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European Union

Money laundering Directive to be extended

The Commission has proposed that the EU Directive on money laundering be extended to activities and professions outside the financial services sector, and that the range of suspicious transactions to which it applies should be broadened to cover the proceeds of serious crimes other than just drug trafficking. The Directive obliges all credit and financial institutions to seek identification of all of their customers entering into a business relationship when a single transaction or series of linked transactions exceed Ecu15,000 (US$16,600) or, even where this threshold is not met, where money laundering is suspected.

According to the Commission's report on the implementation of the Directive, it needs to be extended to deal with recent international developments in the anti-money laundering effort, including the shift of money laundering activities from the traditional financial sector to the non-financial sector, identified by the leading world anti-money laundering body, the Financial Action Task Force on Money Laundering. The Commission is considering extending the Directive to certain "vulnerable non-financial activities and professions", such as the legal profession, auditors, real estate agents and casinos, where they are involved in carrying out financial transactions for their clients. Furthermore, the amended Directive would apply to the proceeds of serious crimes such as terrorism, trafficking in armaments and fraud.

Conditional approval of WorldCom/MCI merger

On July 8 1998, following a second phase inquiry, the Commission gave its conditional clearance to the proposed US$37 billion merger between two US based international telecoms companies, WorldCom and MCI Communications Corporation. The clearance, which is subject to the complete divestiture of MCI's Internet business, will create the fourth largest telecoms provider in the world, behind Japan's NTT, US giant ATT and Deutsche Telekom.

The Commission accepted the arguments of interveners in the case in concluding that the parties were part of a small top level group of Internet Service Providers (ISPs), providing connectivity anywhere on the Internet solely through their own peering agreements. Smaller ISPs must enter into transit agreements with one of the top level group of ISPs to obtain the global connectivity which is a feature of Internet access. The merger would have given the combined entity a market share of 50% of the top level backbone market. The Commission also felt that the situation was exacerbated by the phenomenon of 'network externalities', whereby a network becomes more attractive to new customers because of its existing customer base. The combined entity would have been powerful enough to act independently of its competitors, capable of harming them by degrading the quality of the Internet services it offered to them.

The parties had originally sought to address the Commission's concerns by offering a partial divestiture of MCI's Internet business to Cable & Wireless. The Commission felt, however, that this was not sufficient to address their concerns and insisted that any overlap between WorldCom and MCI Internet businesses be eliminated. The Commission's clearance is conditional on the sale of all of MCI's Internet assets, which should allow the acquirer to assume MCI's position in the Internet market. The parties must obtain the approval of both the US and the EU competition authorities of any proposed purchaser of the MCI Internet business, and the Commission retains the power, if necessary, to take control of the sale process if it is not conducted satisfactorily by the parties.

Approval of transatlantic air alliances

On July 8 1998, following two years of investigation, the Commission announced its preliminary position on two transatlantic airline alliances, the link up between British Airways and American Airlines (BA/AA) and the Star Alliance, involving Lufthansa, United Airlines and Scandanavian Airlines System. As the competition rules contained in Articles 85 and 86 of the EC Treaty have not yet been directly applied to air transport, other than for traffic within the EU, the Commission was forced to rely on the transitional provisions in Article 89 of the EC Treaty for its jurisdiction.

With regard to the BA/AA alliance, which would create the world's largest aviation alliance, the Commission indicated that without the imposition of any conditions, the alliance would reinforce BA/AA's dominant position on hub-to-hub routes and create significant barriers to entry for other competitors. Consequently, as a condition to obtaining the Commission's clearance of the BA/AA alliance, the parties must be prepared to reduce their combined number of weekly frequencies on the London-Dallas, London-Miami and London-Chicago hub-to-hub routes if requested to do so by a competitor during a six-month period following clearance. Further, the parties are required to make a maximum of 267 slots in London freely available to competitors wishing to launch a new service or expand an existing one. This is closer to the figure of 190 offered by the parties than the 350 originally sought by the Commission, and allows BA to divide the slots between Gatwick and Heathrow, rather than just Heathrow as originally envisaged. It is hoped that these conditions will allow competitors to gain a foothold in the markets.

Other proposed conditions relate to frequent flyer programmes, computerized reservation system displays, relations with travel agencies and corporate customers, and interlining. The details of the proposed conditions have been published in the official journal, and interested third parties have 30 days to comment.

In relation to the Star Alliance, already in operation for several years and cleared by the US authorities, the Commission is seeking similar conditions to those imposed on the BA/AA alliance, including a frequency reduction on two hub-to-hub routes and the surrendering of a maximum of 108 slots between Frankfurt and Copenhagen. Lufthansa, in particular, has reacted strongly to the conditions, which it feels are harsher than those imposed on the BA/AA alliance, and United Airlines has opened proceedings before the US department of transport.

Michael Reynolds
Allen & Overy

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