Fight against money laundering and terrorist financing: Commission assesses risks and calls for better implementation of the rules

(Olga DeLawrence, Unsplash)

This article is brought to you in association with the European Commission.

The European Commission is today adopting a Communication and four reports that will support European and national authorities in better addressing money laundering and terrorist financing risks. The Juncker Commission put strong EU rules in place with thefourth and the fifth Anti-Money laundering directives and reinforced the supervisory role of the European Banking Authority. The reports stress the need for their full implementation while underlining that a number of structural shortcomings in the implementation of the Union’s anti-money laundering and counter terrorist financing rules still need to be addressed. Today’s package will serve as a basis for future policy choices on how to further strengthen the EU anti-money laundering framework.

Frans Timmermans, First Vice-President said: “We must close off all opportunities for criminals and terrorists to abuse our financial system and threaten the security of Europeans. There are some very concrete improvements which can be made quickly at operational level. The Commission will continue to support Member States in this, whilst also reflecting on how to address the remaining structural challenges.”

Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said: “A credible framework for preventing and fighting money laundering and terrorist financing is essential to maintain the integrity of the European financial system and reduce risks to financial stability. Yet, today’s analysis gives more proof that our strong AML rules have not been equally applied in all banks and all EU countries. So we have a structural problem in the Union’s capacity to prevent that the financial system is used for illegitimate purposes. This problem has to be addressed and solved sooner rather than later.”

Věra Jourová, Commissioner for Justice, Consumers and Gender Equality said: “We have stringent anti-money laundering rules at EU level, but we need all Member States to implement these rules on the ground. We don’t want to see any weak link point in the EU that criminals could exploit. The recent scandals have shown that Member States should treat this as a matter of urgency.”

The Towards a better implementation of the EU’s anti-money laundering and countering the financing of terrorism framework Communication gives an overview of the four reports published today: the supranational risk assessment report provides an update of sectorial risks associated with money laundering and terrorist financing. The assessment of recent high-profile money laundering cases in the financial sector, the Financial Intelligence Units and the interconnection of central bank account registries’ reports analyse the shortcomings in current anti-money laundering supervision and cooperation, and identifies ways to address them.

Assessment of money laundering risks across the internal market

The supranational risk assessment report is a tool to help Member States identify and address money laundering and terrorist financing risks. It is adopted every two years by the Commission since 2017.

The report shows that most recommendations of the first supranational risk assessment have been implemented by the various actors. However, some horizontal vulnerabilities remain, particularly with regard to anonymous products, the identification of beneficial owners and new unregulated products such as virtual assets. Some of these will be addressed by the upcoming transposition of the fifth Anti-Money Laundering Directive. The report also recalls that Member States still have to fully transpose the fourth Anti-money laundering directive. The Commission calls upon Member States to implement the directive fully and follow the recommendations of this report. This would improve cooperation between supervisors, raise awareness among obliged entities and provide further guidance on beneficial ownership identification.

Assessment and lessons from recent money laundering cases

Following a number of exchanges with the European Parliament and a request from the Council in December 2018, the European Commission has analysed ten recent publicly known cases of money laundering in EU banks to provide an analysis of some of the current shortcomings and outline a possible way forward.

While not being exhaustive, the report shows that:

Banks, in a number of the cases analysed, did not respect effectively or sometimes did not comply at all with anti-money laundering requirements. They lacked the right internal mechanisms to prevent money laundering and did not align their anti-money laundering/counter terrorism financing policies when they had risky business models. The findings also highlighted a lack of coordination between such policies, either at the level of individual entities or at group level.

• National authorities responded with significant differences in terms of the timeliness and effectiveness of their supervisory actions. There were major divergences in terms of prioritisation, resources, expertise and available tools. More particularly with respect to the supervision of a banking group, the supervisors had a tendency to rely excessively on the anti-money laundering framework of host Member States and this impinged on the effectiveness of supervisory actions in cross-border cases at EU level. In addition, the division of responsibilities led to ineffective cooperation between anti-money laundering authorities, prudential authorities, Financial Intelligence Units and law enforcement authorities.

These deficiencies point to outstanding structural issues in the implementation of EU rules, which have been addressed only in part. The regulatory and supervisory fragmentation, coupled with the diversity of tasks, powers and tools available to public authorities, create weaknesses in the implementation of EU rules. Shortcomings in anti-money laundering policies and supervision are more prominent in cross-border situations, both within the EU but also in relation to non-EU countries. While significant actions have been taken by banks and supervisors, more remains to be done. There is, for instance, a need for further harmonisation across Member States and strengthened supervision.

The need for reinforced cooperation between Financial Intelligence Units (FIU)

Financial Intelligence Units play a key role in identifying money laundering risks in each country. The EU FIU’s Platform, which is an expert group of the Commission, has greatly improved the cooperation over the last years, but the Commission has identified remaining issues:

• Access by FIUs to information: due to their different status, powers, and organisation, some FIUs are not able to access and share relevant information (financial, administrative and law enforcement).
• Information sharing between FIUs remains insufficient and is often too slow.
• IT tools: FIUs also sometimes lack the proper IT tools to efficiently import and export information to/from the FIU.net.
• Limited scope of the EU FIUs’ Platform, which cannotproduce legally-binding templates, guidelines and standards.

The report suggests some concrete changes, such as a new support mechanism, that would further improve the cooperation between Financial Intelligence Units (FIU) across the EU.

Interconnection of central bank account registries

The report on the interconnection of central bank account registries sets out a number of elements to be considered for a possible interconnection of bank account registries and data retrieval systems. The Commission suggests that such a system could possibly be a decentralised system with a common platform at EU level. To achieve the interconnection, legislative action would be required, following consultation with Member States’ governments, Financial Intelligence Units, law enforcement authorities and Asset Recovery Offices.

Next steps

Today’s reports will inform the future debate on further action in this area, including with regard to the obligations of financial institutions and the powers and tools necessary for effective supervision. The current degree of integration of the banking market will also require further work on the cross-border aspects of the anti-money laundering/terrorist financing framework. The Commission will continue to monitor closely the implementation of EU anti-money laundering rules by the Member States.

Background

Under the Juncker Commission, the EU has strengthened the anti-money laundering/ counter terrorist financing framework by adopting the fourth Anti-Money Laundering Directive that had to be transposed by Member States by June 2017. The Commission is assessing the transposition of the fourth Anti-Money Laundering Directive, while also working to verify that the rules are correctly implemented by Member States. The Commission has launched infringement procedures against a majority of Member States as it assessed that the communications received from the Member States did not represent a complete transposition of this Directive.

The fifth Anti-Money Laundering Directive will improve the powers of Financial Intelligence Units, increase the transparency around beneficial ownership information, as well as regulate virtual currencies and pre-paid cards to better prevent terrorist financing. Member States are due to transpose the Directive into national law by January 2020.

Following the uncovering of several money laundering cases in 2018, the Commission set up in May 2018 a joint working group together with the European Supervisory Authorities and the European Central Bank. On the basis of the working group’s recommendations, the Commission issued in September 2018 a Communication on strengthening the AML and prudential frameworks and new rules to strengthen the role of the European Banking Authority. This led to the reinforcement of the anti-money laundering and terrorist financing dimension in prudential banking legislation through the adoption of the fifth Capital Requirements Directive in December 2018.