On 7 May 2020 the European Commission published a Communication on an Action Plan for a comprehensive Union policy on preventing money laundering and terrorist financing. The Action Plan is one of the points listed in the Commission’s 2020 Work Programme which sets out how it will turn President Ursula von der Leyen’s Political Guidelines into tangible outcomes. The Commission is inviting stakeholders to put forward their views until 29 July 2020 on the measures set out in the Action Plan, by replying to a questionnaire.
The Plan aims to lead towards a more harmonised AML/ CFT rulebook and an EU-level supervisor that works in close cooperation with national competent authorities, with a view to ensuring high quality and consistent supervision across the Single Market. To this end, it proposes a wide-ranging set of actions based on six pillars which will be rolled out through the coming months:
- ensuring the effective implementation of the existing EU AML/CFT framework,
- establishing an EU single rule book on AML/CFT,
- bringing about EU level AML/CFT supervision,
- establishing a support and cooperation mechanism for FIUs,
- enforcing EU-level criminal law provisions and information exchange,
- strengthening the international dimension of the EU AML/CFT framework.
1. Ensuring the effective implementation of the existing EU AML/CFT framework
The Commission will continue to monitor transposition of the AML Directives at national level and act where it finds infringements or ineffective application of the rules. In Q2 2020 it will propose country-specific recommendations on AML/CFT. Through this year the Commission will closely monitor the setting up by Member States (MS) of the central bank account mechanisms and the beneficial ownership registers and ensure that they are populated with high-quality data.
Where warranted, the Commission will continue to provide technical support to MS in implementing necessary reforms in order to close some of the most important loopholes in the EU AML/CFT system. Loopholes at MS level can range from insufficient staffing in the competent authorities, to shortcomings in the application of the risk-based approach and in mitigating risks from the misuses of shell companies, golden visas and citizenship schemes.
The Commission expects the European Banking Authority (EBA) to make full use of its strengthened mandate, particularly in investigating Directive implementation breaches by national authorities. In a press release published on 7 May, the EBA welcomed the Commission’s Action Plan and expressed its commitment to use its strengthened mandate to lead, coordinate and monitor the EU financial sector’s fight against ML/ FT. It also expressed its willingness to advise on strengthening the AML/ CFT framework and establishing a new European AML Authority.
2. Establishing an EU single rule book on AML/CFT
In Q1 2021 the Commission will propose a more harmonised set of rules to address diverging rule interpretations at MS level and therefore close existing loopholes in the system that can be exploited by criminals.
The Commission considers that, while the AML/ CFT regulatory framework is far-reaching and comprehensive, there is still a degree of diverging implementation at MS level that results in a fragmented overall application. In some cases, MS set additional requirements that go beyond those in the EU AML/ CFT framework, such as the inclusion of crowdfunding platforms or diamond dealers in the list of obliged entities, heterogeneous limitations to cash transactions or the granting to FIUs of powers to freeze assets. The Plan expresses concern that fragmented implementation is creating additional costs and burdens for those providing cross-border services, or leading to regulatory shopping.
EU-level rules also lack sufficient detail in some areas, such as in the division of responsibilities with regard to cross-border issues, that lead to inadequate cooperation among competent authorities (FIUs, supervisors, law enforcement and customs and tax authorities), both domestically and across borders. Together with divergences in the regulatory approach to supervision and in the application of the risk-based approach, this is creating potential loopholes that can be exploited by criminals. Furthermore, inconsistency in the application of the rules is inhibiting the cross-border provision of services, thus undermining the functioning of the Single Market.
The Plan identifies the need for EU AML/CFT legislation to become more granular, more precise and less subject to diverging implementations. The Commission will make legislative proposals in Q1 2021 to deliver a single rulebook for AML/CFT, based on a thorough impact assessment. This rulebook could take the form of a directly-applicable Regulation that establishes harmonised provisions on the list of obliged entities, customer due diligence requirements, identification of PEPs, internal controls, reporting obligations, as well as more explicit rules on beneficial ownership registers and central bank account mechanisms. More harmonised requirements could also be introduced on the structure and tasks of supervision in respect of all obliged entities and the tasks of FIUs.
The Action Plan also envisages that the scope of AML/ CFT rules be widened to address both the implications of technological innovation (such as inclusion of VFA service providers in the EU AML/ CFT remit) and developments in international standards. Other measures might include facilitating the use of digital identification for remote customer identification and verification of customer identity as well as to establish business relationships remotely. Speeding up access by law enforcement authorities and FIUs to financial information and facilitating cross-border cooperation are also on the agenda, as are provisions to facilitate administrative freezing for FIUs and powers to oblige financial institutions to follow up and execute recall requests in order to combat cyber financial crime and fraud.
The Commission also plans to give due attention to mitigating risks arising from investor citizenship and residence schemes and from risky sectors identified through the SNRA exercise. Finally, the Action Plan should lead to better clarity on how AML/CFT rules link up with other legislation in the financial sector, such as the Bank Recovery and Resolution Directive, the Deposit Guarantee Schemes Directive and the Payment Account Directive. The financial services frameworks may be further developed to ensure that prudential supervisors have concrete obligations to share information with their AML/CFT counterparts and for the fit and proper tests required in financial services legislation apply stricter AML/CFT conditions.
In Q1 2021 the Commission will table a proposal to set up an EU-level AML/ CFT supervisory system, probably including the establishment of an EU-level supervisor. Again, this is intended to address the issue of fragmented application of EU rules at MS level that leads to gaps in how they are supervised and applied. The proposal will be based on an impact assessment of options regarding its functions, scope and structure.
AML/CFT supervision within the EU currently is dependent on the MS. Supervision quality and effectiveness has proven to be uneven across the EU, due to significant variations in human and financial resources, skills and importance given to the task at MS level. The EU also lacks effective arrangements to tackle AML/CFT incidents involving cross-border aspects.
To address these issues, in 2021 the Commission will propose the establishment of an EU-level supervisory system. A number of potential supra-national supervisory models are discussed in the Action Plan and the Commission is among others considering whether to enhance the EBA’s AML/ CFT remit beyond the financial services sector (unlikely) or to set up a dedicated AML/ CFT supervisory body with horizontal responsibility across all relevant economic sectors.
The AML/ CFT supervisor will in any case have to be equipped with the necessary AML/CFT competences, investigative capacity and powers, and decision-making structure to ensure effective application of the single rulebook. Functions being mooted for the supervisory body include carrying out on-site inspections to assess the effectiveness of the AML/CFT framework in MS and to enhance coordination with supervisors from outside the EU.
The preferred structure and system will be presented at the beginning of 2021 together with an options impact assessment study. A formalised process will define the interplay and respective powers of EU and national supervisors. The national supervisors will continue to play a central role in the system and will remain in charge of most day-to-day supervision.
4. Establishing a support and cooperation mechanism for FIUs
In Q1 2021, the Commission will propose to establish an EU coordination and support mechanism for FIUs in the EU. In Q4 2020 the Commission will take over the management of the FIU.net network from Europol and eventually hand it over to the body responsible for the EU coordination and support mechanism.
The Action Plan identifies several weaknesses in information exchange and cooperation at both national and cross-border levels. It expresses concern that the chain of information flow, from transmission of reports by obliged entities of suspicious transactions and by other authorities to FIUs, to FIU communication with criminal enforcement authorities, is sometimes disjointed and inconsistent.
At MS level, the use of templates for reporting is limited and where templates exist they tend to be sector-centric, most notably for banks. Some FIUs also lack the necessary IT resources to effectively process and analyse large masses of information. FIU feedback to obliged entities on their reporting is limited at the best of times, and absent in cases of reports concerning another MS. As a result, obliged entities are not adequately tooled to hone their preventive measures. On an institutional level, authorities such as customs rarely if ever receive feedback from FIUs on reports they submit.
FIU.net, the EU decentralised network system for information exchange among FIUs managed by Europol, requires significant software, hardware and functionality upgrades. Improvements are required for the tool to help FIUs conduct more joint analysis of cross-border cases, especially in the context of the ever-increasing complexity of money laundering cases.
The Commission is proposing to establish an FIU coordination and support mechanism at EU level to address the identified issues. This mechanism is intended to lead coordination of the work of national FIUs, which should include identification of suspicious transactions with a cross-border dimension, joint analysis of cross-border cases, identification of trends and factors relevant to assessing the risks of money laundering and terrorist financing at national and supranational level. The mechanism should also give guidance on standards to implement the AML/ CFT rulebook’s provisions dealing with FIUs. It will also promote training and capacity building for FIUs.
The Commission moots a number of possible model entities that could manage the EU coordination and support mechanism. The task could be given to an existing EU agency or to the newly established EU supervior (see point 3 above). Another option could be to transform the existing FIU Platform from an informal Commission committee into a comitology committee that provides input for the Commission to adopt measures through delegated or implementing acts. Yet another possibility is to set up a formal network of FIUs with a specific mandate and set of tasks.
5. Enforcing Union-level criminal law provisions and information exchange
By Q1 20201, the Commission will issue guidance on the role of public-private partnerships in data sharing in the field of judicial and police cooperation. The Commission will consider requesting the European Data Protection Board to issue an opinion on data protection aspects of information sharing in this context.
The Action Plan document notes progress made to date in this area, such as the 5AMLD coming into force and the 6AMLD that will be transposed by December 2020. Directive 2014/42/EU on the freezing and confiscation of criminal proceeds is in force and the Commission will report in 2020 on its implementation and on how the role of asset recovery offices can be improved. Regulation (EU) 2018/1805 on the mutual recognition of freezing orders and confiscation orders will come into effect by end 2020 and will make the freezing and confiscation of criminal assets across the EU quicker and simpler.
Law enforcement authorities have been given enhanced use of financial information for serious offences through direct access to the central bank account mechanism, whilst cooperation between law enforcement authorities, FIUs and Europol has been improved. Europol has stepped up its efforts in order to tackle economic and financial crime with the operational launch of the European Economic and Financial Crimes Centre (EFECC) in 2020.
The European Public Prosecutor’s Office, due to launch operations around the end of 2020, will be competent to investigate and prosecute money laundering offences linked to crimes against the EU budget. The Commission funds the Anti-Money Laundering Operational Network (AMON), which connects relevant law enforcement authorities. MS can also make use of the support of Eurojust to facilitate cross-border cooperation in support of anti-money laundering prosecutions.
The Action Plan identifies an opportunity in encouraging public-private partnerships to make better use of financial intelligence through the sharing of information among law enforcement authorities, FIUs and the private sector. At present the nature of information might limit its sharing and such sharing must comply with data protection law where it involves personal data. The current EU AML/CFT framework already requires FIUs to share typologies and trends with the private sector, and this obligation could be clarified and enhanced to facilitate some types of PPPs and improve information sharing.
The Commission considers it essential to have guidance and share good practices for PPPs in relation, in particular, to antitrust rules, data protection and fundamental rights. This applies to information sharing on typologies and trends and to sharing operational information on intelligence suspects by law enforcement authorities to obliged entities for the purposes of monitoring the transactions of these suspects.
6. Strengthening the international dimension of the EU AML/CFT framework
The Commission published a revised methodology on the assessment of high-risk third countries in parallel with the Action Plan. . It also issued amendments to the list of high-risk third countries is set out in the Annex of Commission Delegated Regulation (EU) 2016/1675 6 that is now better aligned with the FATF list. The Commission Action Plan expresses its intention to increase its involvement in the FATF so that the EU can play a stronger role globally
The Commission maintains that the measures in the Action Plan will be more effective if the EU plays a stronger role in setting and enforcing international standards and speaks with a unified voice in the FATF. The Commission aspires to play a more central role to raise international standards to those adopted in the EU, such as in the case of transparency of beneficial ownership. Similarly, the Commission will actively support efforts to address new and emerging risks at global level.
As a first step, an enhanced coordination mechanism among the Commission and MS should be established for EU representatives to act in unison in the FATF. Eventually, the Commmission envisages that it could be tasked to represent the EU in the FATF, in line with Treaty provisions.
Where it identifies third countries through the new methodology that pose a specific threat to the EU’s financial system, the Commission will seek to engage with them with a view to develop, where possible, an action plan to address those concerns. It will also seek to use its geographically expansive trade policy to seek commitments from the EU’s trade partners to implement AML/CFT measures. Finally, it is developing the EU Global Facility on Money Laundering and Terrorism Financing, a technical facility to assist third countries to raise their technical capacity and address weaknesses in their domestic AML/CFT frameworks.
Article written by Mr Stefan Briffa.
This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.