The European Union’s AML/CTF Action Plan

Key Takeaways

• Inconsistencies in the approach taken by EU Member States in implementing AML/CTF Directives have led to a fundamental review of the framework. As a result a reassessment has been undertaken focusing on the approach that should be taken at an EU-wide level.
• On 7 May 2020, the European Commission published its Action Plan setting out a comprehensive EU policy on preventing Money Laundering (ML) and Terrorist Financing (TF).
• Parallel to the Action Plan, it has issued a consultation paper seeking the public’s views on its proposals. The consultation is open for comments until 29 July 2020.

The EU’s Anti-Money Laundering (AML) / Combating Terrorist Financing (CTF) regime has developed over the years with the introduction of legislative and other measures.

However, the regime has fallen short, and regulation has faced difficulties in staying ahead of criminal methods of pursuing financial crime, particularly with the advent of new technologies. Those committing financial crime will exploit opportunities to further this cause and the current pandemic, for instance, has been used to this end[1].

The underlying objective of the AML/CTF regime is to detect and prevent financial crime. Over time, the system has grown organically as policymakers in the EU have reacted to a changing environment. Advances in technology have continued to take place, there has been a growing number of types of entities and activities, and smarter criminals are continuously devising new ways to launder illicit funds or fund terrorist activities and ideologies.

But in an effort to adapt to new obligations, has the underlying objective of the regime been overlooked? Are we focusing on what really matters?

As the requirements under the regime increase, so does the complexity and cost of compliance, resulting in the investment of resources to ensure strict compliance with legal and regulatory obligations. Therefore, fewer resources are being allocated to assessing the largest financial crime threats faced by jurisdictions. This is true for both public and private bodies. ML and TF are more than just a compliance problem — time needs to be dedicated to the identification and timely reporting of suspicions of financial crime.

The delays and challenges in agreeing new measures between all the Member States and the minimum harmonising nature of EU Directives, has led to inconsistencies and gaps in national regimes. This allows criminals to exploit the weaker regimes, giving rise to regulatory arbitrage and creating barriers to adequate cross-border supervision, leading to weak enforcement action.

Inefficiencies of the current AML/CTF regime have led to a fundamental review of the framework and reassessing of the approach that should be taken at an EU-wide level.

The Action Plan — An Overview

The Commission’s aims to implement a comprehensive and harmonised AML/CTF rulebook, relevant to the threats, risks, and vulnerabilities faced by the EU.

The new regime should allow for some flexibility and will take innovation into account. It is calling for an EU-wide supervisor that will work closely with national supervisors to ensure coordinated and effective supervision across the EU. Enhancements for Financial Intelligence Units (FIUs) are also being proposed.

The Action Plan centres around six pillars:

1. Ensuring the effective implementation of the existing EU AML/CTF framework

To deliver this objective, there is a need to ensure that EU legislation is implemented effectively by all Member States, supervisors, and obliged entities.

The EU will consider the capacity of individual countries to prevent and fight ML and TF and take action to ensure Member States fully and adequately transpose and implement AML/CTF Directives.

2. Establishing an EU single rule book on AML/CTF

The findings over the last few years have shown that there was a clear need to review and reform the EU AML/CTF legislative and regulatory regime. As such, a move from Directives to a directly applicable Regulation in certain areas will be an essential step towards harmonisation for the regime.

At a minimum, the Action Plan suggests that the EU Regulation should include the provisions laying down the list of obliged entities, Customer Due Diligence (CDD) requirements, internal controls, reporting obligations, and those around beneficial ownership registers and central bank account mechanisms.

More precise rules with less area of discretion for Member States would reduce the divergence that currently exists and bring about closer alignment among supervisors and entities across the EU.

Currently, there are differences in the implementation of EU requirements, with some Member States exercising a derogation available and others going above and beyond individual requirements (e.g. in Know Your Customer (KYC) rules and in the reporting of suspicious activities or transactions).

We need a level playing field in order to reduce the scope of regulatory arbitrage and ensure a more efficient framework, resulting in improved supervisory convergence within the EU.

Groups with entities across several EU countries would greatly benefit from being able to apply consistent group-wide AML/CTF policies and procedures.

Today, when considering reform in any area, technological advancements cannot be ignored. Technological solutions that could prove useful in this field and which would leverage enhanced analytics (e.g. for KYC purposes, transaction monitoring and the identification of suspicious transactions and activities) should be explored. Some measures outlined in the Action Plan include the facilitation of the use of digital identification and verification for remote customers.

Wider adoption of such analytics technologies should be encouraged and regulators will play a crucial part in the understanding and acceptance of their use.

These solutions must be in line with international and EU standards, including those on data protection.

The use of appropriate tools could potentially lead to faster identification of financial crime, as well as reducing compliance costs. This will allow entities to allocate additional resources to manage the most significant financial crime risks, creating a more robust and effective AML/CTF framework.

In my previous short piece, I questioned how the Action Plan might affect Virtual Asset Service Providers (VASPs). There are different types of VASPs currently operating in the EU, and not all of them were captured by the recent changes under 5AMLD. This is an area of discrepancy given the different views and treatment of cryptoasset activities within the EU.

The Action Plan recognises the need to broaden EU legislation to address developments in international standards. This suggests that the regime’s scope may need to be expanded to cover other sectors and entities, such as those VASPs not currently covered by the EU’s AML/CTF regime and there should be an assessment of how the rules should apply to this sector.

Alignment with the Financial Action Task Force (FATF) Recommendations is crucial, starting with ensuring a common lexicon.

This is also being considered as part of the recent EU consultation on a proposed bespoke framework for cryptoasset related activities beyond AML/CTF.

Legislative proposals are expected to be published in Q1 2021.

3. Bringing about EU level AML/CTF supervision

The introduction of a central EU supervisor would represent a significant development in the EU’s AML/CTF supervisory framework. This is considered essential to deliver harmonised standards and promote efficient cooperation between all supervisors.

The proposal grants clear powers to a new central supervisor to oversee the activities of national supervisors and provide them with supervisory support, where necessary. National supervisors would still retain most of the day-to-day oversight responsibilities over entities established in their jurisdictions.

The European Banking Authority’s (EBA) remit has recently been extended to include the monitoring and coordination of AML/CTF efforts for all EU financial services providers and supervisors. Although the EBA may be the likely candidate to take on this new role, establishing a new dedicated body to assume this responsibility has not been ruled out.

The Action Plan lays down a few structural options including whether the central supervisor should be responsible for the financial sector only or if it should develop incrementally and take on additional sectors as it consolidates and proves its effectiveness.

The new central supervisor will take a risk-based approach to supervision, allocating resources based on the outcome of its risk assessments. It would encourage and support national supervisors to deliver a higher quality and consistent risk-based approach in their jurisdictions, which will promote cross-border cooperation in the fight against ML and TF.

4. Establishing a support and cooperation mechanism for FIUs

The plan includes enhancements to the coordination and support for FIUs. It proposes a new FIU mechanism at EU level to address current deficiencies, taking a leading role in coordinating the work of national FIUs. The lack or inefficiency around the exchange of information between all relevant authorities is considered a key matter to address.

5. Enforcing Union-level criminal law provisions and information exchange

Several measures are in place to facilitate the enforcement of criminal law provisions and the exchange of information within the EU. Recent initiatives have bolstered existing obligations which will be monitored by the Commission. There is a commitment by the relevant authorities to enhance the methods for investigating and prosecuting financial crime.

The sharing of information between law enforcement agencies, FIUs, and the private sector is encouraged, to the extent possible, and the Commission plans to issue guidance in Q1 2021 to facilitate information sharing arrangements.

6. Strengthening the international dimension of the EU AML/CTF framework

ML and TF are global threats with no borders. The FATF is responsible for setting the global standards in the fight against these crimes. The Commission has actively contributed to the FATF’s work and is committed to continuing implementing their standards in the EU.

The Action Plan recognises that the EU needs to have a more substantial role in setting such international standards. The Commission may wish to consider incorporating the FATF guidance into EU legislation or take other measures to ensure greater alignment.

Final Remarks

The EU is calling for a realignment of its AML/CTF framework. The plan is to introduce a more standardised EU rule book with a new central supervisor that will focus on addressing the issues identified in the Action Plan.

This is intended to give both supervisors and obliged entities a clearer mandate, helping them focus on the most significant ML/TF risks facing their jurisdictions.

The emphasis needs to be on the practical prevention of financial crime rather than following tick-box processes.

In an attempt to achieve as much harmonisation as possible, we should be careful not to be overly prescriptive. Rules should strike the right balance and be targeted to address the underlying risks and specificities of the EU as a whole, without ignoring those present in individual Member States.

Consideration should be given to an approach which is more principles-based and technology-neutral. On top of the added benefit of future-proofing and allowing some flexibility, this could be conducive to ensuring that all relevant entities are caught by the regime.

The starting point could be to revert to the founding principles of AML/CTF regulation. This would focus on the mitigation of ML/TF risks present in the financial services sector.

Entities need to continue moving towards implementing a risk-based approach that focuses on specific business relationships and transactions. Entities should be comfortable in determining and applying their risk appetite, in alignment to their business models, without fear of regulatory action being taken against them in the event of low-level transactions slipping through the net.

Changes are needed for closer cooperation between relevant authorities and institutions at EU level, but also globally. We hope that the Action Plan will be instrumental in achieving this and that it maximises the effectiveness of the EU’s AML/CTF framework.

Ernest Lima
Partner, XReg Consulting
ernest@xreg.consulting

[1] Europol, “Pandemic profiteering: how criminals exploit the COVID-19 crisis”, March 2020. The European Banking Authority also reminded credit and financial institutions of the importance of effective systems and controls and asked competent authorities to support them in this regard. See “EBA statement on actions to mitigate financial crime risks in the COVID-19 pandemic”.