In the wake of numerous money laundering scandals involving European based banks, a provisional deal agreed by the Council presidency and the European Parliament on the supervisory framework for European financial institutions lays the ground work for a tougher approach.

The post-Brexit regulatory landscape for financial institutions in the UK remains unclear but the EU is continuing efforts to improve and strengthen the controls it has in place to deal with money laundering and terrorist financing.

These efforts come in the wake of a succession of scandals involving European based banks and financial institutions. The revelation that Danish lender Danske Bank's Estonian branch was used to launder in excess of $30 billion of Russian money and the fining of Dutch bank ING for its inadequate anti-money laundering controls has led many to question whether existing pan-European controls have the teeth to effectively police national institutions.

What has been agreed?

The Romanian Presidency of the Council of the EU and the European Parliament announced on the 21 March 2019 that they have reached a provisional deal on proposals to review the European system of financial supervision in the area of money laundering and anti-terrorist financing.

The current system consists of the European Central Bank (ECB) and European Systemic Risk Board (ESRB) which are responsible for the financial system and general financial stability in Europe as a whole. Beneath this sits three separate European supervisory authorities that deal with different aspects of the financial sector:

  • European Banking Authority (EBA)
  • European Insurance and Occupational Pensions Authority (EIOPA)
  • European Securities and Markets Authority (ESMA)

The current framework was born out of the financial crisis and is designed to help create greater stability and more effective enforcement of anti-money laundering rules across each member state. What was created was a single set of regulations which were agreed and implemented at EU level.

The overall aim of the reforms is to improve (as opposed to radically redesign) the existing structure. The recognition that greater alignment of the supervisory authorities is needed has led to the commitment to establish coordination groups at EU level to help manage both on-going governance efforts but also to enhance enforcement.

The EBA plays a key role in anti-money laundering efforts at an EU level. The agreement would see a strengthening of the powers of the EBA to actively combat money laundering. The EBA would be given the power to request national authorities investigate possible breaches and enhanced powers to collect intelligence and information from national authorities. It will also be asked to carry out detailed risk assessments and work with Non-EU countries to build better cooperation on cross border issues.

The EBA's current approach to its investigative role is often criticised for being too reactive. This is demonstrated by the recent opening of a formal investigation into breaches of EU law by the Estonian and Danish national authorities in relation to the Danske Bank scandal. The decision to investigate came after the scandal had occurred and only after a request from the European Commission requesting such an investigation be opened.

The ESRB and ECB both play key supervisory roles within the financial system. The ESRB has a particular focus on maintaining stability across the financial system and in providing detailed risk analysis and planning. The ECB, despite its broad mandate and fiscal significance, has a limited scope of powers when it comes to anti-money laundering. The agreement recognises the vital role both these organisations play in preventing money laundering and looks to create greater intelligence sharing about on-going money laundering issues. There is also recognition of the benefits for these organisations of enhanced collaboration with national authorities who often hold vital information about on-going issues or situations of concern.

Next steps

The deal is only provisional and the technical details of the proposals will need to be agreed and confirmed by EU ambassadors. The Parliament and the Council will then need to adopt the finalised agreement before its terms become operational.

DLA commentary

A key issue with the existing framework is not a lack of rules and regulations but a lack of effective enforcement. This long awaited announcement is a move towards improvements in EU wide regulation of the financial services sector but technical negotiations on the details of the proposals have not yet taken place. The ratification and then ultimately how effectively the new policies are implemented and policed will be the benchmark of success. A research paper prepared by Brussels based think tank Bruegel highlighted the significant loopholes that are created by the existing frame work of an integrated single market approach that is reliant on national authorities for intelligence and enforcement. This means, (as demonstrated by recent scandals) the system is only as strong as its "weakest link".

Despite calls from prominent members of the EU policy establishment such as French Finance Minister Bruno Le Maire for a "single EU wide agency" to guarantee effective enforcement of anti-money laundering rules the current proposals do not go nearly as far as some in Brussels would like.

An EU public prosecutor's office that is able to investigate and prosecute wrongdoing across the EU member states remains an unlikely proposition. The ability of the EU to effectively enforce anti-money laundering policy will likely continue to be dependent on the efforts of national authorities.