Following the Danske Bank scandal, which resulted in more than €200 billion in suspicious transactions passing through the European Union’s financial system unnoticed, the need for a revision of the block’s Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) rules became imperative. In May 2020, the Commission announced its Action Plan, aiming to establish a Union policy on combatting money laundering. Its primary aims were:
(1) to ensure the effective implementation of the existing EU AML/CFT framework;
(2) to establish an EU single rulebook on AML/CFT;
(3) to bring about EU-level AML/CFT supervision;
(4) to establish a support and cooperation mechanism for FIUs;
(5) to enforce EU-level criminal law provisions and information exchange;
(6) to strengthen the international dimension of the EU AML/CFT framework.
On July 20th, 2021, the Union took a leap forward, with the introduction of its Anti-Money Laundering Package (‘AML Package’). This is a set of legislative proposals which, if adopted, will revolutionise the way the EU addresses money laundering risks. The AML Package consists of two new regulations, a new AML Directive, and the proposal for the revision of an already existing Regulation on the transfer of funds. This article provides a brief overview of the Package’s most important characteristics, accompanied by commentary on certain aspects of the Proposal.
Anti-Money Laundering Authority
At the epicentre of the proposed reform is a Regulation establishing an Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA). The new Authority will be responsible for both directly supervising some of the Union’s largest financial players as well as aiding and monitoring national Financial Intelligence Units (FIUs), the state authorities responsible for the receipt, analysis and transmitting of suspicious activities reports filed by obliged entities of the private sector. To achieve its objectives, the Authority will be entitled to adopt technical standards and guidelines to carry out of its responsibility to implement EU AML legislation.
As part of its mandate to monitor financial institutions, AMLA will be entitled to carry out reviews and assessments on individual entities or groups of companies. The Authority will also be obliged to maintain an up-to-date list of the entities directly supervised, in order to monitor and address any deficiencies they may have in their AML frameworks. Regarding its implementation mechanisms, AMLA will have the ability to adopt binding decisions, sanctions, and administrative measures against directly supervised entities.
As for as monitoring obliged entities indirectly, this will be achieved through the Authority’s supervision of national FIUs. However, AMLA will not be limited in simply monitoring the work of national authorities. Instead, it will also be responsible for providing technical aid to FIUs, including IT and artificial intelligence services, or any other kind of necessary expertise.
Lastly, at an EU level, AMLA will be taking some of the tasks carried out by already-existing EU agencies. These include taking over the management of the AML database maintained by the European Banking Authority, and that of the secure communication network between FIUs, currently maintained by Europol.
Regarding its implementation, the European Commission aims to have AMLA established by 2023, so that its activities could commence on the following year. For its first two years, the Authority will be limited to indirect supervision through national FIUs. It is expected that this new body will not be fully operational until 2026, the year in which the Authority will complete its staffing and direct supervision of some of the Union’s high-risk financial entities will begin. It remains questionable why the Commission has not pushed for a quicker adoption and implementation, since it recognises how problematic the current regime is. One must bear in mind that its ultimate effectiveness will largely depend on the adoption of the Package’s remaining legislative pieces, the most important of which being the single AML/CFT Rulebook.
EU Single Rulebook
The proposed Regulation on the prevention of the use of the financial system for the purposes of money laundering aims to establish a new EU Rulebook on AML. This will replace obligations of private entities, currently emanating from the 5th AML Directive (5AMLD). The rationale behind this reform is to eliminate any regulatory arbitrage that is being observed between private entities doing business in different member states, due to the varying ways they have implemented 5AMLD. The present fragmented approach came at a cost for national regulators, some of whom had difficulties in adapting these standards into their respective legal systems. More importantly though, the adoption of this Rulebook, will alleviate the current granularity, allowing market players to reduce their costs when offering cross-border services, since a single set of standards will now be applicable throughout the bloc. It is expected that this development will prevent private entities from taking advantage of any fragmentation within the Union, whilst protecting the integrity of the EU’s internal market.
The Rulebook will introduce a series of changes to the AML measures currently applicable. One of the most important reforms is the clarification of a series of risk management procedures. These include the beneficial ownership framework, which is being elaborated upon, the clarification of the definition of politically exposed persons, and the more extensive detailing of processes such as customs due diligence measures (CDD). With regards to CDD, this reform will require member states to adopt a harder stance on third countries which have inefficient AML standards, so that enhanced CDD will be applied harmoniously throughout the Union. These third countries will be categorised into grey, and black lists, in a system that closely resembles that of the Financial Action Task Force (FATF). States on the former list will be subject to due diligence measures that are tailored to the specific risks associated with that country. Contrastingly, states on the latter list will be subject to enhanced due diligence measures, and other countermeasures designed to address the continuous weaknesses in their AML policies.
It is also important to note that this proposed regulation will require nominee shareholders and directors to satisfy additional disclosure requirements. A further innovative aspect of the Rulebook is the introduction for the first time of a maximum threshold on cash transactions, that will be set on €10,000. Additionally, the proposed Regulation will set new requirements on the processing of personal data that will be in harmony with the Union’s data protection legislation.
Further, the Rulebook will contain provisions that will update the EU’s standards on money laundering through cryptoassets. This will be achieved by redefining both the assets regulated as well as the service providers associated with them. Starting with cryptoassets, the EU has taken the much-needed step of introducing a new definition on the assets that should be subjected to AML measures. Under the previous definition, introduced through the 5AMLD, only payment tokens were regulated. This was criticised by practitioners and academics alike, who argued that all types of cryptoassets had the same potential of being used as a means to launder assets. Indeed, the exclusion of utility and investment tokens from the scope of the 5AMLD was out of line as compared with the global standards set by FATF. Under the current proposal though, this gap will be filed as all three types of tokens will be included in its ambit. Importantly, the proposed Regulation does not introduce its own definition of cryptoassets. Instead, it adopts the definition found in another legislative piece, the Markets in Cryptoassets Regulation that is expected to be adopted in 2023. This is a decision that must be welcomed as it will further enhance an EU-wide uniformity on the treatment of this developing class of assets.
Turning to the service providers that will be added to the list of obliged entities, these include crowdfunding platforms and crypto-to-crypto exchanges. This is another welcomed move as, under the 5AMLD, only fiat-to-crypto exchanges were regulated. The expansion of the list of obliged entities signals an effort at a Union level to keep up with technological and market developments, whilst maintaining its technological neutrality.
This Regulation is expected to be adopted and will work in tandem with the establishment of AMLA, and with the remaining measures included in the AML Package. All these changes are expected to strengthen even further the effectiveness of the Union’s AML measures. Nevertheless, one must pose the question: could these be too little too late on behalf of the Union, given the rapidly developing nature of cryptoassets?
As mentioned above, the Rulebook will govern the AML obligations of private entities. Concerning the obligations of national authorities, these will be set through a new, 6th AMLD. This Directive will repeal the 4th and 5th AMLD and will redefine the mechanisms to be put in place by the Member States for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing. This legislation aims to integrate the recommendations made by FATF on issues such as the assessment and mitigation regarding evasion risks of targeted financial sanctions. The EU expects that the introduction of more precise legislation on the competencies of national authorities will better facilitate the implementation of the new AML measures at a Union level and will aid in ensuring the efficiency of AMLA.
Lastly, the AML Package aims to revise the 2015 Regulation on the Transfer of Funds. This proposed amendment will ensure the transmission of certain information throughout the payment chain. Though this was already the case for transfers of fiat currencies and electronic money, this amendment will add cryptoassets to that list of assets. Given that cryptoassets have the same, if not greater potential to act as instruments for money laundering, this was a much-needed change in the law that will enable both national FIUs and the newly formed AMLA to ensure the traceability of money flows, further enhancing their AML weaponry.
Why does it matter?
Though these measures seem like a series of helpful proposals, one needs to bear in mind the actual cost of money laundering in order to comprehend the potential usefulness of the AML Package. According to the Commissioner for Financial Stability, Financial Services, and the Capital Markets Union, Mairead McGuinness, suspicious transactions amount to 1.5% of the EU’s GDP, which roughly translates to €133 billion. This seemingly unpredictable movement of vast amounts of profits could destabilise the Union’s financial system and threaten its integrity. This necessitates the common legislative and regulatory action of member states in order to combat this issue. Up until now, this was done through Directives, a course of action that has proven less effective than what was needed. Varying levels of compliance with the AML Directives, lead to regulation shopping, and increasing costs for cross-border activities by corporations. Moreover, the use of Directives meant that certain member states could limit themselves to mere paper-compliance while others chose to take firmer action. This approach had the additional effect of fragmenting the Union’s financial lawscape, which prevented the EU from reaping the benefits of the common market to its maximum.
Contrastingly, the proposed AML Package aims to rectify those drawbacks. The imposition of a uniform set of rules, and the creation of an EU-wide authority to enforce them, could remove any existing inconsistencies between the approaches of member states. This comes with the prospect of better combatting the aforementioned negative effects of money laundering, thus making the EU a better market to do business in and allowing the Union’s financial sector to flourish and compete even better with other key jurisdictions. One of the most promising features of this reform, is its modernising approach, which will bring the EU at the same page with the current standards set by FATF, while also addressing the risks posed by emerging technologies like cryptoassets. However, one must still recognise that the AML Package remains a proposal that has still a long way prior to its full implementation. It is possible that by that time, certain aspects of the reform, such as its approach on cryptoassets, will be outdated due to their swiftly evolving nature. Nevertheless, the AML Package should still be viewed positively as the structural reforms it will bring about will offer the potential to address any of its shortcomings.
Recent scandals in the EU’s financial and banking sectors have highlighted the weaknesses of the EU’s AML framework and have forced its hand to react by introducing reforms. The measures contained in the proposed AML Package will bring about a series of changes that will revolutionise the Union’s regulatory framework. This includes both the way member states counter money laundering, in terms of substantive measures, and the structural characteristics of that AML system. The creation of AMLA, and the introduction of the single European rulebook on money laundering, has the potential to remove the deficiencies of the current system, which were mostly centred around its fragmented approach. Though the introduction of the AML Package is a positive reform overall, regulators should bear in mind that the introduction of technologies such as cryptoassets make AML a rapidly developing field which could make certain aspects of the Package outdated by the time of its full implementation.