The pace is being kept up to combat money laundering and terrorist financing globally, especially in the EU. Recent high-profile investigations clearly added fuel to the EU’s already existing commitment to anti money laundering (AML).
On 7 May 2020, the European Commission published an action plan (PDF) for a comprehensive EU policy on preventing money laundering.
This comes not long after the fifth anti-money-laundering directive (5AMLD) and the latest directive (EU) 2018/1673 regarding minimum standards for the criminalisation of money laundering (see this blog post for details).
Content of the action plan
The action plan intends to focus AML competence more at EU level than in the member states. Therefore, it aims to build six pillars via EU legislation:
- Ensure the effective implementation of the existing AML rules.
- Establish an EU single rule book on AML.
- Establish EU-level AML supervision.
- Establish a support and co-operation mechanism for financial intelligence units (FIUs).
- Enforce Union-level criminal law provisions and information exchange.
- Strengthen the international dimension of the EU AML framework.
Ensure the effective implementation of the existing AML rules
The Commission takes a zero-tolerance approach towards member states that insufficiently implement 5AMLD (the due date for which was 10 January 2020). Going forward, it plans to closely monitor mandatory amendments to national laws. Special attention is paid to new rules of central bank account mechanisms and beneficial ownership registers, which must be installed.
To reach this goal, the Commission wants to assist national legislators to implement the necessary reforms to close loopholes in the existing AML system.
In its paper, the Commission particularly criticises insufficient staffing in the competent national authorities, shortcomings in the application of the risk-based approach, and an unsatisfactory mitigation of risks from the misuses of shell companies, golden visas and citizenship schemes.
Establish an EU single rule book on AML
The Commission acknowledges that the current minimum harmonisation approach to EU legislation has resulted in a diverging AML landscape.
In practice, these disparities lead to different interpretations of the applicable law and the division of responsibilities in cross-border cases. To close the resulting loopholes and to eliminate uncertainties, the Commission suggests extending the scope of EU legislation to develop improved international standards for AML.
This shall include the harmonisation of technical standards for the monitoring and prevention of infringements. It is the Commissions express goal to – in the end of the reforms – establish a single rule book on AML in the EU.
Establish EU-level AML supervision
A core element of the action plan is to implement a supervision of the AML framework at EU level. Currently, this is in the sole responsibility of member states. It is intended to reduce inequalities and inefficiencies in monitoring compliance with AML requirements.
It has not yet been clarified whether this task should be assigned to an existing EU body or whether a new authority should be established for this purpose.
However, from our point of view the action plan has a clear tendency to entrust the European Banking Authority (EBA) with this task. The Commission cites cost and efficiency reasons for this solution. Plus, recently the institution became a much more active player in combatting money laundering.
Just weeks ago, the EBA issued a consultation on proposed revisions to the risk factor guidelines for financial institutions to money laundering and terrorist financing risk assessment. EBA developed these guidelines in collaboration with several European authorities, but it will now be EBA’s sole mandate to provide further updates.
EBA also recently published a report assessing the national regulator’s approach to uncover gaps in supervision of AML risks. The report concluded that regulators need to 'focus more on assessing the systems and controls within a firm to identify, assess and monitor AML risks, instead of adopting a ‘tick box’ approach'. It suggests that the national regulators should be 'more dissuasive and proportionate when imposing remedial measures to correct deficiencies in a firm’s systems and controls', a broad hint to the severe sanctions handed in other jurisdictions in recent years.
For funding of the new supervisory activities, the Commission considers a contribution by the supervised private sector entities.
Establish a support and co-operation mechanism for FIUs
Suspicious financial transactions currently must be reported by the obliged entities to the national FIUs. On this basis, the FIUs produce financial analyses, which are transmitted to competent authorities. The Commission states that this system generally functioned well so far.
However, the Commission identified weaknesses in the cooperation between national authorities (including FIUs) and EU authorities. It also criticizes – rightly so – that FIUs do not provide (timely) feedback to financial institutions on their suspicious activities reports. As a result, the FIUs do not enable banks to effectively adapt their AML processes based on real, investigated cases of money laundering.
To address this problem, the Commission considers co-ordinating FIUs at EU level. Particular attention is paid to cross-border transactions and identifying global trends to better assess the risks of money laundering within a larger framework.
The scope of possible support and co-operation mechanisms is not yet clear.
Should a larger scale be chosen, this task could be delegated to Europol, or to a new, dedicated body. If the scope of the competences is smaller, the FIU platform is considered for this competence. The FIU platform is an informal committee which serves as a Commission expert group to facilitate cooperation among the FIUs and provides advice and expertise to the Commission.
Enforce Union-level criminal law provisions and information exchange
To combat money laundering at all levels of the law the directive (EU) 2018/1673 brought new standards for the national criminal law and judicial and police cooperation (see our last blog post).
The action plan does not contain further adjustments to national criminal law but aims to improve information exchange and the work of the Anti-Money Laundering Operational Network (AMON). This office is located at Europol and supports the network of national authorities in the combat against money laundering.
The Commission considers equipping AMON with an operational budget to support concrete cases and aims all member states to join the network.
Strengthen the international dimension of the EU AML framework
Since money laundering often does not stop at (the EU) borders the Commission underlines the importance of global cooperation in AML.
It emphasises the value of the work of the global AML policy standard-setter, the Financial Action Task Force on Money Laundering (FATF), an intergovernmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat money laundering.
Notwithstanding, the Commission envisions a stronger role for the EU in setting such international standards. It considers that the EU should join the FATF as a representative.
To protect the EU financial system from foreign attacks the Commission intends to monitor third-countries more intensively. Therefore, the Commission addresses the necessity to evaluate whether the current AML framework covers the listing of high-risk countries enough to mitigate potential risks.
To mitigate the risks of third-country threats the Commission also develops a capacity to provide technical assistance which will be granted to those countries to improve their AML measures to catch up with international standards.
The action plan strongly suggests that the EU is shifting into next gear in its fight against money laundering.
The proposed six pillars are not only designed to evolve the steps taken with the 4AMLD, 5AMLD and the directive 2018/1673 through a more uniform implementation of the existing legal framework and better networking between the authorities of the member states, but to build up more competence at EU level.
This intensified European approach aims to address challenges member states’ prosecuting authorities’ face in cross-border investigations.
The challenges may also be addressed by the European Public Prosecutor's Office which is ready to pick up its work. Laura Kövesi of Romania will run the newly created institution from her central office in Luxembourg alongside European prosecutors from each participating member state. Investigations will be run by delegated prosecutors nationally. Hence, the efficacy will depend on Kövesi’s ability to persuade member states to provide the prosecutors and resources needed.
However, it remains uncertain how effective the proposed measures will be. Rightly, the action plan already admits that EBA in its current state is not fit to fulfil the supervisory role. This is not only true because so far, the Board of Supervisors is composed of the EBA's Chairperson and of the 27 national supervisory authorities – the exact authorities EBA shall supervise – but also because up to now EBA’s regulation activities only concern financial institutes.
Since 4AMLD and 5AMLD extend the scope of anti-money laundering laws to a lot of companies selling goods or services commercially, EBA will face a variety of new challenges.
Still, the EU’s message seems quite clear: companies should get their AML policies in order because more administrative bodies will look more closely on the implemented compliance measures.
EBA’s recent statements suggest that customer due diligence and know-your-customer processes will become even more important. Such an approach should be deemed positive in principle because the data collected hereby can form the foundation of a more data-driven risk assessment conducted by the obliged entities.
However, adjusting to the rising requirements will cost obliged entities even more human and financial resources. Plus, it is to be expected that the costs of the extension of the EU’s competences will be passed on to obliged entities as EBA is already financed by the supervised banks.
Nonetheless, a European approach would have one major advantage: multinational companies would need no more to adjust their AML system to the particularities of each national regulator, but instead can expect a single standard across the EU.
Patrick Kemper contributed as a co-author to this article.