In the EU, the last few years have brought 4AMLD, 5AMLD and now the upcoming 6AMLD, but perhaps there will be no 7AMLD. For all the push from the EU around Anti-Money Laundering (AML), these Directives still rely on member states to pass their own legislation, causing delays, confusion and discrepancies. To create more cohesive, harmonious and powerful AML regulations, the European Commission adopted an action plan for a comprehensive Union policy on preventing money laundering and terrorism financing.
Will the EU get one AML law that supersedes the current member state laws and, if so, what effect will that have?
The EU AML story so far
The first AML Directive was adopted in 1990. Since then the regulatory requirements on obliged entities have become stricter, covering more types of entities and more types of activities.
- Initially, AML was related to the “War on Drugs” and applied only to financial institutions.
- In 2001, amendments were added to cover certain financial services and an additional focus on activities connected to corruption.
- In 2006, 3AMLD added coverage for the gaming industry and certain professional services such as lawyers, accountants, notaries and real estate agents, as well as additional focus on the funding of terrorism. The requirements for Customer Due Diligence (CDD) and suspicious activity reporting came into effect.
- In 2017, 4AMLD came into force with an extensive set of changes. The risk-based approach became a focus, the need to collect beneficial ownership information of companies was added, and enhanced customer due diligence procedures in certain circumstances became necessary.
- In 2020, 5AMLD came into effect with goals on beneficial ownership registers, enhancing the access of financial intelligence units (FIUs) to information, and extension to coverage of virtual currencies.
- The listing of 22 predicate offences relating to money laundering, providing for clear and harmonized definitions of each specific crime, is one of the objectives of 6AMLD, due in 2021.
Unfortunately, for all the efforts of EU regulators and compliance teams, money laundering continues to be a major concern. In 2019, Rob Wainwright, former director of Europol, stated that “professional money launderers are running billions of illegal drug and other criminal profits through the banking system with a 99% success rate.” Considering that in the EU banks are spending $20 billion per year on compliance, a new action plan is in order.
Or, as the EU Commission states, “there is growing consensus that the framework needs to be significantly improved. Major divergences in the way it is applied and serious weaknesses in the enforcement of the rules need to be addressed.”
Six pillars for a stronger AML/CFT framework
To better confront the threats, risks and vulnerabilities of money laundering, the EU wants to better harmonize rules, enforcement and supervision between member states. To that end, they have created six pillars to guide developments:
- Ensuring the effective implementation of the existing EU AML/CFT framework
The first pillar is ensuring that existing laws are properly transposed into legislation and working as intended. Only 11 member states met the date for implementing 4AMLD, and since then the EU has become more proactive in going after any laggards. The EU has already launched infringement proceedings in regard to 5AMLD, which was due on January 10, 2020.
The requirement for effective registers will be closely monitored, and interconnection between the registers is expected in 2021. The EU will also be monitoring staffing levels of regulators, application of the risk-based approach, and shell companies, golden visas and other potential problem areas.
The European Banking Authority (EBA) has been mandated to “lead, coordinate and monitor AML/CFT efforts of all EU financial services providers and competent authorities.” The EBA will be expected to make full use of its strengthened powers.
- Establishing an EU single rule book on AML/CFT
While the different Directives offer a far-reaching scope to combat money laundering, the significant variations and permutations of their enactment has created “a fragmented legislative landscape” that increases costs and complexity for compliance teams. Inadequate cooperation between all the different regulators and enforcement agencies presents loopholes for criminals and problems for legitimate cross-border financial activities.
Moving to direct provisions in such matters as
- List of obliged entities
- Customer due diligence requirements
- Internal controls
- Reporting obligations
- Provisions on beneficial ownership
- Registers and central bank account mechanisms
would provide cohesion, clarity and more simplified compliance.
Other measures that should be considered include how to deal with new technology innovations and “digital identification for remote customer identification and verification of customer identity as well as to establish business relationships remotely.”
- Bringing about EU level AML/CFT supervision
Currently, each member state is in charge of supervising their own AML laws. Thus, there are major differences in the amount of resources, efforts and priorities put into overseeing AML programs, leading to uneven enforcement and systematic weaknesses. The lack of cross-border cohesion creates strains and concerns for the whole system.
The Commission is looking to have an EU-level AML-CFT supervisor in Q1 2021. The plan is to keep existing supervisory agencies in place to handle day-to-day operations and have the EU-level supervisor “oversee and instruct national authorities.” The exact relation and interplay between the different supervisory levels is not yet finalized.
- Establishing a support and cooperation mechanism for FIUs
Similarly, reporting of suspicious activities is made to a member state’s FIUs. Differences in how different FIUs apply rules and cooperate with each other contribute to unevenness in how investigations are handled and weaknesses in the system overall. Joint analysis remains limited, tools for analysis may be lacking in certain jurisdictions, and feedback to companies to help improve their programs is often nonexistent.
The Commission is calling for an FIU coordination and support mechanism at the EU level. This coordination and support would work on identifying suspicious activities that have a cross-border element and help investigate these cases. The Commission will table proposals for this mechanism in Q1 2021.
- Enforcing Union-level criminal law provisions and information exchange
Interconnection between all the various member state agencies tasked with aspects of AML compliance and their counterparts is complex. While there are numerous legislative tools and institutional arrangements in place, effective operationalization is still a work in progress.
To help solve the issue, Europol — the EU’s law enforcement agency — has created a new EU investigative financial crime body, the European Financial and Economic Crime Center (EFFEC). Its aim is “to follow the money to its ultimate destination and take it away from criminals.”
Other initiatives include the Anti-Money Laundering Operational Network (AMON) that connects relevant law enforcement authorities and the European Public Prosecutor’s Office, which is due to begin operations in 2020.
- Strengthening the international dimension of the EU AML/CFT framework
The Commission “remains committed to implementing FATF standards.” However, with this new Union policy, the EU is looking to strengthen global standards and play a larger role in setting these standards.
The next AML chapter in the EU
It’s important to note that this is an action plan and many of these elements are not settled yet. However, the policy is a clear indication of what the EU is looking for in regards to AML compliance in terms of strengthening requirements, closing loopholes and creating better coordination and communication between various regulatory agencies.
For obliged entities operating in Europe, it’s imperative to consider the cross-border implications and how you can streamline operations in an increasingly complicated world. While the vision of a Pan-European compliance regime might be a reality one day, the story still has many twists and turns along the way. Creating systems that are robust, adaptable and scalable will provide a compliance framework that delivers efficient solutions no matter which way the story goes.