The EU’s Dirty Money Blacklist: North Korea, Syria, and… Puerto Rico?

The U.S. Treasury Department scolded the European Union for including U.S. territories on a list of dirty money hotspots around the world, telling American banks to ignore EU directives in an unusual technocratic spat that highlights continued friction between Washington and Brussels. 

The European Commission, the EU’s executive arm, on Wednesday released its revised “blacklist” of countries and territories around the world that it sees as deficient in countering money laundering and terrorism financing. The list, expanded in 2019 to 23 countries from 16, is part of a broader push in Brussels to crack down on dirty money in the wake of money laundering scandals that roiled some of Europe’s biggest banks and exposed serious shortcoming in the bloc’s financial regulations.

Outlined in a jargony 35-page report, the list pointedly includes several U.S. territories: American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands. They were conspicuously paired alongside some of the world’s most repressive regimes and fragile states, such as North Korea, Iran, and Syria. The report directs EU banks to apply “enhanced due diligence measures” when dealing with the countries and territories on the list.

“The action by the EU is unprecedented,” said Jennifer Fowler, an advisor at the Brunswick Group consulting firm and a former Treasury Department official.

The Treasury Department responded with an unusually strong statement that questioned the EU’s findings and urged U.S. banks to ignore the directive.

“In principle, I don’t see anything wrong with the EU maintaining its own list of jurisdictions that they deem high risk, and it could even be useful,” said Joshua Kirschenbaum, a former anti-money laundering expert at the U.S. Treasury. But the EU list is problematic, he said, because it doesn’t clearly distinguish what types of oversight different jurisdictions require: Working with a financial institution in Iran, for example, presents very different challenges than working with one in Guam.

“They’re muddying different concerns,” said Kirschenbaum, now at the German Marshall Fund’s Alliance for Securing Democracy.

The European Commission put out the expanded blacklist as part of an update to its money laundering regulations, thanks in part to pressure from the European Parliament. Previously, the EU blacklist mirrored the list put together by the Financial Action Task Force, the international organization that sets standards regulating the oversight of terrorism financing and money laundering. The United States and the European Union are members of the task force.

The revised EU list took the Financial Action Task Force list as a starting point but also used a broader definition of what countries and territories pose risk to the EU. Over the next six years, Brussels will evaluate additional jurisdictions and could add more names to the high-risk blacklist.

“We needed to be much more stringent and much more demanding” than the previous list, said Ana Gomes, a Portuguese member of the European Parliament and a leading voice in Brussels on tax evasion and money laundering. Though this first iteration doesn’t include notorious offenders such as Russia, Gomes said, “this list is an important step in the right direction; not quite what we expected, but a step in the right direction.”

The EU’s report says U.S. territories were included because they have “strategic deficiencies” in their ability to regulate money laundering. “They are attractive for tax crimes and exposed to a higher threat of money laundering linked to tax crime,” the report notes. Additionally, all the U.S. territories listed but Puerto Rico are classified as “non-cooperative jurisdictions” for not doing enough to tackle tax fraud, evasion, and avoidance.

“The question is: does it operate as a jurisdiction that facilitates money laundering, tax evasion, and so on? If it’s a small or big country, [it] doesn’t make any difference,” Gomes said.

The EU report sought to downplay the inevitable political impact of the new list. “The purpose is not to ‘name and shame’ third countries. Rather, the list will help to ensure that the jurisdictions concerned address identified deficiencies,” the report said.

But even with the disclaimer, it didn’t go over well in Washington. The Treasury Department slammed the list, saying in a statement it “has significant concerns about the substance of the list and the flawed process by which it was developed” and telling American banks they could ignore it.

Treasury also said it was “not provided any meaningful opportunity” before the release of the list to discuss with the European Commission why it listed the U.S. territories.

Not so, said Christian Wigand, a European Commission spokesperson. “In the run-up to the adoption of the list, we had a very constructive discussion with the U.S. authorities as we reached out to them about the U.S. territories that are on the list,” he said in an emailed statement to Foreign Policy.

The spat, though couched in bureaucratic language, is the latest example of worsening strains in the U.S.-EU relationship.

U.S. President Donald Trump has repeatedly attacked the EU for its trade stance, slapped tariffs on European allies, and promoted anti-EU politicians in countries such as Britain and France, while he has referred to the EU as a “foe” like Russia or China. On Thursday, U.S. Vice President Mike Pence took aim at European allies, urging them to abandon the 2015 Iran nuclear deal and accusing Europe of seeking to undermine U.S. sanctions.

European leaders, for their part, have indeed tried to keep doing business with Iran in spite of U.S. sanctions and are working to create an alternative to America’s global financial dominance.

Treasury’s response was “unnecessary and counterproductive,” Kirschenbaum said. “It needlessly escalated the importance of this list and created a rift with the EU.”

And he noted that despite Treasury’s objections, there are some U.S. jurisdictions, especially Puerto Rico, that do have weaker financial oversight than the rest of the United States—leading to a lot of “highly problematic” financial activity.

But Fowler, the former Treasury official, said it’s not clear whether the EU crafted its list with the same rigorous standards as the Financial Action Task Force. Treasury’s response was “a very factual and to the point rebuttal” to the EU, she said.

Ultimately, she said, the list could put American banks in a difficult position, as many operate in the EU. “Time will tell how they decide they want to use this [list] and how U.S. bank examiners will view it.”