Part 4: Policy Recommendations
4.2 Groups of Policy Recommendations
Group A: Recommendations on the Extent of Coverage of Financial Services Provisions
Although there is a significant degree of coherence concerning the definition and scope of financial services covered by EU FTAs, the discrepancies that exist with respect to the detail of specification of what financial services are covered by these FTAs make it necessary for the EU to ensure greater coherence across FTAs regarding these two elements. The EU could do so by striving to liberalise the same financial services with all trading partners. This is required in order to avoid gaps in the domestic implementation of international and European AML/CFT standards – such as those laid down in FATF recommendations and the EU’s 4th AML Directive – in the financial sector. This would further contribute to preventing regional and global fragmentation that might arise from variable harmonisation.
Notwithstanding this, the EU should consider limiting the definition and/or scope of financial services to be liberalised where compelling reasons exist in relation to the EU trading partner’s failure to implement and enforce the application of the said international and European AML/CFT standards (e.g. EU-Colombia/Peru FTA).
While most EU FTAs contain such provisions, the EU should ensure that all FTAs contain provisions on tax cooperation and that such provisions guarantee cooperation at the bilateral level in addition to any regional or international instruments or arrangements (e.g. this is missing in the EU FTA with South Africa). This recommendation should be in line with that under Group C below.
Because illicit financial flows are to a great extent rooted in trade in both goods and services, the EU should seek to include provisions combating the mispricing of internationally traded goods and services.
anti-money laundering/combatting the financing of terrorism
Due to the sometimes rather general nature of FATF recommendations, it is necessary for the EU to strive to reduce the room for discretion of administrative bodies – such as central banks, financial intelligence units, tax administrations and financial inspectorates – when they exercise their powers in the process of applying and enforcing AML/CFT and tax law. This concerns notably administrative decisions on granting or revoking financial service providers’
licences in case of linkages with AML/CFT activities or with the provision of mutual legal assistance and exchange of information. This is required in order to enable otherwise well-drafted legal rules to attain the AML/CFT objectives sought by the EU.
To increase tax transparency and promote the reduction in tax evasion and elusion in its FTAs, the EU should seek to include provisions on country-by-country reporting of corporate tax and the establishment of public registers of beneficial owners. To facilitate this, the EU should also increase the responsibility of EU companies for its foreign activities.
Given that a significant obstacle to the effectiveness of AML/CFT safeguards contained in EU FTAs lies in the deficient enforcement and insufficient operational capacity of the competent administrative bodies of the EU’s trading partner countries, it is necessary for the EU to provide further support to trading partners in terms of training and technical assistance. The EU should therefore strive to transfer sector-specific expertise through person-to-person instruction and provide an adequate level of financial assistance to its trading partners. This is of particular importance in the case of FTAs with developing countries, which typically lack human, financial and technical resources to enforce domestic law and which may otherwise be compliant with international and European standards. These goals could be incorporated within the EU’s Development Cooperation Instrument (DCI), particularly its focus area of good governance, rule of law and the fight against corruption. This recommendation is based on the EU’s moral and legal duty (notably laid down in art. 3(5) and 21(2)(d) TEU) to exercise leadership in preventing money laundering and tax evasion from hindering the potential of developing countries to pursue and achieve sustainable development.
In pursuing these goals and in order to achieve maximum impact, the EU is advised to continue joint capacity-building actions in the AML/CFT field, such as partnering with the Council of Europe or other FATF-Style Regional Bodies. Such projects have thus far yielded positive results in terms of raising the recipient country’s capacity to act. However, the EU needs to make sure that any such assistance continues even after the completion of the project in order to sustain the momentum of reform.
Because there is a high risk of some developing countries being disconnected from global initiatives, there is a need for the EU to insist on the involvement of its trading partners in the work of international AML/CFT and anti-tax evasion networks, such as those operating under the auspices of the FATF, the Basel Committee, the IMF and the OECD. Failing to do so is likely to reduce the transparency and effectiveness of the efforts of domestic and EU authorities in combating illicit financial flows and financial crimes. Where EU trading partners are already connected to such networks, we recommend building on the work of these networks further so as to
seriously impedes the fight against money laundering and tax evasion.
Group C: Recommendations on Drafting and Implementing Financial Services Provisions
The EU should avoid agreeing on overly general, imprecise and vague commitments and reduce the use of ‘best endeavour’ clauses in the AML/CFT and anti-tax evasion area. Such provisions are more likely to be ignored and neglected, and less likely to induce legal reform and effective enforcement because they leave a wide margin for interpretation to the authorities of the trading partner. This can dilute both the legal and the actual effect of the FTA. Therefore, the EU should strive for a greater degree of specification of the AML/CFT and tax-related requirements in its FTAs, for instance by specifying what ‘cooperation’ amounts to and by laying down concrete procedures for its operationalisation.
The EU should analyse the effects of liberalisation of financial services (and of trade in goods and services in general) on money laundering, tax evasion and tax elusion in Trade Sustainability Impact Assessments (Trade SIAs) and in general Impact Assessments (IAs).
The tendency to produce Trade SIAs when negotiations are almost finalised should be reversed because the purpose of these SIAs is to influence the outcome of negotiations, and this is only possible if the expected effects and options are debated – including with the European Parliament – at a stage when the negotiations can still be influenced.
Group D: Recommendations on the ‘Fitness’ and Effectiveness of Existing Compliance Monitoring Mechanisms
In future FTAs, the EU should seek to include provisions on the establishment of mechanisms for monitoring the trading partner’s compliance with the commitments undertaken in FTAs. This can be done through regular or periodic follow-ups of the implementation of FTAs’ AML/CFT and tax provisions. This is in line with EU Treaty obligations and the new EU strategy Trade for All: Towards a More Responsible Trade and Investment Policy (see point 2.2.2 thereof, p. 15).
Taking a step further, the EU should also consider including provisions that would make FTAs conditional on sufficient progress in the implementation and enforcement of the AML/CFT duties, notably in line with FATF standards. The FATF country evaluations based on the new outcome-based approach that combines the assessment of technical compliance (the law on the books) with the assessment of effectiveness of the application of the law in practice may provide a useful benchmark.
The EU should adopt a systemic approach to devising its trade strategy because the realisation of its trade goals is often jeopardised, not by legal shortcomings, but by the trade partner’s poor adherence to the principles of good governance and insufficient enforcement of the rule of law, both of which are unrelated to whether financial services provisions are well-formulated in FTAs. Through a systemic approach, countries experiencing problems with enforcing the rule of law will be required to provide guarantees or submit plans to tackle these problems in at least the medium term.
To this end, the EU should pursue the strategy of imposing a measure of conditionality during trade negotiations where structural weaknesses in the enforcement of the
undermine the EU’s trade goals and the trading partner’s legislative and administrative endeavours in combating money laundering and tax evasion. The conditionality policy that the EU applies towards the states that are candidates for EU membership can be used as a basis on which to shape such a mechanism of conditionality. The mechanism would seek to strike a balance between giving trade benefits to the trading partner and effecting systemic domestic reforms.
With respect to conditionality and monitoring, it should be recalled that following the enhancement of the European Parliament’s foreign affairs powers after the entry into force of the Lisbon Treaty, the European Parliament, led by the INTA Committee, is well placed to request concrete arrangements to be set up in EU FTAs and may use its right of consent to affect them.
Correspondingly, where this is not foreseen, the EU should seek to ensure the participation of MEPs in the bodies set up by EU FTAs in order to enable the European Parliament to have direct access to the policy discussions and negotiations within these bodies. This could also reduce the information asymmetry that arises from executive dominance in diplomatic negotiations, which is crucial for the success of AML/CFT and anti-tax evasion efforts.
The European Parliament should use its delegations for relations with third countries, regions and international organisations (e.g. with South Africa or MERCOSUR) as vehicles for discussing legal and political problems encountered in the area of AML/CFT and tax law. This can be done by establishing working groups or appointing EU and regional rapporteurs on AML/CFT and tax matters within the bodies in which these delegations operate, such as joint parliamentary committees (e.g. with Mexico) or international parliamentary assemblies (e.g. Euro-Latin American Parliamentary Assembly). This would help the European Parliament bolster the achievement of the EU’s AML/CFT and tax goals through the use of existing institutional capacities.