EU Proposals to Strengthen the AML Framework and Potential Impact on Financial Market

In July 2021, the European Commission presented a package consisting of the following four legislative proposals to strengthen the EU anti-money laundering/counter-terrorism financing (AML/CTF) framework:

• The creation of the Anti-Money Laundering Authority (AMLA) to coordinate national authorities.
• New regulation on AML/CTF.
• 6th Anti-Money Laundering Directive (6th AMLD).
• Revision of Regulation 847/2015 on information accompanying transfers of funds.

The aim of the proposal is to enhance the enforcement system to improve the detection of suspicious transactions and activities, to make the anti-money laundering/counter-terrorism financing (AML/CTF) regime in the EU more effective and efficient. The European Commission has highlighted that the EU AML/CTF legal framework is implemented by national laws that transpose the EU directive, often causing delays in the transpositions and lack of convergence. It also stated that “there is no central coordination body at EU level, which hinders cooperation between national supervisors and Financial Intelligence Units (FIUs), which is essential for a fully effective regime".

This regulatory analysis will explore the main points of the proposals and their potential impact on the financial market, including payment services providers, in Europe. It will also take a look at the UK's review of its AML/CTF regulatory and supervisory regime, published just two days after the EU’s.

Background

In July 2019, the European Commission adopted the communication COM/2019/360 Towards better implementation of the EU’s anti-money laundering and countering the financing of terrorism framework and four reports, intending to inform the debate on how to improve the AML/CTF legal framework. It considered the introduction of AML regulation that would be directly applicable in EU countries, as well as the creation of a European supervisory authority that would ensure a consistent approach within the financial market. The communication also highlighted the need “for a stronger mechanism to coordinate and support cross-border cooperation and analysis by Financial Intelligence Units”. The reports underlined that inconsistency in the application and interpretation of Directive 2015/847 within member states has led to weakness in terms of AML, especially in cross-border transactions and creating extra costs for entities.

In May 2020, the European Commission adopted an action plan for a comprehensive EU policy on preventing money laundering and the financing of terrorism based on the following six pillars:

1. Effective implementation of existing rules.
2. A single EU rulebook.
3. EU-level supervision.
4. A support and cooperation mechanism for financial intelligence units.
5. Better use of information to enforce criminal law.
6. A stronger EU in the world.

The pillars aim “at improving the EU's overall fight against money laundering and terrorist financing, as well as strengthening the EU's global role in this area. When combined, these six pillars will ensure that EU rules are more harmonised and therefore more effective.”

Introduction of New EU AML Supervisory Authority

The proposal of the regulation establishing the authority for AML/CTF aims to implement pillars 3 and 4 of the action plan. This new European authority, the Anti-Money Laundering Authority (AMLA), will be a legal entity who “will directly supervise and take decisions towards some of the riskiest cross-border financial sector obliged entities”. It will also coordinate national supervisory authorities to ensure the consistent approach to and application of supervisory standards across the jurisdictions, including through the development of reporting templates that are common across European FIUs.

The authority will draft regulations and implement technical standards, guidelines and recommendations falling within its competence, and be a point of reference in AML/CTF matters for the European Commission.

The EU budget and fees levied from supervised obliged entities will fund the authority.

Proposal for a Regulation on AML/CTF

A proposal for a regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, along with the proposal for a directive and a proposal to amend Regulation (EU) 2015/847, aims to implement pillar 2 of the action plan, establishing an EU single rulebook. To overcome divergence in the implementation of the AML/CTF directives, the regulation incorporates all the rules that apply to the private sector and make a series of changes. The changes include:

• The obliged entities are expanded to include crypto-asset service providers, crowdfunding platforms and migration operators.
• Internal policies, controls and procedures and customer due diligence (CDD) measures are clarified.
• Beneficial owners' requirements are made simpler and more efficient.
• Requirements for reporting suspicious transactions are clarified and new requirements for personal data processing are introduced.
• Limit of €10,000 to large cash payments, allowing member states to provide lower thresholds.
• Ban to provide and keep anonymous crypto-asset wallets.

Proposal for a 6th AMLD

The 6th AMLD will replace the existing Directive 2015/849/EU, with the aim of making national financial intelligence units’ (FIUs) practices more consistent and enhance cooperation between them. To achieve this main objective, the proposal:

• Clarifies the tasks and powers of the FIUs.
• States that the FIU.net system, “a robust, secure and sophisticated platform for FIUs, that enables them to act as one, without the necessity to become one”, will also be provided with a legal basis and, together with a framework, will improve cooperation between them.
• Contains rules to clarify the feedback FIUs should receive from the new authority and the feedback they should give to obliged entities, to ensure FIUs and obliged entities are aware of how the information is used.
• Requires payment service providers (PSPs), electronic money institutions (EMIs) and crypto-assets providers, under Article 5 of the proposal, to appoint a point of contact in another member state, if that is where their head office is situated and where they provide their services by virtue of the right of establishment or the freedom to provide services. The Anti-Money Laundering Authority (AMLA), within two years from the entry into force of the directive, shall also develop draft regulatory technical standards and submit them to the commission for adoption, establishing the conditions under which appointing a point of contact is deemed necessary.
• Clarifies “[t]he powers of the registers of beneficial ownership ... to make sure that [FIUs] can obtain up-to-date, adequate and accurate information” and “an interconnection of the bank account registers is provided for”.
• Provides requirements for the processing of certain categories of personal data (Article 53 of the proposal).

Revision of Regulation 2015/847/EU

The proposal to update Regulation 2015/847/EU on information accompanying transfers of funds and certain crypto-assets (recast) aims to expand the regulation’s scope, which currently only applies to the transfer of funds, which are defined as “banknotes and coins, scriptural money and electronic money” to include crypto-asset transfers. Specifically, it introduces obligations for these providers to gather and make available to the relevant authorities data related to the originators and beneficiaries of the virtual assets transfers, provided by FATF Recommendation 16 and known as the “travel rule”. “‘Crypto-asset’ means a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology” and “‘crypto-asset service provider’ means any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis”, as provided respectively by Article 3, Paragraph 1, points 2 and 8 of the commission proposal for a regulation on markets in Crypto-assets. This also corresponds to the definition of a virtual asset provided by FATF’s Recommendations.

Guidelines on role of AML/CTF compliance officers

On August 2, 2021, the European Banking Authority (EBA) launched a public consultation on new guidelines on the role, tasks and responsibilities of AML/CTF compliance officers, which will close on November 2, 2021.

The guidelines aim to establish a common understanding of compliance and management roles, duties and tasks in the financial sector with regard to AML/CTF, and establish a more uniform and harmonised approach, as reports suggest “that the requirements set out in Directive (EU) 2015/849 have been implemented unevenly across different sectors and Member States, and that they are not always applied effectively”.

UK

In July 2021, shortly after the European Commission introduced its package, the UK government launched two consultations: the Review of the UK’s AML/CTF regulatory and supervisory regime; and Amendments to the ML/TF and Transfer of Funds (Information on the Payer) Regulations 2017 Statutory Instrument 2022.

AML/CTF Supervision

The first call for evidence “supports the review which will aim to assess the UK’s anti-money laundering and counter terrorist financing regulatory (the Money Laundering Regulations and Office for Professional Body Anti-Money Laundering Supervision (OPBAS) regulations) and supervisory regimes”. In the UK, there are 25 AML/CTF supervisors, competent per sector. The document recognises that this has positive aspects, such as “diverse and innovative products are assessed by experts that understand their sectors and are effectively managed”. However, the downside is that “different supervisors can take different approaches to measuring and managing risks amongst their supervised populations”, potentially producing different treatments for entities in different sectors and increasing the chance of the UK financial system being used by criminals. The review will consider different models, including expanding the OPBAS’ remit to coordinate the statutory supervisories or decreasing the number of supervisory authorities.

Crypto-Assets and Travel Rule

The second consultation aims at ensuring alignment with FATF’s international standards, while enhancing and clarifying the UK’s AML framework. In relation to crypto, similar to the EU proposal to review Regulation 847/2015, Chapter 6, among other details, proposes an approach to implement the travel rule in the UK legislation, with the requirements applying to crypto-asset exchange providers and custodian wallet providers operating in the UK. The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 define crypto-asset exchange providers as “a firm or sole practitioner who by way of business provides one or more of the following services, including where the firm or sole practitioner does so as creator or issuer of any of the cryptoassets involved, when providing such services:

1. Exchanging, or arranging or making arrangements with a view to the exchange of, cryptoassets for money or money for cryptoassets.
2. Exchanging, or arranging or making arrangements with a view to the exchange of, one cryptoasset for another, or
3. Operating a machine which utilises automated processes to exchange cryptoassets for money or money for cryptoassets”.

Additionally, hese regulations define “custodian wallet provider” as “a firm or sole practitioner who by way of business provides services to safeguard, or to safeguard and administer:

1. Cryptoassets on behalf of its customers, or
2. Private cryptographic keys on behalf of its customers in order to hold, store and transfer cryptoassets, when providing such services”.

FATF Recommendation 16 has been implemented in the UK for bank accounts through the Funds Transfer Regulation (FTR); however, according to the consultation document, a new piece of legislation is necessary to implement it for crypto-assets, requiring, among other details, cryptoasset providers to make the data related to the originators and beneficiaries of the transfers available to the Financial Conduct Authority (FCA), HM Revenue & Customs, the National Crime Agency (NCA) or the police upon written request.

Conclusion

The EU AML package aims mainly at achieving a uniform and homogeneous approach in member states, via measures including a regulation directly applicable to member states and a new authority with supervision powers directly exercisable on obliged entities and with coordination functions of the national FIUs. To date, lack of uniformity in the application and interpretation of AML rules has led, according to EU reports, to loopholes in the EU financial system, of which criminals have taken advantage. The EU consultation on guidelines for AML compliance and management roles also aims to establish a common ground in terms of expectation from these roles in the financial sector across all member states. Similarly, in the UK, the two calls for views aim to strengthen the AML/CTF framework and relate to topics covered by the EU package, the inclusion of crypto-asset providers as obliged entities, the implementation of the travel rule and supervision.

Next steps

The European Parliament and European Council will discuss the package, which will follow the legislative process. The AMLA is expected to be operational in 2024 and will commence its direct supervision, after the 6th AMLD is transposed into national law.

The UK’s consultations close at 11:45pm on October 14, 2021.