Financial Regulatory Observer - December 2018: Europe's expanding AML remit

White & Case LLP

White & Case LLP

Anti-money laundering policy and regulation continue to evolve in the European Union, but the reality of central federal authority remains some way off.

The European Commission has proposed new initiatives to further harmonise anti-money laundering (AML) supervision in the EU, although it is unclear whether these proposals will still come into force before the European elections next year. We expect to see further legislative attempts at increased European harmonisation in this field, although it seems unlikely that one central European anti-money laundering agency will be introduced in the short term.

Fighting effectively against financial crime, including tax crime, requires a proper implementation of the new rules and a stronger coordination between authorities

The Fifth AML Directive, which came into force on 9 July 2018, was a response to recent terrorist attacks across the EU and the offshore leaks investigated in the Panama papers. EU Member States have until January 2020 to implement the directive into national law.

The Directive introduced four key changes to the AML regime:

  • Member States should ensure that registers of ultimate beneficial owners of companies and other legal entities become accessible to the general public (but not the register of ultimate beneficial owners of trusts, which will still require demonstration of a legitimate interest)
  • The AML regime is extended to cover additional service providers such as electronic wallet providers, virtual currency exchange service providers and art dealers. Further specifications regarding the scope of application of the Fifth AML Directive with respect to tax advisors and estate agents are provided;
  • The threshold for identifying holders of prepaid cards is lowered to €150
  • Member States will have to implement enhanced due diligence measures to monitor suspicious transactions involving high-risk countries more strictly

The Fifth AML Directive also includes the following measures:

  • Registries of politically exposed persons (PEPs): Member States are required to issue and keep an up-to-date list indicating prominent public functions for identification purposes. The Commission will compile a single list of all prominent public functions (based on the information received from the Member States, and also including the prominent public functions at EU level) and make this list public
  • Centralised bank account registries: The Fifth AML Directive obliges Member States to establish centralised national bank account registries or electronic data retrieval systems, which allow for identification of every natural or legal person holding or controlling payment and bank accounts or safe-deposit boxes held by a credit institution within their territory. National competent authorities should have unrestricted access to this information in order to perform their duties under the AML Directive.

December 2020
The deadline for EU Member States to implement the Sixth AML Directive into national laws

Towards the Sixth Directive

On 12 November 2018, the Sixth AML Directive was published in the official Journal of the EU. This directive aims to combat money laundering with the use of criminal law and enables more efficient and swifter cross-border cooperation between Member States. The Sixth AML Directive will need to be transposed into national law by 3 December 2020.

It seems unlikely that one central European anti-money laundering agency will be introduced any time soon

The Sixth AML Directive includes the following important changes:

  • Introduction of a unified list of predicate offences: The definition of criminal activities that constitute predicate offences for money laundering should be sufficiently uniform in all Member States. Member States should ensure that all offences that are punishable by a term of imprisonment to be out in the draft directive are considered predicate offences for money laundering. In addition, the draft directive includes a list of 22 offences that must be considered as predicate offences. It is noteworthy that in the European parliament draft this list includes "tax crimes relating to direct and indirect taxes, as laid down in national law".
  • Criminal liability for organisation: The draft directive requires the extension of criminal liability for money laundering to organisations. Legal persons can be held liable where there is a lack of supervision. Member States must have in place effective, proportionate and dissuasive sanctions, such as the temporary or permanent exclusion from access to public funding, including tender procedures, grants and concessions, the temporary or permanent disqualification from the practice of commercial activities, placing under judicial supervision, a judicial winding-up order or a permanent and temporary closure of establishments that have been used for committing the offence. It will thus become of vital importance for financial institutions to strengthen their governance and oversight arrangements.
  • Increased international cooperation: According to the draft directive, a Member State shall inform the Commission where it decides to extend its jurisdiction to money laundering offences that have been committed outside its territory where (a) the offender is a habitual resident on its territory; and (b) the offence is committed for the benefit of a legal person established on its territory. Where a money laundering offence falls within the jurisdiction of more than one Member State and where any of the Member States concerned can validly prosecute on the basis of the same facts, the Member States concerned shall cooperate in order to decide which of them will prosecute the offender, with the aim of centralising proceedings in a single Member State.

Stronger frameworks

Following recent incidents, the European Commission (EC) reviewed the effectiveness of the supervisory architecture and invited the chairpersons of the European Supervisory Authorities (ESAs) to establish a joint working group "to initiate a collective reflection on the ways of improving the current framework for cooperation between AML and prudential supervisors".

Effective AML policy and enforcement in EU Member States are essential for the overall soundness, integrity and reputation of the entire financial system

On 12 September 2018, the EC issued a communication on strengthening the Union framework for prudential and anti-money laundering supervision for financial institutions.

The EC indicates that fighting effectively against financial crime, including tax crime, needs a proper implementation of the new rules (including the Fifth AML Directive) and a stronger coordination between the different authorities.

In its communication, the EC sets out a strategy based on the analysis carried out by the joint working group. As part of the proposed strategy, the European Commission is proposing a number of short-term legislative and non-legislative initiatives, as well as a number of longer-term objectives.

The number of offences included in the new AML directive.

In the short term, the EC observes that certain provisions in sectoral legislation, and in particular in the Capital Requirements Directive (CRD), may have an impact on AML matters. In this respect, the EC refers to the confidentiality regime in the CRD in combination with the absence of a clear obligation for the prudential supervisors to cooperate with the AML authorities and bodies.

The EC is proposing to amend CRD in two respects. Firstly, in the context of enhancing information exchange requirements, all relevant authorities and bodies that receive, analyse and process information should be explicitly covered by confidentiality waivers. Also, with respect to the duty of cooperation, relevant authorities should have the possibility to refer disagreements on cooperation to the EBA.

The EC is also proposing a number of measures aimed at strengthening supervisory convergence.

These measures include clarifying in more detail the European Banking Authority's (EBA) anti-money laundering-related tasks. As such it proposes that the EBA should carry out periodic independent reviews on anti-money laundering issues, with expert input from the proposed Anti-Money Laundering Standing Committee. Where a review reveals serious shortcomings, it is proposed that the EBA should inform the European Parliament, the Council and the Commission.

The EBA should also carry out regular risk assessment exercises to test strategies and resources in the context of anti-money laundering risks. Finally, the enforcement capacity of the EBA should be strengthened. It is proposed that the EBA should be able to request national supervisors to investigate cases where financial sector operators are alleged to have breached their obligations under the AML Directive and should under certain conditions be able to adopt decisions directly addressed to financial sector operators. The EC also proposes to reinforce cooperation with third-country authorities.

Proposed short-term non-legislative initiatives include the expansion of the Risk-Based Supervision Joint Guidelines to specify common procedures and methodologies, more stringent reviews of the activities of anti-money laundering authorities and a more proactive role for the EBA in the establishment of contacts with third-country authorities. Clarifying the division of tasks between the European Central Bank and the national competent authorities is also highlighted as a point of attention.

In the longer term, the debate on a central European AML authority is ongoing. While it is unlikely that such a body will be established before the next elections, it is clearly a continuing topic of debate.

The EC indicates that "in particular, transformation of the Anti-Money Laundering Directive into a Regulation, which would have the potential of setting a harmonised, directly applicable Union regulatory anti-money laundering framework should be considered". Indeed, differences in national implementation can still cause friction in the regulatory framework.

In addition, regarding the supervisory architecture, the communication indicates: "Different alternatives could also be envisaged in order to ensure high-quality and consistent anti-money laundering supervision, seamless information exchange and optimal cooperation between all relevant authorities in the Union. This may require conferring specific anti-money laundering supervisory tasks to a Union body".

Effective AML policy and enforcement in EU Member States are essential given the potential negative impact of shortcomings in AML enforcement within individual institutions and individual Member States on the overall soundness, integrity and reputation of the entire financial system.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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