AML: KEEPING FINANCE CLEAN
In advance of the Politico Panel today with José Manuel Campa, Chairperson of the European Banking Authority and Sven Giegold from the European Parliament regarding “AML, Keeping Finance Clean”, there are a range of questions to be discussed:
- How much power should a single AML authority at the European level have, and how would it interact with national supervisors?
- What is needed to reinforce the current AML framework? Is the current framework fit to tackle issues emanating from fintech companies?
- How do innovative corporate structures in payments markets interfere with AML supervision?
- Which EU member states are the best at implementing AML recommendations?
How do innovative corporate structures in payments markets interfere with AML supervision?
There are various precedents for issues where complexity breeds obfuscation. These could be from the mirror trades conducted by Deutsche Bank in Russia (Deutsche Bank, Mirror Trades, and More Russian Threads), complexity in Supply Chain Finance (Greensill crisis leaves bank’s founder facing sudden fall to earth) or Wirecard’s transactions in Asia (Wirecard: Scandal-hit firm says missing €1.9bn may not exist)
Which EU members are the best at implementing AML recommendations?
The key issue here is that many of the new institutions from overseas are being created in relatively friendly locations such as the Baltic states. These will be less experienced and less well capitalized. (Lithuania: riding the wave of KYC/AML growth)
Single EU AML Authority
Scandals with Danske Bank in the Baltics and Nordics have led to huge public backlashes and highlighted the problems with European money-laundering regulatory arbitrage. What are the benefits of creating a European version of Fincen? The EBA has previously called for a single AML rulebook (EBA calls on the EU Commission to establish a single rulebook on fighting money laundering and terrorist financing | European Banking Authority). In November, the EU agreed to create a single enforcement agency. (“EU council formally agrees to create new bloc-wide AML regulator with direct authority to review, penalize institutions – CFCS”). This is more like a version of OCC
Akin to Fincen, The European Union will create a pan-EU financial crime compliance guard to directly monitor countries’ regulators and financial institutions. This new entity will have the power to conduct direct reviews, solicit information and impose fines. The agreement will form the basis for more formal legal instruments that are expected to come into effect early next year.
Akin to the OCC, The Council also supports the establishment of a supervisory authority at EU level with direct supervisory powers for a select number of high-risk companies, as well as the power to oversee a national supervisory authority in clearly defined and exceptional situations, a drastic move that is likely to be a drastic move Embarrassing countries and shocking others.
European Banking Authority 2021 Biennial Report on Money-Laundering Risks
Helpfully, when answering these questions, we can look at a new report which the EBA is obliged to publish every 2 years (“The EBA highlights key money laundering and terrorist financing risks across the EU | European Banking Authority”, full PDF).
Risks arising from weaknesses in CFT systems and controls: The EBA is most concerned by non-bank financial institutions: “Credit institutions, payment institutions, bureaux de change, e-money institutions and credit providers (other than credit institutions) are the sectors that appear to be most vulnerable to this risk.”
Risks arising from de-risking: as is ever the case, shutting down institutions such as those similar to Hawahallah mechanisms simply drives risks underground. The EBA guidance recognises this: (“that the application of a risk-based approach does not require firms to refuse or terminate business relationships with entire categories of customers that are considered to present high ML/TF risk”).
Risks arising from supervisory divergence: given that “approaches to assessing ML/TF risk in the sectors under their supervision remain inconsistent across the EU”. The EBA recommends “the European Commission enshrines a common approach to ML/TF risk assessments for financial sector supervisors in directly applicable European Union law”
Risks associated with crowdfunding platforms: for some reason “crowdfunding service providers (CSPs)” are defined even though they represent a very small transactional flow size.
Risks arising from the COVID-19 pandemic: “an increased on-boarding of customers remotely due to restrictions on movement by firms, which may not be accustomed to remote on-boarding otherwise, may expose the financial sector to additional ML/TF risks”.