Despite several adjustments of the EU anti-money laundering (AML) framework, the current regime has not been able to prevent a series of major money laundering scandals, which occurred during the last few years in the Baltics and Nordic countries. Identified weak points of the framework include its diverging national implementation, as well as the lack of a central supervisory body at EU level. Recent pandemic-induced increases in cyber crime and virtual money laundering have underlined the need for reform.
Comprehensive AML legislative package in first quarter of 2021
In November 2020, member states’ finance ministers agreed to the Council’s and Commission’s plans to create a single AML rulebook, an EU-level supervisory body and a coordination and support mechanism for member states' financial intelligence units in the upcoming year. The package of legal proposals is expected to be presented in the first quarter of 2021, most likely March/April. The plans are based on the Commission’s Action Plan of 7 May 2020 for a comprehensive Union AML policy.
The redo has three main pillars, covered below.
- Another recast of the AML Directive (AMLD6), accompanied by a regulation that will be directly applicable. Currently, member states tend to apply AML rules in a wide variety of manners. Diverging interpretations of the rules have created loopholes in the system that the Commissions now intends to close via a more integrated AML framework. Divergence will be minimised in a number of areas, including types of obliged entities, customer due diligence requirements, internal controls, and reporting obligations. However, it is not yet clear which parts will be transferred to the new regulation and which parts will remain in AMLD6.
- A new AML authority to be established at the centre of an EU AML supervisory system with direct supervisory powers over financial institutions. Currently, it is up to the member states to individually supervise the AML rules and, as a result, gaps in supervision have developed. A more integrated supervision could facilitate AML compliance and enforcement in the way the Single Supervisory Mechanism (SSM) did for prudential supervision.
- Full integration of national financial intelligence units (FIUs). National FIUs play a critical role in identifying transactions and activities that could be linked to criminal activities. The Commission will propose an EU mechanism to help further coordinate and support the work of these bodies.
New EU AML watchdog with direct supervisory powers over risky banking groups
A recently leaked presentation by the Commission’s DG FISMA has revealed the EU’s ambitious plans for the new EU AML watchdog.
The Commission intends to shift the focus of the current domestic AML supervisory perspective to a Union-wide perception. Spotted regulatory and supervisory fragmentation appears ill-adapted in light of ever increasing cross-border activity in the Union and centralised prudential supervision in the Banking Union. For this purpose, an EU-level supervisor will be established, with direct supervisory powers over the riskiest cross-border institutions. In clearly defined exceptional situations, the new supervisory body shall also have the authority to take over supervision from a national supervisor.
The obvious approach is to set up the new AML authority in analogy to the SSM. The Commission considers the SSM JST model to be the best matching direct supervisory concept. Thus, similar to the powers of the ECB in the SSM, the responsibilities of the new EU AML supervisor will include the right to general inspections, including requesting information, examining records and conducting on-site and off-site supervision, as well as the right to directly impose supervisory measures and administrative sanctions upon the supervised institutions. Further, the new authority will have certain powers to oversee and direct national AML supervisors.
After several discussions, the Commission has now seemingly decided to go for a newly established EU supervisory body, instead of empowering an existing body such as the EBA or the ECB. This solution seems to be most cost-efficient and preferred by stakeholders. Details regarding the place of incorporation have not yet become public.
Through the creation of the SSM, the EU managed to create a unitary body and to harmonize at least some of the diverse supervision structures in the member states. Something similar could be done in the domain of AML. A new, overarching authority has the potential to act much more quickly, which would be an improvement over the time-consuming process that has to be employed to foster compliance under the current EU AML regime.
However, the future EU AML watchdog will have to be fully integrated into all cooperation structures between the relevant institutions at EU and national level, such as the EBA, the ECB, national competent authorities and national FIUs.
Outlook and remaining challenges
The AML reform can only be effective through a coordinated and unified approach between all EU member states. Yet, to date, not all EU member states have even fully implemented the current EU AML framework. In 2020, the Commission opened infringement proceedings against several member states that failed to notify transposition of the fourth and of the fifth Anti-Money Laundering Directive.
For multinational institutions, the upcoming AML reform could have a major advantage: they would no longer need to adjust their AML system to the particularities of each national regulator, but instead can expect a (largely) single standard across the EU.
However, achieving such a level playing field will take some time. At least two years of preparation may be necessary once the relevant legislation has been ratified. Assuming a Commission proposal in the first half year of 2021 and 18 months of legislative discussion, the establishment of new AML authority could take place in the first half of 2024.