ECB Sets Out Wishlist For EU AML Legislation

February 23, 2022
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With the EU’s new anti-money laundering (AML) legislation hurtling towards reality, the European Central Bank (ECB) has greeted proposals for a new AML authority but has been more cautious about crypto definitions and incoming cash limits.

With the EU’s new anti-money laundering (AML) legislation hurtling towards reality, the European Central Bank (ECB) has greeted proposals for a new AML authority (AMLA) but has been more cautious about crypto definitions and incoming cash limits.

The EU’s AML package has continued to garner praise in Europe, with the ECB offering its endorsement to the European Commission’s key objectives, the AMLA and the AML regulation (AMLR1).

“Some things matter to you, even if you are not directly responsible for them,” said Édouard Fernandez-Bollo, a member of the ECB’s supervisory board in a blog post.

It is not part of the ECB’s mandate to supervise banks’ compliance with rules to prevent money laundering and terrorist financing. “Yet money laundering and terrorist financing risks pose a danger to the sustainability of banks and can seriously damage people’s trust in the banking sector,” he pointed out.

“This is why we really need a strong European anti-money laundering authority,” Fernandez-Bollo, a former legal counsel at the Banque de France, continued. “It would also help us as prudential supervisors because banks that struggle with issues in this area often suffer from structural deficiencies in their internal controls and governance arrangements, which do fall within the scope of ECB Banking Supervision.”

The ECB remains keen on the development of an AMLA. This would be the EU’s first AML watchdog and among other things, will have direct oversight over the EU’s largest financial institutions. It will also act as a coordinating body for national competent authorities and offer support to the trading bloc’s 27 member states.

“The ECB stands ready to cooperate with AMLA and contribute to the legislative process, inter alia, by sharing its experience as a Union-level prudential supervisory authority, where this experience may be relevant for building Union-level AML/CFT supervision,” its opinion, published alongside the blog, says.

The opinion of the ECB stresses the need for the authority to have teeth, perhaps raising concerns about pushback from member states who will lose some national powers to the new authority once it enters into force.

“The ECB would welcome an increase in the scope of AMLA’s direct supervisory tasks to cover a wider subset of entities that are directly supervised by the ECB,” the central bank says.

This, it feels, could have the potential to achieve a higher level of consistency in the anti-money laundering/counter-terrorism financing (AML/CTF) supervisory assessments of such institutions, and therefore also help to further support the prudential supervision for which some of those assessments serve as inputs.

Additionally, the ECB would support amending the criteria for identifying the selected obliged entities, so that the process results in a wider pool of regulated firms to be directly supervised by the AMLA that could include those headquartered in each of the member states and foster a common supervisory culture and convergence of AML/CTF supervisory practices. “This will also decrease the risk of arbitrage,” the opinion argues.

Crypto definitions

The EU’s new AML regulation has been welcomed for replacing the term "virtual currencies" with "crypto-assets".

“The term ‘virtual currencies’ could lead to misperceptions as to the nature of those types of assets, which are not currencies,” the ECB opinion says.

The ECB raised concerns about the alignment between the definition of crypto-assets in the AML regulation and the definition created by the Financial Action Task Force (FATF).

According to the ECB, it is “unclear whether all types of virtual assets, as defined in the FATF Recommendations, are covered by the definition of crypto-assets used in AMLR1”.

As it stands, the FATF Recommendations define a virtual asset as “a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF Recommendations.”

The AML regulation, however, uses the definition crafted in the Markets in Crypto Assets legislation and dictates that legally “crypto-asset means a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”.

So although the FATF definition is technologically neutral, the definition adopted by the EU is limited to virtual assets based on a distributed ledger or similar technology.

“It seems at least theoretically possible that virtual assets could also be based on another technology, in which case they would not seem to be covered by AMLR1.”

If a broader and technology-neutral definition is considered by the co-legislators to ensure compatibility of the EU’s framework with the FATF Recommendations, the ECB points out that policy choices would have to be made also with regard to digital representations of value, which might need to be exempted from the scope of the proposed regulation.

Cash

The AMLR1 introduces a prohibition on people trading in goods and providing services accepting or making payments in cash exceeding €10,000 or the equivalent amount in other currencies.

It also allows member states to retain lower limits or, following a consultation of the ECB, adopt lower limits.

“It is for the Union legislator to ascertain that this prohibition does not unduly interfere with the fundamental right to property as provided for in Article 17 of the Charter of Fundamental Rights of the European Union,” the ECB says.

Meanwhile, the opinion cautions that it is important that such restrictions are evidence-based and comply with the principle of proportionality, being appropriate for attaining the legitimate objective and not going “beyond what is necessary”.

The ECB does, however, appear to accept the cash ceilings' current status.

“The ECB furthermore welcomes, despite the fact that an analysis or impact assessment seems to be missing, that the threshold for the intended prohibition of consumer-to-business and business-to-business transactions is to be set sufficiently high to avoid a factual impact leading to the abolition of euro banknotes,” the opinion says.

Cash continues to play an important role in society, it notes, and the ECB is committed to “safeguarding its existence”.

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