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Lawmakers in Brussels have held a public hearing on the EU’s latest financial crime package and how it can be made effective. Meanwhile, the European Banking Authority's (EBA) new report highlights why the current one is not.
In a meeting organised by members of the European Parliament, anti-money laundering (AML) experts from European and global institutions shared their views on the EU’s latest financial crime initiative.
This looks set to, among other things, introduce an EU-level authority, new rules for crypto-assets, a cash transaction ceiling and the first-ever EU-wide regulation, as opposed to a directive.
Overall, the response to the package has been positive due to its focus on increased alignment among the 27 member states in the trading bloc.
“I very warmly welcome the general objective of the AML package to further harmonise the EU’s rules,” said Marcus Pleyer, president of the Financial Action Task Force, noting that “fragmentation and different approaches to supervisory practise is still seen in Europe”.
After the scandals of the past, the international expectations are very high for a uniform anti-money laundering/counter-terrorism financing (AML/CTF) regime in Europe, he continued, noting that for the EU to be on the right track, information sharing, asset recovery and a risk-based approach need to be the priorities for the new AML package.
This package provides considerable improvement to the EU’s AML approach, said Guillaume Valette-Valla, head of TRACFIN, France’s financial intelligence unit (FIU). “We would acquire new tools for cooperation. For instance, the adoption of bank registers and beneficiaries would be able to be shared with our sisters throughout Europe.”
“Harmonisation with regards to data sets which could be given to the authorities could really help us enhance cooperation and speed it up,” he said.
The new package will bridge gaps that have existed in relation to cooperating in the EU, he said. “Moreover, it will really enable us to start acting, particularly as far as crime is concerned, when it is low scale and low spectrum. You always think of money laundering as being highly complex transactions with the involvement of legal entities but for small scale organised crime, these joint studies and analyses would be of interest.”
The EU’s new single rulebook and authority are building blocks in the right direction, agreed Ilze Znotina, head of Latvia’s FIU.
“Unfortunately, since the recent invasion of Ukraine, the stakes of the EU’s AML system have risen dramatically,” she pointed out. “Our capacity to cooperate in this area is already a matter of not just national but European security.”
With this in mind, Znotina outlined three significant points in the AML package. “First, AML is no longer a matter of financial integrity, it is a matter of the integrity of the EU’s security as a whole.”
“A gap in a single jurisdiction opens the whole of the EU up to not just crime, but money that is increasingly used to support operations by our adversaries,” she said.
More pressingly, for sanctions to be meaningful, authorities must be more willing and able to cooperate, she said. “This means further harmonisation not just to facilitate the activities of FIUs, but also law enforcement networks that are supporting them. This is lacking in the AML package.”
To underscore AML policy, criminalisation needs to be the preference over civil liability, she said, and without cooperation, the system will fail, she said.
The EU’s new AML package is currently subject to the co-legislative process, which can take years. However, dealing with AML is a priority for the EU’s parliament, which consistently critiqued the trading bloc’s management of financial crime and particularly that of the EBA.
With the invasion of Ukraine as well, there is a new motivation throughout Europe to increase the enforcement protocols that can be levied against figures who are close to the Russian regime.
This has already been the case in the UK, with the passing of the Economic Crime Bill.
Not effective just yet
As the EU gears up for a new AML supervisory regime, a new report from the EBA reviews existing supervision.
The EBA found that most competent authorities in its sample were committed to strengthening their approach to AML/CTF supervision.
Among the common challenges that domestic regulators face is the use of the same set of risk factors for all banks and, in some cases, for all financial institutions. This meant that significant differences in banks’ business models could not be considered or assessed, the supervisory authority pointed out.
As a result, the risk associated with specialist banks, including those with high money laundering/terrorism financing (ML/TF) risk business models and customer types, were not always captured or assessed by competent authorities.
The EBA also found that cooperation with FIUs was not always systematic and often ineffective.
“These challenges have hampered the implementation of an effective risk-based approach to AML/CTF supervision,” the EBA warned.
In many cases, competent authorities’ entity-level risk assessment methodology did not consider or include ML/TF risk factors for banks that had been identified at the national level through the national risk assessment, and some competent authorities were unable to explain the meaning of individual risk factors and the reason for their inclusion in the questionnaire. Often their methodology was unclear.
According to the Paris-based regulator, this meant that these competent authorities found interpreting the results from their entity-level risk assessment difficult.
One competent authority, the EBA observed, had identified a number of risk factors that it used as an indicator of the quality of banks’ AML/CTF systems and controls.
For example, it used the number of customers rejected prior to the establishment of a business relationship per year as an indicator of robust AML/CTF controls.
In this instance, the competent authority had not considered whether this could also be an indicator of unwarranted de-risking — a problem that the EBA and other EU authorities are struggling to deal with at the moment.
In two member states, some banks, due to their business model, were unable to answer all the questions in the competent authority’s annual risk assessment questionnaire.
Competent authorities in both of these member states provided waivers to these banks and, in the absence of completed risk assessment questionnaires, did not assess ML/TF risks associated with these banks systematically or at all. Subsequently, the EBA’s review team found that some of these banks were providing products and services to customers associated with high ML/TF risk.
In spite of weaknesses in the EU’s overall economic crime response, the EBA did find that several competent authorities did take steps to put in place a holistic approach to tackling ML/TF risks in their banking sector. For example, it was noted that changes introduced after the recent transposition of relevant EU legislation, such as greater enforcement powers, have started to make a difference.
Furthermore, AML/CTF teams in almost all competent authorities that the EBA reviewed have grown significantly and are set to expand further. It also noted that cooperation with prudential and other EU AML/CTF supervisors has become a clear priority for all, in line with the EBA’s regulatory framework.
