold plating in national implementation of 4AMLD

�  For regulated sectors falling under SNA’s it likely they will lobby these authorities to issue guidance that seeks to harmonise certain approaches to risk management and evidence based AML

�  For other sectors like online gambling operators must either comply with applicable MS laws or face severe criminal law consequences

�  Unlike TFEU Article 56 (freedom of services) challenges - it is much more difficult for an operator to challenge local law and practice in the area of AML �  this means that challenging ‘unlawful’ restrictions arising from unreasonable,

disproportionate or discriminatory AML laws in national courts will be very difficult. �  national courts will be loathe to substitute their opinion on the proper management of

AML with that of the local regulatory body �  the effect may be that a cross-border supplier is effectively blocked out from a local market

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Structural deficits in 4AMLD �  No major structural legal solutions to deal with consistency and conflict of laws across

borders.

�  Obliged entities will therefore be subject to multiple laws and practical obligations depending on the Member State in which they have customers.

�  Much depends on the ability of the SNA’s such as the European Banking Authority to collate information on national practices and risk based approaches and issue guidance based on evidence.

�  Many people believe that SNA’s will simply not be able to cope with their co-ordinating and mediating role

�  There is still time for the EP or Trilogue process to review 4AMLD and ask a simple question:

How does 4AMLD consider and support the digital economy?

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4AMLD – An opportunity missed?

�  Recent proposed EU law shows that the Commission and Parliament are beginning to understand the need for joined up law across sectors and borders

�  Need to encourage the digital economy means that there is more focus on reducing differences in law and practice in areas of agreed EU law

�  E.g. the draft new Data Protection Regulation is seeking to implement the following structure: �  one Law (as a Regulation rather than a Directive = no variation in transposition) �  one Stop Shop (Businesses will be subject to Home State supervision for all of their EU

wide distant supply activities) �  it is estimated that this approach will save as much as €2.3bn in compliance and legal costs

which will be particularly helpful for SME’s and e-commerce businesses

�  In the meantime 4AMLD appears to have been reviewed and approved in an e-commerce vacuum.

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Current Status �  The draft 4AMLD is currently at an advanced stage within the EU legislative process

�  It has been subject to review by the European Council and separately by the European Parliament

�  The EP and EC texts now diverge on some key issues particularly relating to the inclusion of online gambling

�  In March 2014 the EP approved a latest draft an this will now need to be reviewed and approved by the incoming Parliament following recent elections (Oct 2014)

�  The next step is a trilogue process whereby the EP, the Council and the European Commission will appoint members to trilateral negotiations to seek to agree a final text and position on the Directive (circa Oct 2014- Jan 2015)

�  Once the Directive is agreed MS will have 2 years to implement the Directive (2017)

�  SNA’s have 2 years to issue guidance from date of transposition

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