Key Findings of the Comparative Legal Analysis

This chapter provides an analysis of the legal provisions relevant to financial services included in the five FTAs that the EU has concluded with Mexico, South Africa, Serbia, Korea and Colombia/Peru. The domestic legislation of these countries in the relevant fields has also been examined, and some preliminary facts were added regarding the enforcement or lack thereof in practice, including the number of convictions for money laundering. In light of this examination, the following key findings from the comparative analysis can be presented.

2.6.1 Key findings concerning the legal frameworks of EU FTAs

 The EU-Serbia Agreement seems to lay down the most far-reaching obligations in all sectors analysed. This is perhaps unsurprising given that Serbia is an EU candidate country on its way to accession. The strong wording of the Agreement – mirrored by the relatively advanced stage of Serbian legislation – is therefore inextricably intertwined with the specific situation of Serbia in its relations with the EU. However, as we shall see in the conclusions of this study, this does not necessarily exclude that some features of the EU-Serbia Agreement cannot be replicated in Agreements concluded with non-candidate countries.

 The degree of sophistication of the Agreements in question is inversely proportional to their lifespan. The older the Agreement, the weaker the obligations contained therein.

Older Agreements like the one between the EU and Mexico and the EU and South Africa lay down only very weak and vague obligations in virtually all parts relevant to this study. Newer agreements contain in principle more detailed language. One notable exception seems to be the EU-Colombia/Peru Agreement, which, despite its recent conclusion, only contains vague obligations.

 The scope of the Agreements is quite broad. All of them contain broad definitions of financial services and financial services suppliers, covering virtually all the major existing financial services, including banking and insurance. The scope of the EU-South Africa Agreement appears somewhat more limited.

 Despite the previous point, all Agreements also contain prudential carve-outs, leaving the supply of some services outside the scope of the Agreements, at least under certain circumstances. Typically, such carve-outs are connected with public policy considerations, as in the case of monetary or balance of payments difficulties.

 Taxation measures are generally excluded from the scope of the Agreements.

 All Agreements establish one or more governing bodies responsible for the supervision and implementation of their respective Agreement. All of them, on the EU side, include representatives of the Council and the European Commission. The European Parliament is not directly involved.

 There is no direct correspondence between the degree of sophistication of the Agreements and the degree of advancement of the domestic legislation of the countries involved. For example, while the EU-Mexico Agreement is relatively rudimentary, Mexican legislation appears to be quite advanced in many of the fields examined.

 All countries analysed have undertaken – although to a different extent significant efforts in recent years in the attempt to improve their legislation and create a legal environment more amenable to business and investment while tackling illicit capital

flows. However, there is no clear relation, or at least no evidence thereof, between such efforts and the conclusion of the Agreements with the EU.

 Serbia stands as an exception to the above. As far as this country is concerned, the Agreement with the EU and EU action in general has directly occasioned the reforms undertaken by this country.

 When it comes to transparency, tax evasion and money laundering, the EU- Colombia/Peru, EU-South Africa and EU-Mexico Agreements contain only minimal obligations, mostly in the form of ‘best endeavours’ obligations or, even worse,

‘willingness’ obligations, which use vague language such as ‘the Parties take note of’

internationally agreed standards.

 The EU-Korea and EU-Serbia Agreements are quite detailed and far-reaching in prescribing observance of international standards.

 In line with the need for consistency in its external action as set out in Article 21(3) TEU, the new role of the European Parliament regarding international trade and investment agreements and the new Trade for All strategy, the Commission should submit annual reports to the European Parliament and the Council not only on the implementation of the EU-Colombia/Peru and EU-Korea trade agreements, but also on the older trade agreements with South Africa and Mexico. In the same vein, the European Parliament should have an opportunity to hold an ad hoc meeting of its responsible committee with the European Commission within 1 month from it publishing these reports in order for the European Commission to explain any issues related to the implementation of these agreements.

 The existing annual reports from the Commission lack information on the implementation of the provisions on financial services, money laundering and tax evasion. Such reports should provide detailed information on these issues using the example of assessments of the trade and sustainable development chapters in the existing annual reports on the EU-Colombia/Peru and EU-Korea trade agreements.

2.6.2 Key findings concerning third-country implementation of EU FTAs

 All country reports reveal a certain level of compliance with international and European standards in the area of AML and tax evasion.

 South Africa has made significant progress in in improving its AML/CFT legal and institutional framework. However, significant shortcomings remain, such as legal requirements pertaining to the identification of beneficial owners and the lack of application of enhanced due diligence to high risk situations.

 Recently introduced amendments of Peru’s national laws regarding money laundering have been described as rather rudimentary steps. More resources are needed to improve the existing AML/CFT infrastructure, as is real political commitment to investigate and prosecute money launderers.

 Korea is committed to continuous improvement of its AML legislation within the framework of FATF review.

 Almost all domestic jurisdictions analysed – with the notable exception of Korea – are considerably affected by poor implementation of the law, albeit to a different extent and for different reasons. While in Mexico, for example, a low level of law enforcement

seems mainly connected with endemic levels of corruption, in Serbia the main cause seems to be the weak capacity of the Serbian administration. This issue is further elaborated in the empirical part of this study.

 Among the countries examined, Peru, Colombia and Serbia are neither members nor observers of FATF, which is the key international body that sets AML/CFT standards and reviews how its members implement them. However, Peru and Colombia are members of GAFILAT, whose activities fall under the auspices of FATF. Serbia is engaged in other forms of international cooperation in the field of money laundering, such as the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism – MONEYVAL.

 South Africa was in majority ‘compliant’ or ‘largely compliant’ with the Basel Core Principles. With regard to supervision of the insurance sector, considerable room for improvement still exists. A major reform of the supervisory system of the financial sector is expected to further address shortcomings in both banking and insurance supervision by the end of 2016 or early 2017.

 Serbia’s main problem seems to be its tax legislation and administration. In particular, it seems that the country suffers from structural systemic inefficiencies in this sector, which is mirrored by its relatively scarce involvement in international initiatives concerning tax evasion and avoidance.

 Although Korea has scored high on its compliance level with the Basel Core Principles, important challenges remain. These include: mitigating the risks of politicisation of the leadership positions of the FSC and FSS; and deepening the engagement in cross-border cooperation activities by exploring exchange of understanding of supervisory issues at operational levels and contingency planning.

 Unlike other jurisdictions, Colombian tax law did not provide for general tax-avoidance rules. Rather, it consisted of a limited number of anti-avoidance provisions, addressing specific situations, notably concerning the shift of income to foreign jurisdictions.

Regulatory reforms to improve the system are ongoing.

 Mexico has the lowest tax revenue to GDP among the 34 OECD Member States, way below the OECD average. Korea is also low on the OECD list. As non-OECD countries, Colombia and Peru are not represented in the OECD lists, but it seems that challenges with tax revenues also exist there.

 Peruvian bank secrecy law constitutes a serious obstacle for information exchange and, as a result, the fight against illicit capital flows.

 Human resources of the Korean supervisory authorities need to be strengthened in view of the increase of STRs and law enforcement activities. More contextual details about and systematic retrieval of law enforcement activities would improve understanding of the AML activities in Korea.

2.6.3 Concluding remarks

As the findings outlined above demonstrate, all Agreements possess deficiencies and could benefit from improvements. This is especially true for the older ones, such as the EU-Mexico and EU-South Africa Agreements. The examination of the domestic jurisdictions of all the third countries examined has also brought into the open structural weaknesses that ought to be corrected. It is true that the EU’s power to influence third countries is limited for obvious

reasons, not least because of the international law obligation not to interfere with their sovereignty. It is also clear, however, that at least some degree of influence can (lawfully) be exercised through the conclusion of trade instruments. The EU-Serbia Agreement has clearly demonstrated this. Elements of the EU’s approach taken in this agreement could also be useful elsewhere. The concluding part of this study will provide some policy recommendations focused on how to improve EU external trade instruments in order to combat money laundering, tax evasion and elusion. It will also build on the findings of the empirical part of this study.

Part 3: Empirical Analysis – Effects of Liberalisation of Financial