The ECJ on the risk-based approach and enhanced due diligence obligations

In November 2022, the ECJ dealt with the risk assessment of business relationships and the mandatory risk factors to be taken into account in a judgement.

The judgement related to two fines that a tax consultancy and auditing company received from the Latvian supervisory authority. The company did not apply enhanced due diligence in its business relationship with a foundation whose director is a Russian citizen. Only general due diligence obligations were also applied to one contractual partner; this customer was majority-owned by a company based in Russia.

Consideration of national risk assessments also necessary outside of legislation

At first glance, the application of enhanced due diligence obligations does not appear to be mandatory, as Russia is not a high-risk country according to Delegated Regulation (EU) 2016/1675 and a non-governmental organisation as a contractual partner does not represent a mandatory factor for an increased risk under EU law.

At national level, however, Latvia has decided and also published risk reports on state websites that a potentially higher risk of money laundering can be assumed in the case of economic proximity to Russia and in the case of foundations.

The ECJ has now ruled in this judgement that these risk assessments, which take place at national level and outside of legislation, must also be taken into account by obliged entities. If, for example, obliged entities do not take into account the increasing risk factors contained therein, a fine may be imposed. This makes it particularly clear how important the risk-based approach is in the prevention of money laundering.

Significantly more effort for obliged entities under the Money Laundering Act

However, this judgement means a considerable effort for obliged entities. This decision has made it clear to them that, in addition to Annexes 1 and 2 to the AMLA, all other risk factors from official publications must also be taken into account.

For more details, see the decision (ECJ, 17 November 2022 - C-562/20) and BKR (Zeitschrift für Bank-und Kapitalmarktrecht) issue 4/23 "Current developments in money laundering law (2021-2022)".