EU ushers in new anti-money laundering era

The EU is revolutionising its approach to money laundering and the financing of terrorism with the creation of a new bloc-wide body and a raft of new regulations.

In a decisive move designed to beef up its defences against the ever-present scourge of , on Thursday (19 June) the European Union unveiled its comprehensive Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) legislative package. The package, which was formally adopted by the European Parliament in May, establishes a new EU Anti-Money Laundering Authority (AMLA) and introduces stricter regulations aimed at enhancing transparency and accountability across the financial system.

The new regulations mark a major overhaul of the existing AML framework within the EU. Previously, the fight against financial crime was governed by a series of Anti-Money Laundering Directives (AMLDs), which were then transposed into national legislation by each member state. This approach, while engendering some level of consistency, also resulted in variations in implementation across the bloc.

CENTRALISED APPROACH

The introduction of the AMLA represents a shift towards a more centralised approach, with the new body, headquartered in Frankfurt, responsible for directly supervising high-risk financial institutions and crypto-asset service providers. AMLA is empowered to conduct on-site inspections as part of any investigation into potential breaches and has the authority to impose sanctions where necessary.

“The establishment of the AML Authority is a crucial step forward in our fight against financial crime,” stated Commissioner for Financial Stability, Financial Services and the Capital Markets Union Mairead McGuinness. “A single, centralised authority will ensure a more harmonised application of AML/CFT rules across the EU, closing loopholes that criminals might exploit.”

Michelle Kirschner, co-chair of law firm Gibson Dunn & Crutcher’s global financial regulatory group welcomes the initiative, telling ICLG News: “The establishment of the EU AMLA is poised to significantly enhance AML efforts within the EU by providing a unified, consistent and robust framework for combating money laundering. The longer-term benefits include improved coordination, stronger enforcement and advanced monitoring capabilities.”

But the establishment of AMLA does not render member states’ own financial intelligence units (FIUs) redundant. Macfarlanes’ partner Lorna Emson adds context, telling ICLG News in an email: “The AMLA is not looking to replace the current system of FIUs but strengthen them. The AMLA only has direct supervision of certain ‘obliged’ entities in the financial sector exposed to the highest risk of money laundering and which operate in a minimum number of member states. Past those limited number of entities, supervision will remain in the hands of the national supervisory authorities and FIU’s; it is for that reason the majority of the AMLA’s tasks actually deal with coordination and oversight of these units.”

However, Emson adds, “Money laundering is an inherently transnational activity, so having a transnational enforcement mechanism is a pre-requisite in order to respond in kind. There is an obvious inefficiency where parallel AML investigations are occurring in member states without sufficient coordination.”

ENHANCED CUSTOMER DUE DILIGENCE

The new regulations also introduce stricter customer due diligence requirements for banks, investment firms and other financial institutions, which will now be required to conduct more thorough checks on the identity and source of wealth of their clients, particularly for high-risk transactions and individuals. Furthermore, the regulations strengthen the requirement for obliged entities to monitor their clients’ activities on an ongoing basis, including identifying and reporting suspicious transactions that could be indicative of money laundering or terrorist financing.

INCREASED TRANSPARENCY

A key aspect of the new package involves increased transparency around beneficial ownership. The regulations mandate the creation of publicly accessible central registers of beneficial ownership in all EU member states, with these registers disclosing the ultimate owners of companies and trusts, making it more difficult for criminals to hide behind complex corporate structures.

This provision has been met with some concerns from certain sectors, particularly those who argue that it could expose legitimate businesses to unnecessary scrutiny and potential security risks. However, proponents argue that the benefits of increased transparency outweigh the drawbacks, as it will make it significantly harder for criminals to launder illicit funds through shell companies.

REGULATION OF VIRTUAL ASSETS

The AML/CFT package also addresses the growing importance of virtual assets, such as cryptocurrencies, which have previously posed knotty challenges for regulatory authorities. The new regulations introduce specific requirements for , including mandatory registration and customer due diligence procedures.

This provision brings virtual assets under the same AML/CFT regulatory umbrella as traditional financial instruments, closing a gap that could be exploited by criminals seeking to move funds anonymously by leveraging blockchain-based technology.

ALIGNING WITH INTERNATIONAL STANDARDS

The new EU regulations are also designed to align the bloc’s AML/CFT framework with the latest recommendations issued by the Financial Action Task Force (FATF), the global standard-setting body for financial crime. The rules are expected to come into full effect by the end of 2024, with member states responsible for transposing the provisions into national law. Implementation will undoubtedly require significant adjustments for some financial institutions, particularly those accustomed to less stringent national regulations.

Furthermore, the effectiveness of the AML Authority will depend on its ability to craft an atmosphere of cooperation and information sharing between member states, as ensuring smooth coordination between national authorities and the new central body will be crucial in the fight against financial crime. As Gibson Dunn’s Kirschner explains: “The benefits will outweigh the challenges, but only time will tell. It is key that AMLA appreciates that each member state has its own unique financial system and that a one-size-fits-all approach may not be appropriate across the entire bloc.” Nonetheless, Kirschner cautions: “It is possible that issues of national sovereignty and a fear that surrendering competency to AMLA will result in a consequential lesser control over national financial systems. The key test of the effectiveness of AMLA will be its ability to act quickly and take decisive action while minimising bureaucracy and delays.”

ROBUST FIREWALL

The establishment of the AMLA and the introduction of stricter AML/CFT regulations clearly represent a positive step forward and, by adopting a more centralised and harmonised approach, the bloc is serious about creating a robust firewall against money laundering and terrorist financing. But, as Kirschner warns, “the implementation of the AMLA is likely to encounter several challenges [which] can be categorised into operational, technical, political and coordination issues”.

Those challenges – as is so often the case – often boil down to the purely practical and administrative. Sefika Sahin, managing associate with Addleshaw Goddard in Germany, tells ICLG News in an email: “Crucially, AMLA will also keep an eye on the resources available to national AML/CFT supervisors. If needed, it may demand improvements in technology or more staff. However, there’s often a shortage of the necessary people and technology, especially with so many regulatory changes happening right now. So, it will be fascinating to see how much information technology and artificial intelligence will be used to make processes automatic.”

Picking up the tech theme, Macfarlanes’ Emson highlights how the AMLA will need to be on top of its game, warning: “Trying to enforce AML processes in the age of digital transactions and cryptocurrencies is a problem well established supervisory authorities are already struggling with, and will require considerable innovation and technological integration on the part of the AMLA.”

BIG RISK

Financial institutions operating within the EU will need to start readying themselves for the implementation of the new AMLA regime sooner rather than later. Sahin cautions: “AMLA is due to commence operations in mid-2025. Having a full range of supervisory powers, it is conceivable that it will shut down entire business units and prohibit financial institutions from onboarding customers because they fail to manage risks appropriately. Banks that don’t start preparing now are taking a big risk.”

It is undeniable that European lawmakers have financial malfeasance squarely in their sights, and these are far from victimless crimes. Money laundering not only deprives national exchequers of much-needed revenue, it also underpins the illegal drugs trade, forced prostitution and people trafficking. The AMLA, and the regulations it is set to enforce, should therefore be welcomed, but whether or not the new regime has the resources and the teeth to keep pace with the criminals remains to be seen.

DERIVATIVES

Tackling money laundering is not the only financial crusade currently occupying the minds of EU legislators, with the European Commission also proposing stricter rules for identifying and reporting over-the-counter (OTC) . This follows the Markets in Financial Instruments Regulation (MiFIR) Review, which clarified that pre- and post-trade transparency requirements for non-equity instruments now apply to both exchange-traded and OTC derivatives. Previously, post-trade disclosure obligations for investment firms only applied to OTC derivatives. The new rules maintain this requirement for OTC trades, but remove it for derivatives executed on regulated exchanges. Transaction reporting, however, remains mandatory for both types of derivatives.

The proposed regulation focuses on OTC interest rate swaps and credit default swaps, outlining the specific reference data needed to comply with the enhanced transparency requirements. Additionally, it details the complete set of identifying data to be assigned to a specific OTC derivative for these swap types.

The regulation will not be applied until September 2024, giving firms the time and opportunity to update their internal systems to accommodate the new data requirements, while aligning with the MiFIR Review’s timeline for launching a consolidated reporting system for OTC derivatives trades. A consultation on the regulation remains ongoing.

Article Credit: https://iclg.com/news/20907-eu-ushers-in-new-anti-money-laundering-era