This article was originally published in Money Laundering Bulletin.
In an effort to achieve better common understanding by competent authorities and financial sector operators of the European Union’s anti-money laundering regulatory framework, on 2 August  the European Banking Authority (EBA) launched a public consultation on draft Guidelines on the policies and procedures around compliance management and the role and responsibilities of the AML/CFT Compliance Officer under Article 8 and Chapter VI of Directive (EU) 2015/849. 
Since 2015, several reports  have highlighted the uneven and ineffective application of the requirements set out in Directive 2015/849.
This Directive provides that a compliance officer should only be appointed by obliged entities “where appropriate with regard to the size and nature of the business”.  Given this rather general wording, some financial sector operators determined they had no need to appoint a compliance officer.
However, the Guidelines now make it clear that all financial sector firms must do so: other obliged entities (independent legal professionals, estate agents, etc.) may still apply the distinctly vague proportionality test.
The Guidelines also provide some direction on the general responsibilities and duties of a compliance officer.
Effective and proportionate application
Under the Guidelines, proportionality and effectiveness for a financial sector operator are to be assessed by reference to its type, size, internal organization, nature, scope and the complexity of its activities, as well as the money laundering and/or terrorist financing risks to which it is potentially exposed.
Whereas proportionality is relatively easy to determine, the question remains of how effectiveness is to be assessed based on the above-mentioned criteria.
Effectiveness implies high quality AML/CFT control procedures. In practical terms, this means providing adequate resources, hiring suitably qualified staff, adapting the corporate governance documents, and developing internal reporting policies. Taking these steps should ensure that senior management has clearly defined responsibilities and create an efficient reporting flow, aimed at identifying information that highlights money laundering and/or terrorist financing concerns.
These operational issues, previously identified as deficient, precipitated the introduction of the new Guidelines.
For example, in their 2017 Joint Opinion on the risks of money laundering and terrorist financing affecting the EU’s financial sector, the European Supervisory Authorities concluded that senior management of some financial sector operators see AML/CFT issues as immaterial, especially when set alongside a corporate culture that pursues profits at the expense of robust compliance. This means that safeguarding adequate resources and hiring qualified staff for AML/CFT roles was not seen as a priority, which adversely affected the quality of the relevant control procedures.
In addition, a 2019 Report from the European Commission on the assessment of recent alleged money laundering cases involving EU credit institutions suggested that many of the entities under review had not established adequate risk management systems and controls. The report’s analysis revealed deficiencies in governance arrangements, internal reporting and group policies, as well as senior management responsibilities and accountability.
Similarly, effectiveness can also stem from appropriate interaction between the supervisory authorities and senior management of the financial sector operators concerned. This reinforces the need for involvement by these operators in AML/CFT issues, clear lines of responsibility, and even a direct line with staff who have AML/CFT responsibility.
In its 2019/20 AML/CFT review of competent authorities, the EBA found that in some Member States, supervisors who were responsible for the AML/CFT supervision of banks did not interact with those banks’ senior management. This oversight occurred because there was no legal or regulatory requirement to appoint a relevant compliance officer of sufficient seniority to report to the financial institution’s senior management body. The EBA emphasised that as a result, there was a risk that AML/CFT supervision may not be effective in those Member States.
Consequence of group compliance requirements
Given the obligation imposed by Directive 2015/849 for groups of companies to appoint a compliance officer at the parent company level, who is responsible for ensuring that compliance with AML/CFT programs is developed at group level for all global subsidiaries, certain points are worth considering.
First, this obligation may impact relations between businesses in the EU and the United Kingdom (or any other third country). Subsidiaries located in third country jurisdictions will have to look into whether they have an obligation to appoint a local compliance officer to meet the obligations of their parent companies based in EU Member States. There is also the question of whether parent companies based in third countries have an obligation to appoint a global compliance officer to ensure Directive compliance of subsidiaries located in EU Member States.
We also consider that the EU Directive 2015/849 imposes an obligation on groups of companies to implement effective AML/CFT programs in accordance with EU law at the level of majority-owned subsidiaries located in third countries,.
The Guidelines note that competent authorities of EU Member States also have a duty to review AML/CFT compliance in the financial sector operators in their jurisdictions. Breaches of obligations under Directive 2015/849carry administrative sanctions up to €5m, or 10% of the operator’s total annual turnover, whichever is greater.
It remains to be seen whether the requirement to appoint a compliance officer will be deemed adequate cause to trigger extraterritorial intervention by EU Member States’ authorities under Directive 2015/849.
Even though the Guidelines will help financial sector operators interpret their AML/CFT obligations, some aspects remain unclear, namely, when other obliged entities need to appoint a compliance officer, the criteria around effective and proportionate application of the requirements, and scope for extraterritorial enforcement.
This article was originally published in Thomson Reuters Regulatory Intelligence.
Along with the development of technology, progress and globalisation sustained by business agreements and transactions concluded all over the world, there are also certain misconducts and one will notice fraud increasing daily. In an effort to achieve a common better understanding by competent authorities and financial sector operators of the anti-money laundering regulatory framework, the European Banking Authority (“EBA”) has launched, on 2 August, 2021, a public consultation paper on the Guidelines regarding the policies and procedures in relation to compliance management and the role and responsibilities of the AML/CFT Compliance Officer under Article 8 and Chapter VI of Directive (EU) 2015/849 (the “Guidelines”).
It is noteworthy to mention that the money laundering and terrorist financing field is strongly regulated by the European Union (“EU”) through several directives, among which Directive (EU) 2015/849 of May 20, 2015 (the “Directive 2015/849”).
In a nutshell, the Guidelines aim to provide a better understanding over a certain topic included in Directive 2015/849, namely to clarify and elaborate the role and responsibilities of:
Nevertheless, as discussed herein below, the rationale behind the publication of the Guidelines was derived from EU Member States and financial sector operators’ practice when implementing Directive 2015/849.
Starting with 2015, there have been a number of reports indicating that the requirements set out in Directive 2015/849 have been implemented and applied unevenly or ineffectively by the Member States.
With respect to the Compliance Officer, the “motto” of the Guidelines, Directive 2015/849 provides that the appointment of the same should be performed by the obliged entities only under certain circumstances, where appropriate with regard to the size and nature of the business. Given this rather general wording, certain financial sector operators did not comply with the same and, on the basis of their own analysis, considered that there was no need to appoint a Compliance Officer.
However, the Guidelines came to shed some light over this interpretative obligation, explaining that the appointment of a Compliance Officer is mandatory for all the financial sector operators, whilst other obliged entities (like independent legal professionals, estate agents, etc.) should still carry out this proportionality test.
Considering the above, it is still not clear how the other obliged entities can properly understand and apply their obligations regarding the Compliance Officer, since the phrase “the size and nature of the business” is rather vague and has an orientation character.
Hence, it can be argued that, for the time being, the common ground for the appointment or not of a Compliance Officer should be the best practice in this field adopted by the other obliged entities of the Member States. In addition to that, the Guidelines can offer certain direction with respect to the general responsibilities and role of such Compliance Officer when appointed.
Another overarching statement involves the effective and proportionate application of the Guidelines themselves. As pointed out therein, proportionality and effectiveness are to be assessed by reference to the financial sector operator’s type, size, internal organisation, nature, scope and complexity of its activities, as well as the money laundering and/or terrorist financing risks to which the financial sector operator is exposed.
Whereas proportionality is easier to infer, the question raises how effectiveness is going to be assessed on the basis of the above-mentioned criteria.
From our standpoint, effectiveness shall imply high quality in terms of AML/CFT control procedures, which may be achieved by way of ensuring adequate resources, hiring suitably qualified staff, adapting the corporate governance documents and developing internal reporting policies, so as to ensure clear responsibilities for the senior management and create an efficient reporting flow, aimed at identifying information highlighting money laundering and/or terrorist financing concerns.
In that same vein, effectiveness may also stem from the appropriate interaction between the supervisory authorities and the senior management of the financial sector operators concerned, which reinforces the need for the latter’s involvement in AML/CFT issues, clear responsibilities and even a direct line with AML/CFT responsible staff.
It should be pointed out that these precise matters have been previously identified as shortcomings, being the very reason why these Guidelines were issued in the first place.
On the grounds of the obligation imposed by the Directive 2015/849 for groups of companies to appoint a compliance officer at the parent company level, having the role of ensuring compliance with AML/CFT programs developed at group level for all subsidiaries worldwide, certain points might be worth considering.
On the one hand, this obligation may have an impact on the business relations between the EU and the United Kingdom (or any other third country), in terms of whether subsidiaries located in such third jurisdictions may have an obligation to appoint a local compliance officer so as to ensure compliance with the above mentioned requirements for their parent companies based in EU Member States, respectively whether parent companies based in third jurisdictions may have an obligation to appoint a global compliance officer so as to ensure compliance of subsidiaries located in EU Member States with the requirements thereunder.
In addition, it is our opinion that the EU Directive 2015/849 also imposes groups of companies to implement effective AML/CFT programs in accordance with EU law at the level of majority owned subsidiaries located in third countries, including where the regulations of the respective third jurisdictions prevent such measures being applied with the rigor imposed by the same.
Nonetheless, the authorities of EU Member States also have the obligation, according to the Guidelines, to review the implementation of this AML/CFT compliance function by financial sector operators in their jurisdiction and may even impose administrative sanctions of a maximum amount of at least EUR 5,000,000 or 10% of the operators’ total annual turnover for breaches of their obligations under Directive 2015/849 that are serious, repeated, systematic, or a combination thereof.
It remains to be seen whether the appointment of a compliance officer may be considered such a substantial part of the AML/CFT policies required to be implemented at group level, so as to grant EU Member States’ authorities objective reasons to perform the extraterritorial interventions allowed under Directive 2015/849.
Even though these Guidelines are a first true glimpse of what is expected from financial sector operators in relation to AML/CFT, certain aspects, such as the mandatory appointment of a Compliance Officer by other obliged entities, the criteria ensuring an effective and proportionate application of the same, or the extent to which extraterritoriality may be enforced thereunder still remain unclear.
Time will show whether the EBA’s endeavour will have the expected impact, or rather the answers thus provided will leave room for new questions triggering the need to issue additional guidelines to the Guidelines.
On 11 October 2011, the European Commission launched a proposal (COM (2011) 635 final) for a Regulation on a Common European Sales Law (CESL), seeking to foster cross-border trade within the EU by introducing a set of uniform rules for business-to-consumer and business-to-business cross-border sale agreements (in the latter case, provided that one of the parties is a SME). With a timeframe for adoption that is yet unclear, the proposal is currently at the heart of debates amongst stakeholders and legal practitioners. This article provides a quick briefing on the main principles of the CESL proposal as well as on some of the questions surrounding the CESL both from a legal perspective and a practical standpoint.
Principles of CESL proposal
The Commission’s proposal relies on Article 114 TFEU regarding approximation of laws of the Member States as required for the establishment and functioning of the internal market, and aims to enshrine a single set of fully harmonised contract law rules regarding sale contracts, contracts for the supply of digital content as well as related service contracts. As per the Commission’s explanatory memorandum to the CESL proposal, said rules are to be considered as a second contract law regime within the national law of each Member State.
CESL does not apply to contracts lacking a cross-border dimension, nor to contracts entered into by parties if none of which is a SME. Nonetheless, as per the CESL regulation proposal, Member States may individually choose to have CESL contract rules apply to both such types of contracts. Contracts granting or promising to grant any form of credit to a consumer are also excluded from the current scope of the CESL, along with ‘mixed-purpose’ contracts (ie, contracts including any other elements than those pertaining to the three categories of contracts falling under the material scope of the CESL). CESL does however apply to contracts under which goods, digital content or related services are supplied on a continuing basis and paid for by consumers in instalments, for the duration of the supply.
CESL should govern a contract falling under its scope only if the parties opt out in this respect, and it should further to such option implicitly exclude, as per its terms, both: (i) national laws governing matters within its scope, including consumer protection laws enacted by the Member States further to the existing European directives (save for the information requirements laid down according to Directive 2006/123/EC on the services in the internal market, which should complement those within the CESL); and (ii) the UN Convention on Contracts for the International Sale of Goods (CISG).
Born on a background of ambitious endeavours relating to the creation of a single European contract law, the proposed CESL was designed to regulate the ‘full lifecycle’ of the contract (save a few aspects such as illegality of contracts and representation, which the Commission has arguably presented as a point with minor impact) as well as consumer protection rules and pre-contractual information duties.
With a view to facilitate access to jurisprudence related to the CESL, the Commission is set to create a database of final decisions rendered by both the European Court of Justice and national courts, the Member States being required to promptly communicate to the Commission any national judgments applying the proposed CESL Regulation.
A highly debated instrument
The Commission’s proposal has received mixed feedback. Whilst some stakeholders (notably including online sellers) welcomed the CESL initiative, others have questioned a relatively large number of aspects, including compliance with EU treaties, the overall efficiency of the measure, the drafting quality of the CESL and its effects in terms of legal certainty.
For instance, voices have been raised against the suitability of Article 114 TFUE as a legal basis for the Commission’s proposal, to the extent that CESL is an optional instrument which does not modify existing national laws, but rather adds a separate set of rules and as such could not be seen as approximating the laws of the Member States. The compliance of the proposal with the subsidiarity and proportionality principles is also at the centre of debates, along with the interaction between CESL and Rome I Regulation on the law applicable to contractual obligations. The CESL was equally said to increase legal uncertainty due, amongst other things, to certain inconsistencies and a considerable room left for interpretation to the relevant courts.
There are in addition several aspects that may under practical terms deter both parties and their advisors from choosing to have contracts governed by the CESL. First and foremost, the complexity of the issues to be considered upon the drafting and negotiation of a contract governed by CESL are likely to dramatically increase as compared to those entailed in case of contracts governed by national laws. Causes are, amongst others:
Since the making of a contract requires one to anticipate as much as possible the potential difficulties triggered by the (non)performance thereof as required to implement legal carve-outs conferring a certain degree of protection, it is obvious that such aspects may render the CESL exercise substantially more cumbersome and therefore unwanted. It is for the same reason that insofar there has been reported a rather scarce number of references within contracts to similar instruments such as the CISG and the UNIDROIT Principles of International Commercial Contracts (although the latter seems to be increasingly used in arbitration for support in interpreting contracts, even where these are exclusively governed by national laws).
Moreover, parties and practitioners from common law jurisdictions may be reluctant to embrace some of the fundamental principles within the CESL which are of Romano-Germanic tradition, such as for instance good faith and fair dealing, which are contrary to the highly pragmatic nature of common law contracts.
Since the declared purpose of the CESL was to encourage cross-border consumption, enhance consumer protection and provide a less cumbersome framework for SMEs, another important question is, of course, whether the optional nature of the CESL would under practical terms actually result in its being applied by the parties, bearing in mind that the content of the contract is normally within the hands of the party holding the leverage, and which party is usually not the consumer or a SME (at least not when dealing with large corporations).
As regards business-to-consumer contracts, undertakings may find appealing the uniform set of consumer protection rules offered by the CESL, as opposed to Rome I regulation provisions which subject such contracts to the mandatory provisions of the laws at the consumer’s habitual place of residence and which, in the Commission’s opinion, should be circumvented by the choice of the CESL. It should be however also noted that the amendment of Rome I Regulation by means of the proposed CESL regulation is one of the matters under debate.
In respect of business-to-business contracts, it may seem unlikely that large corporations, which normally use contract templates pre-defined at group level, would be willing to undertake the cost of bringing the templates to which they have grown accustomed to in line with the CESL rules (which cost would include not only attorney fees but also time and expenses for training of the legal and commercial staff handling the contracts). Moreover, a potential argument that costs triggered by validation of group templates under national laws would decrease if they would be subject to a uniform set of rules under the CESL is not likely to hold, bearing in mind that CESL, as said, does not settle all relevant aspects pertaining to the contracts and that practice shows that such templates usually exclude the application of uniform rules such as CISG.
All in all, current arguments for and against the CESL are many and a number of others may still be raised, depending on future developments. Their sequence however seems to show that, at the current stage of development of the national legal systems as well as of the EU framework, efficient harmonisation of contract law on a large scale, although clearly desirable, may remain for the time being just a desire.