Moran Harari, Florencia Lorenzo, Adam Abukari ■ Strengthening the fight against money laundering: Criminalisation of the EU directive
The Tax Justice Network and Coventry University, partners in the EU 2020 Horizon TRACE project, have recently responded to a call for evidence regarding the Criminalisation of Money Laundering Directive, in which we highlighted critical loopholes and provided recommendations to improve the EU’s ability to combat money laundering effectively.
Here are our main recommendations which in our view can provide the EU with a roadmap for a more effective regulatory framework:
Harmonising tax crime definitions
One key area of concern is the lack of harmonisation in the definitions of tax crimes among EU member states (see pages 236 onwards in this Oxford University Press Open Access Book). While tax evasion and fraud are criminal offences across the EU, there are significant disparities in how these crimes are defined and penalised. Definitional variations of tax offences serve as critical enablers of cross-border tax crime in the EU, as it frustrates investigation efforts.
We therefore recommend harmonising the definitions of tax crimes. By eliminating definitional inconsistencies, the EU can prevent dubious individuals and multinational corporations from exploiting legal loopholes to evade taxes and engage in money laundering.
Leveraging technological innovation
As technology continues to evolve, so do the techniques and tools employed by money launderers. The TRACE project has revealed that emerging technologies, such as artificial intelligence, have enabled increasingly sophisticated money laundering methods in various sectors, including art, gambling, and cryptocurrency.
To address these risks, the directive must be updated to account for the opportunities and challenges presented by technology including the use of artificial intelligence tools to track illicit financial flows more effectively.
Protecting whistle blowers
Whistle blowers play a crucial role in uncovering money laundering activities. Their actions enhance transparency and support law enforcement agencies in exposing financial crimes. While the EU has a Whistle-blower Protection Directive, this protection should extend to the directive on the criminalisation of money laundering. Incorporating whistle blowing protection provisions into this directive would highlight the vital role that whistle blowers play in the fight against money laundering and tax crimes.
Transparency of legal entities and arrangements
Identifying the individuals that ultimately control and benefit from legal entities is essential to preventing tax evasion, money laundering, corruption, and terrorism financing. To improve transparency, the EU should invest in a robust beneficial ownership framework, ensuring that information is accessible to the public.
While progress has been made in establishing beneficial ownership registries, challenges remain. Some countries have not effectively eliminated the use of bearer shares, which introduces secrecy risks. The EU should encourage member states to close these loopholes and prevent the use of bearer shares.
Enhancing public access to beneficial ownership data
Public disclosure of beneficial ownership information is crucial for preventing financial crimes. Accessible data allows civil society organisations, journalists, and authorities to hold individuals accountable for their actions. Up until October 2022, public access to such information had been gradually improving, and according to the Tax Justice Network’s assessment, laws requiring beneficial ownership to be registered with a government authority have been approved in a total of 97 jurisdictions. However, in November 2022, a ruling by the EU Court of Justice disrupted this trend by invalidating public access to beneficial ownership information for local legal entities within the EU in the context of combating money laundering. Nonetheless, as the Tax Justice Network reported in July 2023, some EU countries have chosen to maintain their public registers, a practice that should be encouraged throughout the Union.
Verification mechanisms for beneficial ownership data
Ensuring the accuracy and legitimacy of beneficial ownership information is vital. The EU should use interconnected government and public databases to verify and maintain consistent ownership data within and across member states. Implementing advanced big data analytics and automated IT systems can help detect suspicious cases and streamline the verification process (as outlined in the Tax Justice Network’s Roadmap to Effective Beneficial Ownership Transparency (REBOT) paper in greater detail).
Applying a whole of government approach to data and maximising synergies between policies
Illicit financial flows often intersect with multiple crimes and social issues. To address these challenges comprehensively, beyond the imperative of ensuring that authorities possess adequate and verified information, the EU needs legal frameworks and tools that ensure that once data is registered, it becomes accessible to all pertinent stakeholders. The absence of collaboration and a fragmented approach to tackling illicit financial activities can result in scenarios where critical information exists but remains unshared among relevant authorities, whether domestically or internationally. Applying a whole of government approach to data should also consider multiple angles, such as corruption, national security, tax abuse, and social inequalities. This is likely to facilitate more effective prosecution of money laundering offenses.
A good example is the use of data collected as part of the common reporting standard. While this has improved data sharing for tax purposes, limitations prevent broader use of this data (eg for preventing money laundering). The EU should ensure that data shared for tax purposes can also be accessed by authorities responsible for preventing, investigating, and prosecuting money laundering offenses.
Publishing common reporting standard data and other statistics
Making data publicly available and interconnected is a powerful tool in preventing financial crimes. Public access to anonymised statistics, such as those collected through the common reporting standard, can help stakeholders identify potential offences and anomalies. The EU should consider publishing common reporting standard data and other statistics to improve transparency and understanding of money laundering patterns.
An ongoing battle
The fight against money laundering is an ongoing battle that requires constant adaptation to evolving techniques and technologies. In closing these critical loopholes, the EU can strengthen its fight against money laundering, protect its financial system’s integrity, and contribute to a safer and more transparent global economy.
You can read our full submission here.
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