EU Commission Proposes Standardized AML/CFT Framework to Enforce Regulations Consistently

On 7 May 2020, the European Commission (EC) announced an Action Plan for a comprehensive European Union (EU) policy on the prevention of money laundering and terrorist financing (ML/TF) built around six pillars: 

• Ensuring effective implementation of the existing EU Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) framework;
• Establishing an EU single rulebook on AML/CFT;
• Bringing about EU-level AML/CFT supervision;
• Establishing a support and cooperation mechanism for Financial Intelligence Units (FIUs);
• Enforcing EU-level criminal law provisions and information exchange; and
• Strengthening the international dimension of the EU AML/CFT framework.

On 20 July 2021, the EC formally announced a comprehensive and ambitious package to move the Action Plan forward, which combines a series of legislative proposals with the creation of a new EU AML/CFT Authority (EU AMLA). Pending the statutory consultations and legislative process under EU law, the EC expects the new framework, including the EU AMLA, to be operational in 2024. 

The Key Elements of the EC’s Proposal

The EU AML/CFT Authority

The new EU AMLA is at the core of the EC’s proposal. As a new supranational authority, the EU AMLA will serve two key roles:

1. Regulation and Supervision

The EU AMLA will create an integrated AML/CFT supervision system, with minimum standards for financial sector obliged entities (FSOEs) across the EU within two years of its establishment. The EU AMLA will also have powers to directly regulate FSOEs across several scenarios. For example, where entities have a footprint across more than seven EU countries, where FSOEs’ local regulators fail to exercise sufficient supervision, or for entities with known ML/TF failings. Some of the EU AMLA’s key tasks in regulation and supervision include:

• Developing guidelines on money laundering and terrorist financing risks, trends, and methods that may not have country-specific dimensions.
• Producing regulatory technical standards on systems and controls such as: (i) governance; (ii) relationships with parent undertakings; (iii) onboarding and ongoing due diligence; (iv) transaction-monitoring rules; (v) third-party reliance and outsourcing; and (vi) information sharing within the context of a new EU Rulebook for AML/CFT.
• Drafting technical standards specifying a common template for the reporting of suspicious transactions.
  
  

2. Coordination and Support 

The EU AMLA will serve as a point of coordination for national regulators and other relevant authorities of all EU Member States. The EC identified that different approaches to AML/CFT regulation and the lack of coordination among Member States’ FIUs “hindered optimal AML/CFT practices at [EU] level” historically. With its proposal, the EC seeks to create a mechanism to help address ML/TF as a cross-border or transnational issue and create “supervisory convergence and a common supervisory culture.” 

The EU Rulebook for AML/CFT

The EC proposes to create a single EU Rulebook for AML/CFT, setting out EU-wide standards for due diligence, ongoing monitoring, and the powers and tasks of supervisors and FIUs. The new Rulebook moves away from the approach set out in Money Laundering Directives (MLDs) by creating EU-level rules that are directly applicable to FSOEs rather than having to be first incorporated into local law. With its proposal, the EU is seeking to mitigate the possibility of differences in application in different Member States due to divergences in transposition of Directives such as the MLDs.

Cryptocurrency and Other Digital Assets

Only certain crypto-asset service providers in the EU are currently required to comply with applicable AML/CFT requirements. The EC proposes to extend the requirements to all crypto-asset service providers, particularly the requirements relating to due diligence and Know Your Customer, transaction monitoring, and the prohibition of transactions with anonymous wallets. The proposal would also align EU requirements with Financial Action Task Force (FATF) standards.

Limit on Large Cash Payments

The EC also wishes to set an EU-wide limit on large cash transactions of EUR 10,000. This is the EC’s second attempt to impose cash transaction reporting requirements to FSOEs after the first attempt in 2015. The Commission acknowledges that its previous approach was “ineffective in light of the poor understanding and application of AML/CFT requirements, lack of supervision and limited number of suspicious transactions reported to the FIU.” The new limit seeks to create an EU-wide standard that mitigates the risk of cash-based money laundering.

Third Countries

The EC is also looking to reformulate the EU’s approach to the identification of high-risk third countries. Directive (EU) 2015/849 mandates the EU to identify high-risk third countries with strategic deficiencies in their AML/CFT regime. The EC’s proposal will align the EU’s identification of high-risk third countries to the FATF designation of High-Risk Jurisdictions subject to a Call for Action (blacklist) and Jurisdictions under Increased Monitoring (grey-list).

What Does the EC’s Proposal Mean?

The EC’s proposal seeks to create the first EU-wide AML/CFT framework with a common set of rules enforced by a transnational regulator with enforcement powers. For certain FSOEs, this may require dealing with a further regulator, in addition to new requirements, such as the sharing of suspicious activity reports and other information to EU Member States in which the FSOE may not have a footprint.  Conversely, the new set of harmonised rules will have many benefits for FSOEs, especially the Compliance functions, operating in the EU. The new approach will allow FSOEs to reduce inconsistencies—and incompatibilities—between many national legal and regulatory frameworks across the EU, while creating EU-wide standards for their financial crime programmes.

How Guidehouse Can Help

While the EC does not expect the new AML/CFT framework to come into force until 2024, and AMLA to be fully operational by 2026, the proposals provide a strong signal that the fight against ML/TF is trending toward a transnational approach. Guidehouse has extensive experience helping firms operating across the EU assess and enhance their financial crime programmes to ensure compliance with applicable regulations, including:

• Conducting financial crime risk assessments and gap analyses against applicable laws, regulations, and international standards
• Supporting crypto-asset service providers with the development of their financial crime programmes
• Developing compliance testing methodologies