Financial Regulatory Observer
December 2018

BREXIT COUNTDOWN ›
Our Brexit countdown illustrates the key dates and milestones on the road to Brexit. Discover more.

The EU and the UK must still negotiate a framework for their future relationship

 

Negotiation process

Article 50 TEU sets out three cumulative requirements for an orderly withdrawal from the EU: a unilateral notification of withdrawal; a withdrawal agreement (WA); and a framework for the EU-UK future relationship. The UK fulfilled the first requirement on 29 March 2017 when it formally notified the European Council of its intention to withdraw from the EU. The second and the third requirement, however, are not yet fulfilled. Even though the EU and the UK reached a draft WA on the negotiators’ level on 14 November 2018, it remains to be seen whether this draft WA will be accepted by the House of Commons. On 14 November 2018 a draft political declaration on a future framework was concluded by the EU and the UK as well. This draft declaration was specified a couple of days later on 22 November 2018.

Withdrawal Agreement

The WA, the second requirement, is set to be an international treaty between the EU and the UK comprising good faith commitments, which are legally binding on both parties under international law. The final version must include a transition agreement and, in a separate political declaration, commitments to finalizing a treaty on the future relationship between the EU and the UK after Brexit day.

The EU and the UK started to negotiate the WA on 19 June 2017. During the first phase of negotiations, they discussed issues in relation to citizens’ rights, financial settlement and the Ireland/Northern Ireland border. As a result of the first phase, they released the Draft Agreement on the withdrawal of the UK from the EU and European Atomic Energy Community on 28 February 2018, including a protocol on Ireland/Northern Ireland.

On 14 November 2018, the EU and the UK agreed on a 585 page-long draft WA on the negotiators’ level. The draft WA covers the issues mentioned above as well as provisions to safeguard the circulation of goods already placed on the market on 29 March 2019. It does not contain any detailed provisions on financial services whatsoever.

_{31 Dec 2020}
End of Brexit transition period

 

Transition period

In Art. 126 of the WA, a transition period is stipulated. This period would run from Brexit day to 31 December 2020. During this time, EU law and jurisprudence would continue to apply to the UK as if it were an EU Member State; but being a third country, the UK would no longer participate in the EU institutions or have any voting rights. During the transition period, it is also envisaged that the UK will remain in the EU Single Market, the EU Customs Union and within the jurisdiction of the Court of the European Union. After the transition period, the UK would be free of all EU obligations and able to adopt its own trade deals with other countries. In addition, according to Art. 132 of the draft WA, this transition period might also be extended for at least one year—a provision that remained widely unnoticed.

Ratifying the WA

The EU can only adopt the WA, while considering the future framework declaration, if the Council of the EU and the European Parliament give their consent. The Members of the European Parliament, including the MEPs from the UK, have to vote with a simple majority. Then, the WA has to pass the Council with a strong qualified majority, without the UK being allowed to vote (Article 238(3)b TEU). In principle, the WA does not require ratification by the remaining Member States.

On 25 November 2018, the European Council endorsed the draft WA. Thus, it is now the UK’s turn to take further steps, namely approving the draft WA in the House of Commons on 11 December 2018. If the House of Commons accepts the draft WA, the European Council could agree formally on the then finalized WA at its 13 and 14 December 2018 meeting.

However, if the House of Commons blocks the ratification, an emergency session would need to be held. Consequently, there might be renegotiations at the European Council Meeting on 13 and 14 December 2018, followed by a second vote in the House of Commons on a renegotiated WA at the European Council Meeting.

In case no deal has been reached by the end of 21 January 2019, the UK Parliament will then discuss next steps, contingency measures or seek an extension to the Article 50 TEU process. If Parliament approves, the UK then has to pass the Withdrawal Bill (see below for further detail) to implement the WA into domestic law. After the WA has been signed, it has to be presented before both Houses for a period of 21 sitting days, as required by the Constitutional Reform and Governance Act 2010, before it may be ratified.

By ratifying the treaty, the parties give their consent to be bound in accordance with international law. The ratified WA will enter into force on Brexit day, and the transition period will start.

Whether or not there will be a deal, 29 March 2019 11pm GMT is the point of no return; from that moment on, the UK will no longer be a member of the EU

 

Future framework

The EU and the UK are still negotiating the third withdrawal requirement: a framework for their future relationship. Although it merely constitutes a political act, the framework has to be agreed to alongside the WA to ensure an orderly withdrawal. Once the UK has left the EU, the parties will have to negotiate an actual treaty in accordance with the process used to reach agreements with third countries outlined in Article 218(3) TFEU. On 22 November 2018, the EU and the UK issued a specified political declaration setting out the future framework of the relationship between them. Their aim is to conclude a Free Trade Agreement that would liberalize trade in services well beyond WTO commitments and build on recent Free Trade Agreements of the EU, such as CETA. Regarding financial services, the political declaration outlines the parties’ intent to establish an equivalence regime, which would, however, be framed by their regulatory and decision-making autonomy. As the UK rejects membership in the European Economic Area, such as Norway or Liechtenstein, it would thus be under a future framework agreement, a third country to the EU.

Further, the EU and the UK intend to assess each others’ regulatory framework until June 2020 in order to prepare an equivalence regime taking effect in January 2021.

By now
_100%
of the Withdrawal Agreement has been negotiated— now pending parliamentary approval

 

UK Brexit legislation

To prepare for post-Brexit, the UK Parliament passed the EU (Withdrawal) Act 2018 on 26 June 2018. The Act repeals the 1972 European Communities Act (ECA), but is without prejudice to the outcome of the negotiations. On 29 March 2019, the Act will convert all EU law in force at that date and applicable to the UK into a new domestic legal category called "retained EU law". This category preserves the rights in EU treaties on which individuals can directly rely in court, as well as all laws made in the UK to implement EU obligations. Ultimately, from the UK perspective, this process "freezes" EU law in time. To circumvent the likely disadvantages caused by applying a static body of EU law, the UK authorities will assume the competencies of the EU institutions, and after 29 March 2019 ministers will be able to amend or remove retained EU law where necessary.

If a WA is reached, the UK will need to delay the Act’s key effects to ensure the continued application of EU law during the transition period. To that extent, it is envisaged that the UK Parliament would pass the transitional EU (Withdrawal Agreement and Implementation) Bill before ratification of the WA. The Bill would delay Union law from turning into "retained EU law" and preserve the necessary parts of the ECA during the transition period. It would also implement the WA into UK law and prolong the period for the UK to apply correcting powers to EU legislation until 31 December 2022 to ensure a coherent and functioning UK statute book. The Bill would sunset at the end of the transition period, giving the Act full effect.

Brexit

Whether or not there will be a deal, 29 March 2019 11 p.m. GMT is the point of no return; from that moment onward, the UK will no longer be an EU Member State.

As matters currently stand, if the UK and the EU have not ratified the WA by that date, the UK on the one hand and the EU Member States on the other will immediately become third countries with respect to each other.

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Fighting effectively against financial crime, including tax crime, requires a proper implementation of the new rules and a stronger coordination between authorities

 

_{December 2020}
The deadline for EU Member States to implement the Sixth AML Directive into national laws

 

The European Commission has proposed new initiatives to further harmonise anti-money laundering (AML) supervision in the EU, although it is unclear whether these proposals will still come into force before the European elections next year. We expect to see further legislative attempts at increased European harmonisation in this field, although it seems unlikely that one central European anti-money laundering agency will be introduced in the short term.

The Fifth AML Directive, which came into force on 9 July 2018, was a response to recent terrorist attacks across the EU and the offshore leaks investigated in the Panama papers. EU Member States have until January 2020 to implement the directive into national law.

The Directive introduced four key changes to the AML regime:

• Member States should ensure that registers of ultimate beneficial owners of companies and other legal entities become accessible to the general public (but not the register of ultimate beneficial owners of trusts, which will still require demonstration of a legitimate interest)
• The AML regime is extended to cover additional service providers such as electronic wallet providers, virtual currency exchange service providers and art dealers. Further specifications regarding the scope of application of the Fifth AML Directive with respect to tax advisors and estate agents are provided;
• The threshold for identifying holders of prepaid cards is lowered to €150
• Member States will have to implement enhanced due diligence measures to monitor suspicious transactions involving high-risk countries more strictly

The Fifth AML Directive also includes the following measures:

• Registries of politically exposed persons (PEPs): Member States are required to issue and keep an up-to-date list indicating prominent public functions for identification purposes. The Commission will compile a single list of all prominent public functions (based on the information received from the Member States, and also including the prominent public functions at EU level) and make this list public
• Centralised bank account registries: The Fifth AML Directive obliges Member States to establish centralised national bank account registries or electronic data retrieval systems, which allow for identification of every natural or legal person holding or controlling payment and bank accounts or safe-deposit boxes held by a credit institution within their territory. National competent authorities should have unrestricted access to this information in order to perform their duties under the AML Directive.

It seems unlikely that one central European anti-money laundering agency will be introduced any time soon

 

Towards the Sixth Directive

On 12 November 2018, the Sixth AML Directive was published in the official Journal of the EU. This directive aims to combat money laundering with the use of criminal law and enables more efficient and swifter cross-border cooperation between Member States. The Sixth AML Directive will need to be transposed into national law by 3 December 2020.

The Sixth AML Directive includes the following important changes:

• Introduction of a unified list of predicate offences: The definition of criminal activities that constitute predicate offences for money laundering should be sufficiently uniform in all Member States. Member States should ensure that all offences that are punishable by a term of imprisonment to be out in the draft directive are considered predicate offences for money laundering. In addition, the draft directive includes a list of 22 offences that must be considered as predicate offences. It is noteworthy that in the European parliament draft this list includes "tax crimes relating to direct and indirect taxes, as laid down in national law".
• Criminal liability for organisation: The draft directive requires the extension of criminal liability for money laundering to organisations. Legal persons can be held liable where there is a lack of supervision. Member States must have in place effective, proportionate and dissuasive sanctions, such as the temporary or permanent exclusion from access to public funding, including tender procedures, grants and concessions, the temporary or permanent disqualification from the practice of commercial activities, placing under judicial supervision, a judicial winding-up order or a permanent and temporary closure of establishments that have been used for committing the offence. It will thus become of vital importance for financial institutions to strengthen their governance and oversight arrangements.
• Increased international cooperation: According to the draft directive, a Member State shall inform the Commission where it decides to extend its jurisdiction to money laundering offences that have been committed outside its territory where (a) the offender is a habitual resident on its territory; and (b) the offence is committed for the benefit of a legal person established on its territory. Where a money laundering offence falls within the jurisdiction of more than one Member State and where any of the Member States concerned can validly prosecute on the basis of the same facts, the Member States concerned shall cooperate in order to decide which of them will prosecute the offender, with the aim of centralising proceedings in a single Member State.

Effective AML policy and enforcement in EU Member States are essential for the overall soundness, integrity and reputation of the entire financial system

 

₂₂
The number of offences included in the new AML directive.

 

Stronger frameworks

Following recent incidents, the European Commission (EC) reviewed the effectiveness of the supervisory architecture and invited the chairpersons of the European Supervisory Authorities (ESAs) to establish a joint working group "to initiate a collective reflection on the ways of improving the current framework for cooperation between AML and prudential supervisors".

On 12 September 2018, the EC issued a communication on strengthening the Union framework for prudential and anti-money laundering supervision for financial institutions.

The EC indicates that fighting effectively against financial crime, including tax crime, needs a proper implementation of the new rules (including the Fifth AML Directive) and a stronger coordination between the different authorities.

In its communication, the EC sets out a strategy based on the analysis carried out by the joint working group. As part of the proposed strategy, the European Commission is proposing a number of short-term legislative and non-legislative initiatives, as well as a number of longer-term objectives.

In the short term, the EC observes that certain provisions in sectoral legislation, and in particular in the Capital Requirements Directive (CRD), may have an impact on AML matters. In this respect, the EC refers to the confidentiality regime in the CRD in combination with the absence of a clear obligation for the prudential supervisors to cooperate with the AML authorities and bodies.

The EC is proposing to amend CRD in two respects. Firstly, in the context of enhancing information exchange requirements, all relevant authorities and bodies that receive, analyse and process information should be explicitly covered by confidentiality waivers. Also, with respect to the duty of cooperation, relevant authorities should have the possibility to refer disagreements on cooperation to the EBA.

The EC is also proposing a number of measures aimed at strengthening supervisory convergence.

These measures include clarifying in more detail the European Banking Authority's (EBA) anti-money laundering-related tasks. As such it proposes that the EBA should carry out periodic independent reviews on anti-money laundering issues, with expert input from the proposed Anti-Money Laundering Standing Committee. Where a review reveals serious shortcomings, it is proposed that the EBA should inform the European Parliament, the Council and the Commission.

The EBA should also carry out regular risk assessment exercises to test strategies and resources in the context of anti-money laundering risks. Finally, the enforcement capacity of the EBA should be strengthened. It is proposed that the EBA should be able to request national supervisors to investigate cases where financial sector operators are alleged to have breached their obligations under the AML Directive and should under certain conditions be able to adopt decisions directly addressed to financial sector operators. The EC also proposes to reinforce cooperation with third-country authorities.

Proposed short-term non-legislative initiatives include the expansion of the Risk-Based Supervision Joint Guidelines to specify common procedures and methodologies, more stringent reviews of the activities of anti-money laundering authorities and a more proactive role for the EBA in the establishment of contacts with third-country authorities. Clarifying the division of tasks between the European Central Bank and the national competent authorities is also highlighted as a point of attention.

In the longer term, the debate on a central European AML authority is ongoing. While it is unlikely that such a body will be established before the next elections, it is clearly a continuing topic of debate.

The EC indicates that "in particular, transformation of the Anti-Money Laundering Directive into a Regulation, which would have the potential of setting a harmonised, directly applicable Union regulatory anti-money laundering framework should be considered". Indeed, differences in national implementation can still cause friction in the regulatory framework.

In addition, regarding the supervisory architecture, the communication indicates: "Different alternatives could also be envisaged in order to ensure high-quality and consistent anti-money laundering supervision, seamless information exchange and optimal cooperation between all relevant authorities in the Union. This may require conferring specific anti-money laundering supervisory tasks to a Union body".

Effective AML policy and enforcement in EU Member States are essential given the potential negative impact of shortcomings in AML enforcement within individual institutions and individual Member States on the overall soundness, integrity and reputation of the entire financial system.

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This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2018 White & Case LLP