Saudi Arabia is one of the U.K's top arms importers with billions of dollars in business deals.
The European Commission added Saudi Arabia, Panama, Nigeria and other jurisdictions to a blacklist of nations seen as posing a threat because of lax controls on terrorism financing and money laundering, the EU executive said on Wednesday.
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The move is part of a crackdown on money laundering after several scandals at EU banks but has been criticized by several EU countries including Britain worried about their economic relations with the listed states, notably Saudi Arabia.
Panama said it should be removed from the list because it recently adopted stronger rules against money laundering.
Despite pressure to exclude Riyadh from the list, the commission decided to list the kingdom, confirming a Reuters report in January.
Apart from reputational damage, inclusion on the list complicates financial relations with the EU. The bloc's banks will have to carry out additional checks on payments involving entities from listed jurisdictions.
Also newcomers to the list are Libya, Botswana, Ghana, Samoa, the Bahamas and the four United States territories of American Samoa, U.S. Virgin Islands, Puerto Rico and Guam.
The 28 EU member states now have one month, which can be extended to two, to endorse the list. They could reject it by qualified majority. EU justice commissioner Vera Jourova, who proposed the list, told a news conference that she was confident states would not block it.
But concerns remain. Britain, which plans to leave the EU on March 29, said on Wednesday the list could "confuse businesses" because it diverges from a smaller listing compiled by its Financial Action Task Force (FATF), which is the global standard-setter for anti-money laundering.
The FATF list includes 12 jurisdictions - all on the EU blacklist - but excludes Saudi Arabia, Panama and U.S. territories. The FATF will update its list next week.
London has led a pushback against the EU list in past days, and at closed-door meetings urged the exclusion of Saudi Arabia, EU sources told Reuters.
The oil-rich kingdom is a major importer of goods and weapons from the EU. Several top British banks have operations there. Royal Bank of Scotland is the European bank with the largest turnover in Saudi Arabia, with around 150 million euros (US$169.28 million) in 2015, according to public data.
HSBC is Europe's most successful bank in Riyadh. It booked profits of 450 million euros in 2015 in the kingdom but disclosed no turnover and has no employees there, according to public data released under EU rules.