The European Union is set to amend its comprehensive anti-money laundering (AML) and combating the financing of terrorism action plan (CFT) regulation in the combat against illicit activities. The action plan is comprised of six key pillars: effective implementation of existing rules; a single EU rulebook; EU-level supervision; a support and cooperation mechanism for financial intelligence units; better use of information to enforce criminal law; and, a stronger EU in the world.
Released on May 7 2020, the EU intends to deliver on its action plan during 2021. This primer will address the rule changes and some of the key issues with the plan.
What are some of the key changes set out in the plan?
The most significant aspect of the action plan is turning major requirements from directives into regulation.
“The previous AML legislative packages have been directives, that’s now being moved to regulation,” said Che Sidanius, global head of financial crime and industry affairs at Refinitiv. “The rules will be directly transposed to national legislation, meaning that upcoming AML legislative package will be applied entirely across the EU. There is no debate or wiggle room between how these rules apply for different jurisdictions in different contexts. That is a major change.”
This will help streamline processes across EU countries. “Money laundering directives existed before, but the adherence to it wasn’t unified,” said Kathleen Harris, partner at Arnold and Porter. “When people are reporting on their own national risk assessment you were seeing gaps in those processes. This plan is trying to get member states to behave all in the same way.”
However, the action plan does not form part of the AML/CTF rules in itself. “The action plan sets out the measures that the Commission plans to adopt to ensure that the rules and regulations are harmonious on both an EU and international level,” said Lisa Lee Lewis, head of risk consulting EMEA advisory at Norton Rose Fulbright.
The main regulations addressed in the action plan include: the 5th Anti-Money Laundering Directive (5AMLD); the 4th Anti-Money Laundering Directive (4AMLD); and the whistle-blower protection Directive.
How does it differ from currently established AML rules in the EU?
The 5th AML Directive (set out in the action plan) extends the scope to additional sectors including crypto-assets and custodian wallet providers, estate agents, precious metal dealers and art dealers. Member states are also required to create ‘politically exposed person’ (PEPs) lists.
“Additionally, enforcement mechanisms will be bolstered because it is widely believed that the global policemen for the fight against financial crime (including in Europe) is the US; and Europe wants to address this,” said Sidanius.
What were the motivations behind the changes?
“There was a recognition by the EU commission and member states that the current fight against financial crime was not effective,” Sidanius continued. “In fact, damaging the perception of the EU as a safe place of doing business.”
In 2013, Danske Bank was in the middle of a money laundering scandal when it became known that over €200 billion ($227 billion) flowed through its Estonian subsidiary undetected.
“Danish supervisory risk council said Danske Bank not only threatened the integrity of Danish banking, but it threatened the sovereign risk rating of the entire country,” added Sidanius. “The size of banking assets in Europe are multiple times higher than GDP so if one of the large banks collapsed it would have incredible consequences, not only for the country but to the rest of Europe.”
The new rules will also help prevent divergence in implementation of AML provisions across the EU. “The main motivation of the European Commission’s action plan is to try to further harmonise and remedy a fragmented and disparate application of the current rules,” said Lewis.
What are some of the potential compliance challenges?
While the new rules are set to harmonise implementation and enforcement, this does not mean that there will not be teething issues.
“The difference in application of the AML/CTF framework across member states has resulted in a fragmented legislative landscape across the EU, leading to additional costs and burdens for many firms operating on a cross border basis,” added Lewis.
“Examples of such measures are the identification of additional obliged entities like crowdfunding platforms or diamond dealers, the national definition of PEPs, the granting of powers to FIUs to freeze assets and the introduction of limitations to payments in cash,” she added.
This unequal legislative landscape will add compliance challenges.
Lewis continued: “Inadequate cooperation among competent authorities (FIUs, supervisors, law enforcement and customs and tax authorities), both domestically and across borders, can create potential loopholes that can be exploited by criminals.”
Additionally, AML regulation may come into conflict with other key pieces of legislation namely data privacy acts. “A significant challenge will be navigating conflicting regulation for example data privacy,” said Sidanius. “AML requires process personal data vs data protection restricts the processing of personal data. It’s not quite clear how organisation will navigate those issues.”
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