The U.S. Treasury Department on Wednesday told American banks they can ignore an updated European Union blacklist of dirty-money hotspots, calling into question the EU’s methodology for developing the list, which includes several U.S. territories.
The list, released Wednesday, results from efforts by the EU to tighten longstanding measures against money laundering and terrorism financing since the publication of the Panama Papers in 2016, which revealed how global elites avoided taxes or laundered money through offshore shell companies. It’s an update from an EU list released in 2017.
The EU list includes Saudi Arabia and Panama, but it also U.S. territories such as the U.S. Virgin Islands and Puerto Rico, placing them alongside the likes of Iran, Syria and North Korea.
Banks in the EU will be required to use increased due diligence on financial operations involving customers and financial institutions from the blacklisted countries.
EU Justice Commissioner Věra Jourová said the list was aimed at ensuring “dirty money from other countries does not find its way into our financial system.” She urged the listed countries “to remedy their deficiencies swiftly.”
The U.S. Treasury Department said it “has significant concerns about the substance of the list,” saying its development was flawed. It said it didn’t expect U.S financial institutions to take the European Commission’s list into account as they carry out anti-money-laundering compliance.
The bloc blacklisted countries based on its own criteria and assessment of jurisdictions that have a systemic effect on the integrity of the EU financial system, have economic relevance and strong ties with the EU, or are identified by the International Monetary Fund as an offshore financial center, the European Commission said.
The Treasury, however, said the Financial Action Task Force is the global standard-setting body for combating money laundering and terrorism financing. The FATF, created by the Group of Seven industrial countries in 1989, already compiles a list of high-risk jurisdictions.
The FATF conducts peer reviews of countries to assess their anti-money-laundering and counter-terrorist financing legal regimes. Countries that fail to implement its standards run the risk of being labeled as high-risk or uncooperative jurisdictions, making it harder for those nations to transact with the banking systems of FATF member states.
The U.S. Treasury said the European Commission didn’t include sufficiently in-depth reviews, only gave affected jurisdictions a cursory basis for the determination, told the jurisdictions they were going to be included only days before the announcement and didn’t give them meaningful opportunity to challenge their inclusion.
The credibility of the FATF process, however, increasingly is in doubt, said Tom Keatinge, director of the Centre for Financial Crime and Security Studies at the Royal United Services Institute, a think tank focused on international security and defense.
Mr. Keatinge pointed to a recent case involving Pakistan, in which the U.S. faced off with Saudi Arabia over punishing Islamabad over what it sees as inaction against terrorists operating on its soil, with Washington winning the battle. Pakistan’s efforts to get itself off the FATF watchlist are ongoing, according to local media reports.
“We can see from a number of examples recently of the FATF being politicized,” Mr. Keatinge said.
Washington also rejected the inclusion of U.S. territories to the list, saying the U.S. legal framework against money laundering also applies to those jurisdictions. The U.S. wasn’t given any meaningful opportunity to discuss the basis for including the listed U.S. territories, the Treasury said.
Christian Wigand, a spokesman for the European Commission, said the EU “had a constructive discussion with U.S. authorities as we reached out to them about the U.S. territories on the list.”
In the past 18 months, the U.S. and EU have diverged on a number of related issues after more than a decade of coming closer together, said David Murray, a former U.S. Treasury official.
“This leads to differences in risk appetites among financial institutions and between financial institutions and their clients, which makes compliance more difficult, particularly in global banks that must satisfy all of their regulators,” said Mr. Murray, now a vice president at the Financial Integrity Network, an illicit finance-focused consultancy.
Policy makers on both sides of the Atlantic need to acknowledge that nobody is doing enough to combat money laundering, said Clark Gascoigne, the deputy director of the Financial Accountability and Corporate Transparency Coalition, a consortium of research and advocacy groups.
The EU has enacted important laws but member states fail to enforce them, whereas the U.S. has stronger enforcement but its legal regime is riddled with loopholes, he said. “It’s time to stop pointing fingers and start taking action,” said Mr. Gascoigne.
Saudi Arabia, which has been accused of helping or allowing the financing of terrorists since the attacks of Sept. 11, 2001, didn’t respond to a request for comment.
Panama’s foreign ministry rejected the country’s inclusion, saying the country hadn’t had an opportunity to explain the actions it has taken to tackle money laundering and terrorism financing. It hopes to hold talks with the Europeans to address their concerns, the ministry said.