Mauritius within the European Union's AML high-risk third countries list
In the middle of the lockdown period on 7 May 2020 the European Commission (Commission) has issued a communication outlining its intention to strengthen the fight against money laundering and terrorist financing. In this context, an ambitious action plan has been announced in order to bolster, better enforce, supervise and coordinate the EU's rules combating money laundering and terrorist financing. Measures will be taken within the next 12 months.
Within the same communication, the Commission published a more transparent and precise methodology in order to identify high-risk third countries having "strategic deficiencies" in their domestic legal regimes (regarding anti-money laundering and countering terrorist financing regimes (AML)) that pose significant threats to the EU's financial system. The practical objective for the Commission is to increase its engagement with third countries while developing stronger cooperation with the Financial Action Task Force (FATF).
The Commission has also updated its list of high-risk third countries by inter alia adding Mauritius.
Mauritius in the EU's high-risk third countries list
According to the Anti-Money Laundering Directive (AMLD), the Commission has a legal obligation to identify high-risk third jurisdictions having strategic deficiencies regarding their anti-money laundering and countering terrorist financing legal framework.
Regardless of the recent efforts made, the Commission has considered that Mauritius domestic legal regime is not in line with the international best practices as far as AML is concerned.
In this context, the Commission has identified Mauritius as a high-risk third country for the purpose of its anti-money laundering legal framework. In practice, this means that Mauritius will now be considered as a jurisdiction presenting a strategic deficiency for AML purposes. This position seems in line with the decision taken earlier this year by the FATF to include Mauritius in its "grey-list" of jurisdictions identified as having deficiencies in their anti-money laundering framework.
The Commission has amended the list in the form of a Delegated Regulation. It should then be submitted to the EU Parliament and Council for approval within one month (with potential one month extension). That being said, taking into consideration the current COVID-19 crisis, the date of application of these measures to new third countries included in the EU's high-risk third countries list should be 1 October 2020.
The Mauritius government has already communicated that all efforts will be made to have Mauritius removed from both the EU high-risk third countries list and from the FATF "grey list". That being said, in the meantime measures described above may have significant impacts on the attractiveness of Mauritius as a financial hub – especially for investors based within the EU.
Consequences for EU based companies
The above measure will generally have adverse consequences for EU basednentities carrying out transactions with Mauritius entities.
In practice, according to the 4th and 5th EU Anti-Money Laundering Directives, EU entities (such as EU funds, asset managers, banks, other regulated institutions, etc.) must complete customer due diligence procedures for each entity they are transacting with. This monitoring covers initial checks on identity (including the beneficial owners) as well as ongoing checks on past and current transactions.
For clients and counterparties located in countries identified as high-risk jurisdictions by the Commission, an enhanced process should systematically apply. This may also imply a systematic analysis of the business rationale on a transaction-by-transaction basis. It is expected that this should significantly weigh down the day-to-day activities for EU companies transacting with Mauritius companies.
The above should also apply to UK regulated entities regardless of the on-going Brexit process – as the UK government has transposed the EU Anti-Money Laundering Directives and has already accepted to transpose the 5th EU Anti-Money Laundering Directives.
Investment structuring in Africa via Mauritius
Despite efforts from Mauritius to align its laws and practices with the international best practices (including with the OECDs BEPS Action plan (BEPS)) it has still some significant challenges to be carefully monitored and urgently solved.
For a number of years Mauritius has been considered as a suitable jurisdiction to channel investments into Africa. This may not be the case anymore, especially for EU based investors (including funds and asset managers).
The inclusion of Mauritius within the high-risk countries' list for AML purposes will generate (additional) significant risk management requirements for EU investors. Going forward, fund raising efforts of Mauritius funds or holding vehicles towards EU investors may be more challenging.
EU investors and especially European Development Financing Institutions (DFIs) are making strict due diligences of structures in which they invest. Being "black listed" by the Commission for AML purposes, Mauritius may well be significantly impacted going forward.
This is another bad sign for Mauritius. Few months ago some African jurisdictions (e.g. Senegal and Kenya) have challenged double tax treaties concluded with Mauritius. Finally, Senegal has even cancelled its double tax treaty with Mauritius considering that the provisions of the treaty were unbalanced and not in line with current internal standards.
Luxembourg – a natural hub to structure investments from EU investors into
DFIs are currently decisive on the setting-up of investment platforms targeting opportunities on the African continent. It appears that the most active DFIs investing in Africa is the European Investment Bank (EIB) which is headquartered in Luxembourg.
DFIs have recently implemented tax compliance policies in order to make sure that structures in which they invest in are observing the anti-tax avoidance international guidelines as well as the best practices in terms of transparency.
Luxembourg is generally recognized as observing the international requirements both from a tax perspective as well as for transparency purposes. As an illustration Luxembourg has inter alia concluded a economically balanced treaty with Senegal which includes specific guidance and provisions of BEPS while combining influences from both the OECD and the UN models. This double tax treaty entered into force on 14 June 2018 and is effective since 1 January 2019. In parallel, Luxembourg is negociating new double treaties fully in line with the international tax practice with several other African jurisdictions (e.g. Egypt, Ethiopia, Mali or Rwanda).
In light of the above, Luxembourg should therefore become a natural alternative to structure African inbound investments going forward. It may also be strongly recommended to review existing structures where EU investors are holding participations or more generally transacting with Mauritius entities.
For more information please contact Yacine Diallo.
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