One step closer towards a new EU AML/CFT regime

It will soon be two years since the European Commission published an ambitious legislative package to overhaul its anti-money laundering (AML) and counter terrorism financing (CTF) regime (see our July 2021 blogpost). The legislative package is primarily focusing on the establishment of an EU single rulebook via a new AML/CFT Regulation (AMLR) and the creation of a new AML/CFT supervisory authority at EU level (AMLA).

After an intense period of negotiations, Member States in the Council of the EU (the Council) – which approved their positions on AMLA in June 2022 and on the AMLR in December 2022 – were very much waiting for Members of the European Parliament (MEPs) to align position on the initiative. This week, on 28 March, MEPs finally adopted their respective mandates to enter into interinstitutional negotiations, paving the way for the last phase of the EU legislative process. In fact, as of April, the co-legislators, together with the European Commission, will need to find a common final position.

In this blogpost, we analyse the main differences between the positions of the European Parliament (the Parliament) and the Council and take a look ahead at the potential near future of this ambitious legislative project.

Key sticking points between the Council and Parliament

AMLR

Until now, the European Union has laid down its AML requirements solely in form of a Directive, leading to a minimum standard but also to different standards across the European Union. Under the new regime, the EU plans to lay down its requirements to be fulfilled by ‘obliged entities’ in a directly applicable Regulation. Apart from a few discrepancies, the Parliament’s position on the AMLR seems to be very much in line with the stand taken by the Council. However, based on the published compromise proposals, it seems very likely that the upcoming discussion in the trilogues will focus on the following aspects:

• Limit to cash payments: Both institutions, the Parliament and the Council aim to limit large cash payments within the EU. While both parties foresee that Member states shall have the possibility to impose a lower maximum cash limit, a final position needs to be found regarding the specific cash payment limit. The Parliament suggests implementing an EU-wide maximum limit of EUR 7,000 for cash payments whereas the Council proposed a maximum limit of EUR 10,000.
• Customer due diligence measures: In principle, both institutions agree on implementing provisions to further harmonize customer due diligence measures. These measures shall include a risk-based approach and require the identification and verification of customers. Similar to the current system, the Parliament and the Council have agreed on implementing simplified and enhanced customer due diligence measures – depending on the risk identified for each customer. Enhanced measures shall inter alia apply to entities operating in sectors identified as including high-risk for money laundry and terrorism financing. The Parliament has proposed to extend enhanced due diligence to further categories of customers, such as customers applying for residency in Member States in exchange for an investment, as well as high-net-worth customers holding a minimum of EUR 1,000,000 in financial wealth / assets, and customers which are legal entities linked to offshore financial centres. This approach would vastly broaden the applicability of enhanced due diligence requirements.
• MEPs also agreed on expanding customer due diligence measures to require obliged entities to verify whether their customers are subject to targeted financial sanctions. In addition to the fact, that both institutions have reached an agreement on extending the scope of AMLR to crypto-asset service providers, the Parliament has agreed on proposing a prohibition on credit and financial institutions regarding relationships with unregistered or unlicensed crypto-asset services providers which are not established in any jurisdiction.
• Beneficial Ownership verification (thresholds): Both institutions agreed on implementing provisions regarding the verification of beneficial owners. Yet there are differences on the threshold in relation to shares and voting rights the beneficial owner must own or control. The Parliament proposes a threshold of 15% plus one of the shares or voting rights, whereas the Council agreed on a threshold of 25%. In addition, the Parliament has proposed to lower the threshold to 5% in relation to the extractive industry and entities, which are associated with high money laundering and terrorist financing risk.

AMLA

In the same vein, the Parliament’s position on AMLA is overall very much aligned with the Council’s General Approach even if there are a few divergences. We shall expect the discussion in trilogues to focus on the following aspects:

• Direct supervision: Both institutions agreed on including Crypto-Asset Service Providers (CASPs) under the scope. However, for the assessment of obliged entities, the Council has proposed to include entities which have presence in at least seven Member States whereas the Parliament has decided to go for presence in at least four Member States. In addition, the Parliament is being more precise than the Council when addressing the risk of obliged entities and focusing on the residual risk as well as considering the risk management systems put in place by the obliged entities for the assessment methodology. 
• Process of listing selected obliged entities: Overall there is agreement between the Parliament and the Council about the fact that 40 obliged entities shall be covered under the first selection process and about the commencement of this process on 1 July 2023. However, the Parliament goes a bit further and will focus on the 40 obliged entities which have the highest residual risk profile in at least two Member States. Moreover, when describing the factors of customer-related risk, the Parliament is including the share of non-resident customers from third countries. In fact, MEPs have made a link with the third countries listed in the EU tax blacklist, as well as with those which have been listed for a period of over three years in the EU tax grey list.
• Tasks and powers: The Parliament has also granted AMLA with powers to mediate between national financial supervisors and settle disagreements between them. In relation to targeted financial sanctions, MEPs consider that AMLA shall receive data and analyses from competent authorities, third countries, international organisations and other sources in view of preparing new targeted financial sanctions, as well as to receive information on possible violations of these sanctions.
• Location: While the Council’s position was partial and did not address the issue of the seat of the Authority, the Parliament – which shall also take part of this decision – has developed its own objective criteria for deciding the location of the AMLA seat. This aspect will be a tough one for the discussion given that already 10 Member States have expressed interest in hosting AMLA, including Ireland which presented its candidacy this week. Among the different aspects to be considered, MEPs have considered as key factors the need for a balance of geographical distribution of EU institutions, the accessibility of the location, the proven quality of the AML/CFT framework of the hosting country, as well as the ability to recruit high-qualified and specialised staff, among other factors.

Looking Ahead

Interinstitutional negotiations among the European Commission, the Parliament and the Council will kick off in April 2023 under the Swedish Presidency of the Council. While the co-legislators have tried to negotiate all the files under the AML/CFT legislative package together, the Swedes have already flagged their interest on closing a final agreement on AMLA before the end of its mandate.

Many sticking points would need to be agreed in a short period of time for the Swedes to find an agreement on AMLA before the end of June 2023. Thus, we may expect a final deal to be reached on these pieces of legislation under the Spanish Presidency, which is taking over the Swedes in July 2023. In case the Spanish would close a deal on AMLA, it remains to be seen how the neutral role of the Presidency would affect their candidacy to host AMLA in Madrid.

Following a potential agreement on the EU AML/CFT legislative framework in the second half of the year, AMLR legislative provisions will apply two years after its entry into force. If no major changes are introduced in trilogues, AMLA will only be established in January 2024 and carrying out direct supervision to selected obliged entities as of 2026.