We need to talk about the EU’s ambitious AML reform plan

But will support remain strong once the plan becomes a reality? AML expert Matthew Redhead joins FinCrime Report in explaining the potential areas of concern and challenge we are likely to see once details have been ironed out. It is very difficult to argue with much of the sentiment in the European Union’s draft plan for reforming anti-money laundering across Europe.

The plans would see the creation of a “single rulebook” for anti-money laundering regulation and centralised supervision, along with the facilitation of greater information sharing and greater support for Financial Intelligence Units. The overall aim, according to German Finance Minister Olaf Scholz, is to strengthen the AML framework and provide an “important sign that we all stand united”.

The plans have now been approved in draft form by finance ministers. They also have the backing of the European Banking Association, which wants an overhaul of the AML legal framework to “reduce the risk of gaps created by divergent approaches”. MEPs have given their strong backing, with Spanish MEP Luis Garicano calling for an end to “economic nationalism,” where national authorities would turn a blind eye to the wrongdoings of important institutions based within their borders. German MEP Sven Giegold has even called for the reforms to go further and create a Europe-wide Financial Intelligence Unit, a proposal not currently on the cards.

So far there has been very little in the way of dissenting voices to the plan, with seemingly all the key players signed up to the desire for greater harmonisation across Europe in the way countries tackle money laundering.

But dig a bit deeper, might there be some issues next year when we start to see some meat put on the bones?

First, it may be useful to remind ourselves of the proposals. The European Commission plan outlines six “pillars” for the plan to build on, which it says will “ensure that EU rules are more harmonised and therefore more effective” (see box below).

At-a-glance: the six pillars of the European Commission AML reform plan

A single EU rulebook:  The Commission will propose a more harmonised set of rules in the first quarter of 2021.

EU-level supervision: Currently it is up to each member state to individually supervise EU rules in this area. The Commission believes that, as a result, gaps can develop in how the rules are supervised. In the first quarter of 2021, the Commission will propose to set up an EU-level supervisor.

Effective application of EU rules: The Commission will continue to monitor closely the implementation of EU rules by member states to ensure that the national rules are in line with the highest possible standards. It is also encouraging the European Banking Authority (EBA) to make full use of its new powers to tackle money laundering and terrorist financing.

A coordination and support mechanism for member states’ Financial Intelligence Units: The Commission will propose to establish an EU mechanism to help further coordinate and support the work of these units.

Enforcing EU-level criminal law provisions and information exchange: Guidance will be issued on the role of public-private partnerships to clarify and enhance data sharing.

The EU’s global role: The EU will adjust its approach to third countries with strategic deficiencies in their anti-money laundering and countering terrorist financing regimes that pose significant threats to the single market. 

Taking each of these pillars in turn, Matthew Redhead, a researcher and writer on financial crime, explains the potential areas of dispute once we start to get more detail on the plans next year.

A single EU rulebook

The draft plan as approved by finance ministers says a single rulebook will “allow for a level playing field in the common market and for an even application of the provisions throughout the union.”

It is notable, however, that the plan does not seem to include all of the current EU anti-money laundering directives. The plan states that “parts” of the directive will be transferred to a directly applicable regulation, “wherever it is necessary to reduce national divergencies in transposition that undermine an effective implementation of the AML/CFT framework”.

Matthew Redhead questions the effectiveness of the rule book, or indeed whether it can be termed a “single rulebook” at all, if the regulatory requirements are split between regulation at EU level and directives implemented via domestic legislation. 

“It is not clear to me at this stage which bits would be in the rule book and which bits would be left in directives,” he says. 

“But if you are going to get everybody to do the same thing, all of it needs to be in regulation – not chopped up into little bits where, for example, you say ‘everybody must have a central beneficial ownership register’ but you can have different versions of suspicious activity reporting. It makes no sense.”

Redhead believes the EU principle of subsidiarity, under which decisions are retained by member states if intervention from the EU isn’t necessary, might be a factor at play here. He fears what he terms a “classic Brussels fudge”, which leaves a lot open to interpretation.

The driver for this is maybe a realisation that a genuinely comprehensive single rulebook would create a huge amount of upheaval for jurisdictions, regulators and, ultimately, AML compliance teams.

Redhead questions whether significant recent decisions by individual member states, such as Germany’s plan to widen the definition of money laundering by removing its list of predicate offences, or the Netherlands adoption of a lower standard for reporting suspicious activity, would have to be reversed if they are at odds with the rules in the new book.

“The level of legislative change that would be required would dwarf anything that’s happened already because, of course, directives have mainly been incremental. I think that there would be a hell of a lot of a resistance to it,” he says.

Changes to transaction monitoring, for instance, could lead to teams reconfiguring their systems and could require new legal standards and whole new approaches to be put in place quickly. 

Redhead says that harmonisation of rules would benefit larger institutions in the longer term, while having a relatively larger cost impact on smaller firms.

EU-level supervision

EU finance ministers have called on the Commission to look at the feasibility of transferring supervisory tasks to either an existing authority or to a “newly established and autonomous EU supervisory body”.

If the supervisory function goes to an existing body, the EU’s EBA is the obvious contender as it already worked to harmonise prudential rules for financial institutions across Europe. 

However, the suggestion that the EBA takes on the role is opposed by those who argue that its remit is too narrow to shoulder AML regulation. “The EBA only has competence in banking matters, while AML issues stretch well beyond the financial sector”, MEP Frances Fitzgerald said in a recent interview.

Redhead agrees, and says the EBA would have to think closely about its terms of reference if handed such an expanded role.

 “The level of legislative change that would be required would dwarf anything that’s happened already”

Matthew Redhead

That aside, Redhead believes there are real benefits to having a supervisor at EU level in terms of driving up standards.

He says: “Effectively what you would imagine the AML supervisor to be doing is supervising the supervisors – and that is an issue, it is something that is needed. 

“There has been an assumption in the past that all regulators are equal. They are not. Some are exceptional, but some are awful.”

He does however also warn of a “quashing of innovation” if the body adopts fixed views in areas of regulation. 

He cautions that the body would have to be “pretty substantial” if it’s going to be able to monitor 27 different jurisdictions, some of which already have multiple regulators. 

Effective application of EU rules

One of the arguably less eye-catching pillars in the reform plan is the Commission’s pledge to “continue to monitor the implementation of EU rules by member states to ensure that the national rules are in line with the highest possible standards.”

For Redhead, this is little more than an exhortation from the EU to follow the rules.

“It’s a message to the member states to say ‘Please please please get your house in order; make sure you transpose and implement the rules’,” he says. “I looked at it and I can’t really see very much by way of indications of any greater punishments for member states for not implementing things.”

Redhead says the lack of a punitive element is striking and that the obvious way to ensure countries follow the rules would be the threat of removing equivalence with the EU. 

He accepts that if the single rulebook and supervisory body are implemented then it may be the case that the body could take people to the European Court of Justice, but he believes that, on its own, this pillar is unlikely to be effective.

A coordination and support mechanism for member states’ Financial Intelligence Units

The plan as it stands would involve the creation of a “co-ordination and support mechanism” for Financial Intelligence Units (FIUs). As with much of the document, there is not a huge amount of specificity about what this mechanism would do, only that it would “provide guidance, procedures and adopt binding technical formats and templates as necessary”.

Redhead suspects the mechanism will simply help with the “existing narratives” around AML/CFT and in reality will be little more than “an extra bit of padding.”

What is really needed, in his view, is more guidance about what an FIU should actually be. 

“The real issue is the absolute diversity of types of FIU – you’ve got the administrative ones, the ones sat in law enforcement, the ones sat next to the regulator,” he says.

“You’ve got the diversity of types of people who work in different FIUs – lawyers, police officers, investigators etc – and then you’ve got massively different levels of resourcing, technology and data. 

“What they really need is a common rulebook for FIUs; common standards for what an FIU should look like and what it is able to do and commitments from EU member states about how much they are actually going to support these things.”

Enforcing EU-level criminal law provisions and information exchange

Another key pillar in the plan is to “consider the information-sharing possibilities within groups of companies as well as between other obliged entities”. 

For Redhead, the tool that would be most likely to make a difference would be the sharing of Suspicious Activity Reports (SARs).

“To make this work better, we’d need a common standard of SARs and you’d need commonality and an ability to share these SARs between different jurisdictions, and I don’t see that in the plan at this stage.

“To my mind, if you are going to have a single rulebook and a single supervisor then you are going to really need a single SAR system as well.” 

The Commission is promising guidance on the application of data protection rules in relation to information sharing within public-private partnerships. Better co-ordination on data-sharing is something that is definitely needed, says Redhead.

The EU’s global role

The sixth and final pillar looks at the EU on the global stage and its involvement in supporting the Financial Action Task Force (FATF) in shaping international standards.

Redhead believes this pillar is “motherhood and apple pie” – meaning it contains principles that are easy and comforting to support, but which lack much teeth.

“This largely seems to be about working with FATF, but the EU is already a member of FATF. I don’t think this is really saying that much that is particularly new,” he says.

And finally……what about the UK and Brexit?  

There is a great unknown about how the UK will interact with the reform plan.

Redhead says the key is whether the EU accepts that the UK’s money laundering controls are of equivalence with the new system in Europe. 

“It’s an equivalence issue, isn’t it? So, if the EU were to look at the UK money laundering regulations  and think they are not good enough in comparison, then there will be a risk then that businesses and financial institutions in the European Union would be required to carry out higher levels of due diligence on the UK companies that they do business with. That would create a lot of additional friction,” says Redhead.

He adds, however, that this shouldn’t happen, as the UK’s strong reputation in FATF should lead to accepted equivalence.