OPINION OF ADVOCATE GENERAL
KOKOTT
delivered on 29 September 2022 (1)
Case C‑78/21
AS ‘PrivatBank’,
A,
B,
Unimain Holdings Limited
v
Finanšu un kapitāla tirgus komisija
(Request for a preliminary ruling from the Administratīvā apgabaltiesa (Regional Administrative Court, Latvia))
(Reference for a preliminary ruling – Articles 56 and 63 TFEU – Freedom to provide services – Free movement of capital and payments – Financial services – Restrictions – Prohibition for a credit institution to establish or maintain business relations with persons having no connection with Latvia – Justification – Prevention of the use of the financial system for the purpose of money laundering and terrorist financing – Article 65(1)(b) TFEU – Directive (EU) 2015/849 – Proportionality)
I. Introduction
1. The system for the prevention of money laundering and terrorist financing in the European Union establishes certain requirements for the risk management systems of banks. Those requirements include, inter alia, the obligation to verify the identity of customers before establishing a business relationship or carrying out a transaction and to obtain information on the purpose of the business relationship. If this is not possible, the transactions and business relationships in question may not be carried out/established. The intensity of the due diligence measures depends on the customer’s risk profile, which, according to recital 22 of Directive (EU) 2015/849, (2) is to be determined using a holistic, risk-based approach.
2. In the present case, the Latvian supervisory authority responsible for combating money laundering, the Finanšu un kapitāla tirgus komisija (Financial and Capital Markets Commission, Latvia; ‘the FKTK’), identified, over a certain period of time, deficiencies in the risk management system of a credit institution established in Latvia. The latter was clearly incapable of performing the requisite due diligence measures with respect to its customers. Therefore, the FKTK imposed on that credit institution a requirement that it should not establish a business relationship with anyone who is found to have no links with Latvia and to have a monthly account turnover exceeding a certain threshold, or that it should immediately terminate such a relationship, where the business relationship was commenced after the adoption of the FKTK’s decision. This raises the question as to whether, and if so, under what circumstances and conditions, such a measure is compatible with fundamental freedoms.
II. Legal framework
A. European Union law
1. TFEU
3. In accordance with the first paragraph of Article 56 TFEU, within the framework of the Treaty provisions set out below, restrictions on freedom to provide services within the European Union are to be prohibited in respect of nationals of Member States who are established in a Member State other than that of the person for whom the services are intended.
4. Under Article 63(1) TFEU, all restrictions on the movement of capital between Member States and between Member States and third countries are prohibited.
5. Article 65(1)(b) TFEU provides that the provisions of Article 63 TFEU are to be without prejudice to the right of Member States to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on grounds of public policy or public security.
2. Directive 2015/849
6. The fourth EU Money Laundering Directive, Directive 2015/849, recast the third EU Money Laundering Directive, Directive 2005/60/EC. (3) The fifth EU Money Laundering Directive, Directive (EU) 2018/843, (4) is not temporally applicable to the present case.
7. Recital 22 of Directive 2015/849 is worded as follows:
‘The risk of money laundering and terrorist financing is not the same in every case. Accordingly, a holistic, risk-based approach should be used. The risk-based approach is not an unduly permissive option for Member States and obliged entities. It involves the use of evidence-based decision-making in order to target the risks of money laundering and terrorist financing facing the Union and those operating within it more effectively.’
8. Article 1(1) and (2) of Directive 2015/849 defines the subject matter of that directive:
‘1. This Directive aims to prevent the use of the Union’s financial system for the purposes of money laundering and terrorist financing.
2. Member States shall ensure that money laundering and terrorist financing are prohibited.’
9. According to Article 5 of Directive 2015/849:
‘Member States may adopt or retain in force stricter provisions in the field covered by this Directive to prevent money laundering and terrorist financing, within the limits of Union law.’
10. Article 7(1) of Directive 2015/849 concerns the risk assessment to be carried out by Member States:
‘Each Member State shall take appropriate steps to identify, assess, understand and mitigate the risks of money laundering and terrorist financing affecting it, as well as any data protection concerns in that regard. It shall keep that risk assessment up to date.’
11. Article 8(1) of Directive 2015/849 concerns the risk assessment to be carried out by financial institutions:
‘Member States shall ensure that obliged entities take appropriate steps to identify and assess the risks of money laundering and terrorist financing, taking into account risk factors including those relating to their customers, countries or geographic areas, products, services, transactions or delivery channels. Those steps shall be proportionate to the nature and size of the obliged entities.’
12. Chapter II of Directive 2015/849 regulates customer due diligence. In Section 1, entitled ‘General provisions’, Articles 13 and 14 set out the standard customer due diligence measures. According to Article 13(1), those measures consist in identifying the customer (point (a)) and the beneficial owner (point (b)), assessing and, as appropriate, obtaining information on the purpose and intended nature of the business relationship (point (c)) and conducting ongoing monitoring of the business relationship (point (d)).
13. The first subparagraph of Article 14(4) of Directive 2015/849 governs the consequences of the inability to comply with the due diligence requirements referred to in Article 13 of that directive:
‘Member States shall require that, where an obliged entity is unable to comply with the customer due diligence requirements laid down in point (a), (b) or (c) of the first subparagraph of Article 13(1), it shall not carry out a transaction through a bank account, establish a business relationship or carry out the transaction, and shall terminate the business relationship and consider making a suspicious transaction report to the [Financial Intelligence Unit (FIU)] in relation to the customer in accordance with Article 33.’
14. Sections 2 and 3 of Chapter II of Directive 2015/849 regulate, respectively, simplified and enhanced customer due diligence.
15. With regard to simplified customer due diligence measures, it follows from Article 15(1) and (2) of Directive 2015/849 that where a Member State or an obliged entity identifies areas of lower risk, or where an obliged entity has ascertained that the business relationship or the transaction presents a lower degree of risk, the Member State may allow the obliged entity to apply simplified customer due diligence measures. In relation to the respective risk assessments, Article 16 of that directive refers to the factors of potentially lower risk situations set out in Annex II.
16. With regard to enhanced customer due diligence, it follows from Article 18(1) of Directive 2015/849 that, in the cases referred to in Articles 19 to 24, and when dealing with natural persons or legal entities established in the third countries identified by the Commission as high-risk third countries, as well as in other cases of higher risk that are identified by Member States or obliged entities, the latter are to apply enhanced customer due diligence measures to manage and mitigate those risks appropriately. In relation to the risk assessment, Article 18(3) refers to the factors of potentially higher-risk situations set out in Annex III.
17. Section 4 of Chapter VI of Directive 2015/849, entitled ‘Policies, procedures and supervision’, governs sanctions. In accordance with the second sentence of Article 58(1), sanctions or measures resulting from the implementation of the directive must be effective, proportionate and dissuasive. Article 59(2) of the directive lists administrative sanctions and measures that Member States can apply as a minimum, including in particular, according to point (c) of that provision, the withdrawal or suspension of authorisation, where an obliged entity is subject to an authorisation.
18. Article 59(4) of Directive 2015/849 also permits administrative sanctions which are not provided for in the directive:
‘Member States may empower competent authorities to impose additional types of administrative sanctions in addition to those referred to in points (a) to (d) of paragraph 2 or to impose administrative pecuniary sanctions exceeding the amounts referred to in point (e) of paragraph 2 and in paragraph 3.’
19. Annexes II and III to Directive 2015/849 each contain a non-exhaustive list of factors and types of evidence of potentially lower risk and, respectively, potentially higher risk. In accordance with point 1(c) read in conjunction with point 3(a) of Annex II, the Member States are situated in a geographical area of lower risk. In accordance with point 3(b) of Annex III, the factors for a potentially higher geographical risk include ‘countries identified by credible sources as having significant levels of corruption or other criminal activity’.
B. Latvian law
20. Article 6(1) and (12)(2) of the Noziedzīgi iegūtu līdzekļu legalizācijas un terorisma un proliferācijas finansēšanas novēršanas likums (Law on the prevention of money laundering, terrorist and proliferation financing) (‘the Anti-money laundering law’) of 17 July 2008 (Latvijas Vēstnesis, 2008, No 116) provides that credit institutions must perform and document an assessment of the risks of money laundering, terrorist and proliferation financing and, based on that assessment, must establish an internal control system to prevent money laundering, terrorist and proliferation financing, having particular regard to domestic and geographic risks, that is, the risk that the customer or the customer’s beneficial owner is linked to a country or territory whose economic, social, legal or political circumstances may indicate a high risk of money laundering, terrorist and proliferation financing inherent in that country or territory.
21. Article 5, Article 6(13) and Article 7(1)(3) of the Finanšu un kapitāla tirgus komisijas likums (Law on the Financial and Capital Markets Commission) of 1 June 2000 (Latvijas Vēstnesis, 2000, No 230/232), Article 45(1)(1) of the Anti-money laundering law, and Article 991 and Article 113(1)(4) of the Kredītiestāžu likums (Law on credit institutions) of 5 October 1995 (Latvijas Vēstnesis, 1995, No 163) provide that the FKTK is to carry out supervision and monitoring to ensure that financial and capital markets institutions comply with the requirements of the Anti-money laundering law, with powers to impose restrictions on a credit institution’s rights and activities, including powers to suspend all or part of its financial services and to impose restrictions on compliance with obligations.
III. Facts and request for a preliminary ruling
22. AS ‘PrivatBank’ (‘PrivatBank’) is a credit institution established in Latvia. Person A and Person B, who are Cypriot nationals, and the Cypriot company Unimain Holdings Limited are shareholders in PrivatBank.
23. From 17 to 30 October 2017, the FKTK undertook an inspection of PrivatBank’s activities to assess whether it was complying with legislative requirements on the prevention of money laundering and terrorist financing when carrying out due diligence measures on customers connected to its shareholders and when monitoring their transactions.
24. In its inspection, the FKTK found that PrivatBank had breached, in particular, the requirements concerning the prevention of money laundering and terrorist financing established in the Law on credit institutions and in the Anti-money laundering law. The FKTK took the view that the bank’s internal control system during the customer due diligence and transaction monitoring phases was not sufficiently capable of ensuring, over a prolonged period of time that the bank complied with all legislative requirements on the prevention of money laundering and terrorist financing or that it had effective money laundering and terrorist financing risk management systems in place. In particular, PrivatBank had created more favourable conditions for certain customers, whose beneficial owners were shareholders, as regarded monitoring transactions by existing customers and also registering new customers in this group.
25. By decision of 13 September 2019, FKTK fined PrivatBank and imposed a number of requirements on it (‘the decision at issue’). One of the requirements imposed on the bank until such time as it implemented the measures established in the decision at issue and obtained FKTK approval was that it should not establish a business relationship with anyone who was found to fulfil any of the following criteria, or that it should immediately terminate such a relationship, where the business relationship was commenced after the adoption of the decision at issue:
– in the case of a natural person, he or she has no links with Latvia and his or her monthly account turnover exceeds EUR 15 000 or, in the case of a legal person, it is not connected to Latvia and its monthly account turnover exceeds EUR 50 000 (paragraph 4.4.1.2 of the decision at issue);
– in the case of a company, its beneficial owners are shareholders in the bank or parties related to shareholders (paragraph 4.4.1.3 of the decision at issue).
26. PrivatBank was also required to ensure that the monthly account turnover of customers whose beneficial owners were bank shareholders or their related parties and the monthly account turnover of customers in the group of customers connected to such customers did not exceed the 2019 monthly account turnover for the customer in question according to information supplied by the bank (paragraph 4.4.2 of the decision at issue).
27. PrivatBank lodged an action with the Administratīvā apgabaltiesa (Regional Administrative Court, Latvia) seeking to have the decision at issue annulled in respect of the finding of a breach and the imposition of a fine. Person A, Person B and the company Unimain Holdings Limited lodged an action with that court seeking the annulment of the requirements imposed in paragraphs 4.4.1.2, 4.4.1.3 and 4.4.2 of the decision at issue. PrivatBank’s shareholders take the view that the decision at issue infringes Articles 18 and 63 TFEU. The restrictions in the decision at issue were not imposed in response to any unlawful activity or as a consequence of the prohibitions introduced in the EU, including Latvia, in connection with money laundering. The restrictions were adopted and apply in relation to any natural or legal person, even where that person is acting lawfully. As a result of the requirement to restrict its working relationships solely and exclusively to individuals and undertakings from Latvia, the bank must automatically treat all other persons, including individuals and undertakings from the European Union, as inherently dangerous and potentially high risk, since the bank is not permitted to decide otherwise and to establish a relationship with such persons.
28. Against that, the FKTK submits that the decision at issue cannot be regarded as a restriction on the free movement of capital because, first, it applies only to a specific credit institution and, second, it affects only a limited group of customers of that credit institution. The decision at issue does not deprive those customers of the right to deposit funds in any other credit institution authorised in Latvia. The objective of the obligations at issue is to prevent the breaches of legislation committed by the bank and to guard against possible new infringements in the future which could have serious consequences not only in terms of the risk that the bank might become involved in money laundering or attempted money laundering or in evading or breaching international sanctions, but also in terms of the reputational risk to the financial sector as a whole. Accordingly, that decision constitutes a restriction that is permissible and proportionate under the terms of Article 65(1)(b) TFEU.
29. In those circumstances, the Administratīvā apgabaltiesa (Regional Administrative Court) decided to stay the proceedings and, by order of 11 January 2021, to refer the following questions to the Court of Justice for a preliminary ruling:
‘(1) May financial loans and credits and operations in current and deposit accounts with financial institutions (including banks), referred to in Annex [I] to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the [EEC] Treaty, [(5)] also be classed as movements of capital within the meaning of Article 63(1) of the Treaty on the Functioning of the European Union?
(2) Does a restriction (which does not follow directly from the Member State’s legislation) imposed on a specific credit institution by the competent authority of a Member State, prohibiting the institution from entering into business relationships with persons who are not nationals of the Republic of Latvia and requiring it to terminate any such existing relationships, constitute a measure adopted by a Member State for the purposes of Article 63(1) of the Treaty on the Functioning of the European Union and, as such, amount to a restriction on the principle of free movement of capital between Member States arising from that provision?
(3) Is the restriction on the free movement of capital, which is guaranteed under Article 63(1) of the Treaty on the Functioning of the European Union, justified by the objective of preventing the use of the Union’s financial system for the purposes of money laundering and terrorist financing, which is set out in Article 1 of [Directive 2015/849]?
(4) Is the means chosen by the Member State – the imposition on a specific credit institution of a prohibition on entering into business relationships with persons who are not nationals of a specific Member State (the Republic of Latvia) and a requirement to terminate any such existing relationships – appropriate to achieve the objective established in Article 1 of [Directive 2015/849], and does it therefore constitute an exception provided for in Article 65(1)(b) of the Treaty on the Functioning of the European Union?’
30. On 10 March 2022, in response to a request for clarification made by the Court, the referring court made additional submissions regarding the facts of the case, clarifying that the measure referred to in point 4.4.1.2 of the decision at issue does not attach to Latvian nationality, but to links with Latvia.
31. In the proceedings before the Court, PrivatBank, the Latvian and Italian Governments and the European Commission submitted written observations on the questions asked by the referring court. The applicants – A and Others – the Latvian Government, the FKTK and the Commission made submissions at the hearing held on 27 April 2022.
IV. Legal assessment
32. The subject matter of the request for a preliminary ruling is the lawfulness of PrivatBank’s obligation not to establish business relationships or to terminate them immediately where it is found that the person with whom a business relationship was established is a person with no link to Latvia. These restrictions only apply above a certain monthly account turnover: for natural persons, an account turnover above EUR 15 000, for legal persons, above EUR 50 000. (6)
33. In response to a request for clarification made by the Court, the referring court confirmed that the decision at issue did not attach to the nationality of the customers concerned, but to their connection with Latvia.
34. In what follows, I will first comment on the question as to the applicable fundamental freedoms (A) and then on their restriction (B). Finally, I will examine whether the objective of preventing the use of the financial system for the purpose of money laundering and terrorist financing can justify such a restriction (C).
A. First question: Applicable fundamental freedoms
35. The referring court seeks to ascertain, first, whether financial loans and credits and operations in current and deposit accounts with financial institutions and, in particular, banks are to be classed as ‘movements of capital’ within the meaning of Article 63(1) TFEU.
36. In the absence of a definition of ‘movement of capital’ in the Treaties, the Court has recognised the nomenclature that constitutes Annex I to Directive 88/361 as having indicative value. (7) As pointed out in the introduction to that annex, the capital movements listed in this nomenclature are taken to cover, in particular, all the operations necessary for the purposes of capital movements and operations to repay credits or loans, the list which it contains is not exhaustive. Heading VI of Annex I lists ‘Operations in current and deposit accounts with financial institutions’ and Heading VIII lists ‘Financial loans and credits’. Moreover, that annex states, in the section entitled ‘Explanatory notes’, that ‘financial institutions’ include banks. Moreover, the Court has already clarified that the activity of granting credit on a commercial basis concerns, in principle, the free movement of capital. (8)
37. Accordingly, the answer to the first question is that financial loans and credits and operations in current and deposit accounts with financial institutions, such as banks, are to be classed as ‘movements of capital’ within the meaning of Article 63(1) TFEU.
38. As the Court has already ruled that the activity of granting credit also constitutes a service within the meaning of Article 56 TFEU. It concerns, in principle, both the freedom to provide services within the meaning of Article 56 et seq. TFEU and the free movement of capital within the meaning of Article 63 et seq. TFEU. (9)
39. The question therefore arises whether both fundamental freedoms must be examined or whether, in the circumstances of the main proceedings, one prevails over the other.
40. This is because, according to the Court, it is not possible to infer from the first paragraph of Article 57 TFEU – according to which ‘services shall be considered to be “services” within the meaning of the Treaties where they are normally provided for remuneration, in so far as they are not governed by the provisions relating to freedom of movement for goods, capital and persons’ – a general principle that the freedom to provide services is subsidiary to the free movement of capital. (10)
41. Rather, the Court will consider a measure that is related to both the freedom to provide services and the free movement of capital at the same time, in principle only with regard to one of those two freedoms if it becomes apparent that, in the circumstances of the individual case, one of the two freedoms is entirely secondary to the other and can be attributed to it. (11) If, on the other hand, it is not apparent that one of the two fundamental freedoms is entirely secondary to the other, both fundamental freedoms must be examined. (12)
42. The Court has held that, in certain circumstances, the activity of granting credit primarily concerned the freedom to provide services. In that respect, the reduction in cross-border financial traffic relating to those services was merely an unavoidable consequence of the restriction on the freedom to provide services. Therefore, only the freedom to provide services was examined. (13)
43. However, that is not the situation in the present case.
44. In this case, the prohibition of certain business relationships (14) concerns, in fact, to the same extent, both the use of the bank’s financial services and capital flows as such. This is because, first, that decision attaches directly to the movement of capital by virtue of the criterion of the level of account turnover, irrespective of the use of certain advisory services. Second, the aim of the restrictions imposed is to prevent cross-border financial traffic with the purpose of concealing money laundering operations. Third, in attaching to the level of account turnover, the decision prohibits not only loan-related transactions, but also all other business relationships between PrivatBank with movement of capital on the accounts of the clients concerned, in respect of which it cannot be determined in a general manner whether they fall under the freedom to provide services or the free movement of capital, or both. Lastly, Directive 2015/849 also proceeds on the premiss that both fundamental freedoms apply in the area of money laundering prevention. (15)
45. For those reasons, I take the view, like the Commission and the Italian Government, that the restriction at issue on PrivatBank’s business relationships comes within the scope both of the rules on the freedom to provide services and of those on the free movement of capital. Accordingly, in what follows, I will answer the referring court’s questions in the light of both fundamental freedoms.
46. It can therefore also be left open whether and, if so, to what extent restrictions on the free movement of capital might be more easily possible where only the free movement of capital applies, as suggested by, in particular, the wording of Article 65 TFEU. (16)
B. Second question: Restriction of the freedom to provide services and the free movement of capital
47. The obligation of a bank to terminate or not to establish business relationships with customers with no connection to the Member State in which that bank has its registered office does not attach to the nationality of the customers concerned. Therefore, there is no direct discrimination on grounds of nationality, but only indirect discrimination, which is likewise prohibited under the first paragraph of Article 56 and Article 63(1) TFEU. (17)
48. Here, as the Latvian Government has explained, the connection with Latvia is understood as a connection of an economic or personal nature. Such a link may be established by residence, property in the country, or other factors. Latvian nationals may also lack a connection with Latvia, for example if they live abroad and do not have any ties with their home country.
49. However, it can be assumed that Latvian nationals have the required connection with Latvia much more often than persons without that nationality. Thus, the attachment to a connection with Latvia means that the customers who are mainly concerned are those who are not Latvian nationals.
50. That indirectly discriminatory effect can also not be countered by the FKTK’s position that persons who have ties to Latvia and those who do not are not in a comparable situation. In some cases, the Court no longer examines the criterion of an objectively comparable situation as an additional condition of discrimination. (18) Moreover, I have already expressed reservations about the application of that criterion on several occasions elsewhere, as it ultimately leads only to the examination of justification being brought forward. (19)
51. Thus, although it is obvious that persons with connections to Latvia and persons without such connections are not in the same position, this cannot be a decisive factor in the examination of the existence of a restriction on the freedom to provide services and the free movement of capital. This is because, if the lack of a connection to the Member State in question were to suffice without further ado as an objective difference in the facts in order to establish the absence of discrimination, the fundamental freedoms would be de facto undermined. Indeed, they are intended precisely to enable the cross-border use of services and the establishment of capital movements to other Member States and third countries. Therefore, subject to justification, they prohibit restrictions based on an absence of ties to a particular Member State.
52. The question is rather whether the present restriction can be justified on the basis of the differences between the domestic and foreign customers. This is because the performance of the bank’s due diligence measures is more difficult in the case of foreign customers than in the case of domestic ones, as the FKTK pointed out at the hearing. This concerns, however, the justification of the measure and not the question as to whether it constitutes a restriction on the freedom to provide services and the free movement of capital.
53. The Latvian Government’s argument against the existence of a restriction, according to which affected customers can obtain services from any other credit institution which has been authorised in Latvia, is likewise unconvincing. This is because it is part of the essence of the freedom to provide services and the free movement of capital that the beneficiaries themselves can choose the bank with which they wish to establish a relationship in order, for example, to avail themselves of certain conditions or products.
54. The fact that only a few customers are affected, namely the customers of PrivatBank who have no connection with Latvia and exceed the specified account turnover, or that the measure applies only for a limited period, is also unable to constitute an argument against the restrictive effect of the measure. In accordance with settled case-law of the Court, even a minor restriction of a fundamental freedom is prohibited. (20) That notwithstanding, the measure potentially applies to all persons who have no connection with Latvia and wish to enter into transactions with PrivatBank above the specified amount. This could also be a lot of customers.
55. Consequently, such an obligation not to establish business relationships restricts both the free movement of services and the free movement of capital.
C. Third and fourth questions: Justification of the restriction, in particular proportionality
56. By its third and fourth questions, which can be examined together, the referring court seeks to ascertain whether the restriction can be justified by the objective of preventing money laundering and terrorist financing (21) and as an exception under Article 65(1)(b) TFEU.
57. According to settled case-law, a restriction of fundamental freedoms is permissible only where, first, it is justified by one of the written grounds of justification or by an overriding reason in the public interest and, second, it respects the principle of proportionality. In particular, it must be appropriate for ensuring, in a consistent and systematic manner, the attainment of the objective which it pursues and does not go beyond what is necessary in order to attain it. (22)
1. Objective of preventing money laundering and terrorist financing
58. According to the statements made by the FKTK and the Latvian Government, the objective of the restriction of PrivatBank’s business relationships is, in particular, to prevent the bank from infringing the legislation on money laundering prevention and to guard against new infringements in the future. That legislation aims to prevent the use of the European Union’s financial system for the purposes of money laundering and terrorist financing in accordance with Article 1(1) of Directive 2015/849.
59. The combating of money laundering and the financing of terrorism constitutes a legitimate aim capable of justifying a barrier to the fundamental freedoms guaranteed by the Treaty. (23) As Directive 2015/849 provides for minimum harmonisation, (24) Member States may adopt more far-reaching national provisions in that respect. (25)
60. In addition to the objective of preventing money laundering and terrorist financing, the present restriction at issue seeks to enforce the legislation on financial supervision in the area of money laundering prevention. Therefore, it also pursues the objective, prescribed in Article 65(1)(b) TFEU, (26) of measures to prevent infringements of national law and regulations in the field of the prudential supervision of financial institutions.
2. Appropriateness of the measure
61. A national measure is appropriate for securing the attainment of the aim pursued only if it reflects the concern to attain that aim in a consistent and systematic manner. (27)
62. As the Latvian Government stated at the hearing, one of the core principles of Directive 2015/849 is that banks must know their customers (‘know your customer’ principle). For that reason, Article 8 of that directive provides for general due diligence requirements for banks, compliance with which is monitored by the Member States in accordance with Article 7.
63. It is true that Directive 2015/849 proceeds on the premiss that customers from other Member States do not pose a higher risk. (28) Nevertheless, it may be difficult for financial institutions to obtain, on an individual basis, information on customers who do not carry out any economic activity in the country in which they open a bank account, do not reside or own property there and do not otherwise have any significant ties with that country. As it is more difficult for banks to obtain information about the source of funds and the transactions of customers abroad, the risks are potentially greater. For example, the greater distance between the customer and the bank may favour the anonymity of transactions, which may in turn lead to an increased risk of money laundering. (29)
64. In view of the previously identified deficiencies in PrivatBank’s risk management system and the risk identified by the FKTK in relation to the bank’s compliance with its due diligence requirements in respect of customers domiciled abroad, (30) the obligation at issue therefore appears to me to be an appropriate measure to mitigate the risk of money laundering and terrorist financing.
65. Moreover, at the hearing the FKTK stated that the existence of significant levels of account turnover each month from persons who have no connection with Latvia constitutes a risk factor in itself. By virtue of the fact that the measure at issue attaches to the amount of the monthly account turnover, the FKTK was able to take that risk into account also.
66. Contrary to the view taken by the Commission, the fact that the FKTK uses the criterion of the level of account turnover to exclude from the measure customers of the bank who have no connection with Latvia and have a lower monthly account turnover, but who could also pose a risk of money laundering, does not mean that the measure does not pursue the intended objective in a consistent and systematic manner.
67. First, Member States have discretion in the selection of the risk factors to be taken into account, as Annex II and III to Directive 2015/849 show. Accordingly, the list of factors and types of evidence of potentially lower or higher risk contained in those annexes is expressly non-exhaustive. This is also confirmed by Article 5 of that directive, according to which Member States may adopt stricter provisions to prevent money laundering and terrorist financing, within the limits of EU law.
68. Second, Directive 2015/849 states, in recital 22, that the risk of money laundering and terrorist financing is not the same in every case. Accordingly, the directive provides for simplified due diligence where the risk is low (31) or where transactions are carried out on only an occasional or very limited basis. (32) In addition, the minimum value for the application of due diligence measures to the execution of occasional transactions is set at EUR 15 000. (33) Therefore, the decision to opt for a monthly account turnover of more than EUR 15 000 in the case of private individuals and EUR 50 000 in the case of legal persons is not unreasonable and is, moreover, more lenient than if all instances of transactions were covered.
69. It follows from the foregoing that a restriction of business relationships, such as the one at issue, may be appropriate for attaining the objective of preventing money laundering and terrorist financing in a consistent and systematic manner. In order for that to be the case, it must be proved that the bank cannot comply with its due diligence requirements on account of the distance between the customer and the bank and that the determination of the group of customers covered by the measure corresponds to the money laundering risk identified.
3. Necessity of the measure
70. Furthermore, the Member State must demonstrate that the stated objective cannot be attained by less restrictive measures. (34)
71. The Commission has expressed concerns as to the necessity of the general prohibition of business relationships with customers with no connection with Latvia and the obligation to terminate such business relationships. According to the Commission, that measure had not been preceded by an individual risk assessment with regard to the specific customer; more lenient measures, such as enhanced due diligence under Article 18 of Directive 2015/849, enter into consideration.
72. As stated in the introduction, the starting point for the system of preventive measures under Directive 2015/849 is a risk assessment using a holistic, risk-based approach. As Advocate General Pitruzzella recently stated, that risk assessment is a precondition for the selection of appropriate preventive measures – that is to say, customer due diligence measures – which are intended to prevent money laundering and terrorist financing or at least to limit them. In the absence of a risk assessment, it is not possible for the Member State concerned or, as the case may be, an interested party, to decide on a case-by-case basis which measures to apply. (35)
73. In that connection, Directive 2015/849 distinguishes three types of customer due diligence measures (36) that obliged entities are required to apply depending on the level of risk identified: standard, simplified and enhanced due diligence measures. (37)
74. However, a common feature of all those forms of due diligence is that they require a risk assessment in relation to each customer and, accordingly, individual measures. The risk assessment therefore relates to concrete situations and is not carried out in the abstract. (38)
75. Although the present measure at issue is similar to the requirement to terminate business relationships which is laid down in the first subparagraph of Article 14(4) of Directive 2015/849, that requirement presupposes that the bank is unable to comply with one of the due diligence requirements set out in Article 13(1), first paragraph, points (a) to (c) in a specific case. It must therefore be impossible for due diligence requirements to be complied with in relation to a specific customer. This is also confirmed by the scheme, since the first subparagraph of Article 14(4), concerning the suspicious transaction report, expressly contains the wording ‘in relation to the customer’. According to the explanatory memorandum concerning the inclusion of that provision in the third EU Money Laundering Directive, Directive 2005/60, (39) the proposal was intended to ensure that the business relationship with a customer would be terminated where the customer identification procedure could not be satisfactorily completed. (40)
76. Like the Commission, I therefore consider that the measure at issue cannot be based on the first subparagraph of Article 14(4) of Directive 2015/849. This is because it does not relate to a specific customer, but sweepingly imposes the obligations at issue with regard to a group of customers defined on the basis of general criteria.
77. In general, that measure also does not otherwise form part of the system of customer due diligence under Directive 2015/849. Accordingly, the enhanced due diligence measures also constitute measures that reinforce the scope and nature of the monitoring of a particular business relationship. This applies, for instance to the establishment of the source of funds that are involved in the business relationship or transaction. The application of those due diligence measures thus always presupposes that a higher risk has been established in the individual case. (41)
78. It is true that the directive also allows geographical factors to be taken into account. Accordingly, point 3(b) of Annex III to the directive lists ‘countries identified by credible sources as having significant levels of corruption or other criminal activity’ as a factor for a higher risk. (42) The restriction at issue at least potentially covers customers from such countries.
79. However, it necessarily includes areas of other Member States which, according to the concept on which the directive is based, are situated in a geographical area of lower risk (point 1(c) read in conjunction with point 3(a) of Annex II to the directive).
80. The key question therefore remains whether a measure, which, by virtue of the broad criterion of ‘absence of a connection’ with Latvia, may also affect customers who, in accordance with Directive 2015/849, should not a priori pose a higher risk of money laundering or terrorist financing, is still to be regarded as necessary.
81. In the present case, according to the submission of the Latvian Government, more lenient measures have already been ordered in the past, without success, but they were not sufficiently effective to counteract the risks identified. It is for the referring court to determine whether that is the case.
82. According to the scheme of Directive 2015/849, the next step in case of a serious, repeated or systematic failure to comply with customer due diligence requirements would be the ordering of administrative sanctions under Article 59(1) thereof.
83. The Member States have a wide margin of discretion in that regard. They may establish a higher level of protection than that chosen by the EU legislature, allow or impose customer due diligence requirements other than those provided for in that directive, or identify other high-risk situations within the margin of discretion granted to them. (43) It also follows from Article 59(4) of the directive that other types of administrative sanctions than those referred to in that article are permissible.
84. Under Article 59(2)(c), the withdrawal or suspension of authorisation can also be considered, where an obliged entity is subject to an authorisation.
85. By contrast, the prohibition or obligation to terminate business relationships with customers with no connection with Latvia still appears to be the milder means.
86. Moreover, both the Commission and the Latvian Government confirmed at the hearing that it is particularly common for financial institutions in Latvia to be confronted with the risk of money laundering. The Latvian Government pointed out that, due to those circumstances, the Republic of Latvia made use of the possibility to create further measures.
87. Therefore, according to the information available to the Court, the situation is characterised by the fact that particular risk factors have been identified and the bank concerned is threatened with the withdrawal of its licence. A less severe, equally effective remedy does not seem to be apparent, which is a matter for the referring court to verify. With this in mind, I consider that such a temporary prohibition of business relationships with customers with no connection with the Member State of financial supervision is necessary. (44)
4. Proportionality in the narrower sense
88. Lastly, in addition to appropriateness and necessity, it is necessary to examine proportionality in the strict sense. (45) Accordingly, it must be ensured that the prohibition of business relationships with customers with no connection with Latvia does not lead to an excessive impairment of the legitimate interests of PrivatBank and its (potential) customers. In that respect, the interests of the bank and the customers concerned must be carefully balanced with the objective of preventing money laundering and terrorist financing.
89. It was only for a limited period of time that the Latvian supervisory authority ordered the termination or non-establishment of PrivatBank’s business relationships with the customers concerned. The prohibition of the establishment of business relationships applied only with effect from the date of the decision at issue. Furthermore, the only business relationships which had to be terminated were those which were established following the adoption of that decision – and were thus established in breach of it. Moreover, both obligations applied only until such time as the bank implemented further measures which were ordered at the same time and were aimed at the remedying of the deficiencies in the bank’s risk management system. (46) That temporal restriction had a disciplinary effect on the bank, as it could itself influence the end of the restrictions. According to the FKTK, they are now no longer in effect.
90. Moreover, the intensity of the measure imposed to the detriment of the private bank is not disproportionate to the objective pursued, which is the prevention of money laundering and terrorist financing. First, the bank was able to maintain existing business relationships even with customers with no connection with Latvia and with a high monthly account turnover, since the prohibition applied only to business relationships established after the adoption of the decision at issue. Second, the bank was able to establish new business relationships with customers who did not have a connection with Latvia and had an account turnover lower than that laid down in that decision. In comparison with those restrictions, the withdrawal of the bank’s licence would be a much more intensive measure, which is precisely avoided by the restriction at issue. (47)
91. Moreover, PrivatBank itself culpably contributed to the risk situation to which the Latvian financial supervisory authority had to respond in so far as, according to the findings of the FKTK, the bank committed infringements of the legal provisions on the prevention of money laundering and terrorist financing over a long period of time. (48)
92. From the customers’ point of view also, the disadvantages associated with the prohibition of certain business relationships do not outweigh the advantages of effectively combating money laundering. Although the free movement of capital protects the freedom to choose a credit institution, it does not confer a right to establish business relationships with a particular bank irrespective of the specific circumstances.
5. Conclusion regarding the third and fourth questions
93. In the light of the foregoing, prohibiting business relationships with customers who have no connection with the Member State in which a bank is established is not contrary to the freedom to provide services and the free movement of capital, provided that the measure is proportionate to the objective of combating money laundering and terrorism. That is for the referring court to assess in the light of all the circumstances of the individual case. Those circumstances include, in particular, the risk of money laundering identified, the degree to which the bank repeatedly breaches anti-money laundering rules and the measures already taken in the past without success, as well as the duration of the restriction and its intensity in comparison with other equally effective means.
V. Conclusion
94. In the light of the foregoing considerations, I propose that the Court reply as follows to the questions referred for a preliminary ruling by the Administratīvā apgabaltiesa (Regional Administrative Court, Latvia):
(1) Financial loans and credits and operations in current and deposit accounts with financial institutions, such as banks, are ‘movements of capital’ within the meaning of Article 63(1) TFEU.
(2) An order by which the competent authority of a Member State imposes on a particular credit institution a prohibition on the establishment of business relationships with persons having no connection with that Member State, and an obligation to terminate such business relationships established after the adoption of that order, restricts the freedom to provide services within the meaning of the first paragraph of Article 56 TFEU and the free movement of capital within the meaning of Article 63(1) TFEU.
(3) Such a restriction may be justified by the objective of preventing money laundering and terrorist financing and may fall under the exception in Article 65(1)(b) TFEU. This presupposes that the bank cannot comply with its due diligence requirements due to the absence of a connection between the customers in question and the Member State concerned and that the determination of the group of customers covered by the measure corresponds to the risk of money laundering identified. Furthermore, the principle of proportionality must be observed.
(4) The following factors in particular must be taken into account in the assessment of proportionality:
– the risk of money laundering identified;
– the degree to which the bank repeatedly breaches anti-money laundering rules, and the measures already taken in the past without success;
– the intensity and duration of the restriction.