Dec. 7 (Bloomberg) -- European Union governments backed a proposal to fight funding of terrorism and crime by requiring banks and attorneys to know more about customers and extending transaction-reporting requirements to retailers.

The proposal, which seeks to enact recommendations by an international law-enforcement group called the Financial Action Task Force, won preliminary agreement of EU finance ministers in Brussels today. EU governments will wait for the European Parliament to pass the legislation before formally approving it.

The legislation requires businesses such as jewelry dealers and art galleries to monitor suspicious transactions and report cash purchases of more than 15,000 euros ($20,000). Customer- verification rules for banks and attorneys would be tightened by requiring them to verify who owns the interests they represent.

``This is going to make life harder for money launderers,'' Financial Services Commissioner Charlie McCreevy told reporters in Brussels after the finance ministers' agreement.

Criminals ``launder'' money by shifting it between accounts, businesses and countries to make it appear legitimate. The EU and crime-fighting groups like the FATF are seeking to widen and, at the same time, tighten their dragnet, with an increasing focus on crimping funds flowing to terrorists.

Know Your Customer

The know-your-customer rules, as drafted by the European Commission, may inhibit legitimate business and attorney-client relations, said Stephen Revell, chairman of an International Bar Association task force on money laundering laws. For example, he said, the rules don't permit a multinational company to verify the identity and ownership structure of a client just once if that client visits offices in different countries.

``We're very supportive of the fight against crime, but we think the law ought to be well written and proportionate to the objective you're trying to achieve,'' Revell said in a telephone interview today.

The EU should complete implementing past money-laundering legislation before adding new laws, he said. Some EU governments have been late in writing the legislation into national law. Critics include the International Monetary Fund, which last month called on Luxembourg to update its laws to make terrorism a predicate crime triggering money-laundering protections.

Finance Minister Gerrit Zalm of the Netherlands, which holds the EU's six-month rotating presidency until yearend, told reporters today it is up to the commission to ensure that EU countries implement directives.

To contact the reporter on this story: John Rega in the Brussels bureau jrega@bloomberg.net

Last Updated: December 7, 2004 13:21 EST