Recent money-laundering and terrorist financing scandals in Europe have raised questions as to the adequacy and effectiveness of the European Union’s current AML/CFT framework. In response, an Action Plan was published by the European Commission on 7 May 2020 outlining how it proposes to address shortcomings identified in the current regime. The following is an overview of the major changes proposed in the Action Plan. For a more detailed account of the proposal, see this article by XReg Partner, Ernest Lima.
Financial services companies authorised in any of the 27 Member States, are allowed to provide their services throughout the EU either on a services basis (i.e. no physical presence in the host country) or on an establishment basis (i.e. with a physical presence in the host country, typically through a branch).
As a result, the provision of financial services in the EU has no boundaries.
Given that financial services can be provided seemingly without borders, the expectation would naturally be that licensing and supervisory requirements are very similar, if not identical, across the EU. However, this is not the case.
Currently, the application of specific rules developed at EU level differs between jurisdictions. This is the case with EU Directives such as the 4AMLD and the 5AMLD, which are transposed into local legislation by each Member State, allowing for discretion in their transposition.
When requirements are applied differently between jurisdictions, the potential arises for regulatory arbitrage and for the creation of “weak links” in the system as a whole.
The 5AMLD, for example, came into force on 10 January 2020. However, out of 27 Member States, eight have still not implemented the requirements, and 19 are likely to have implemented them differently to each other.
Directives differ from other types of EU legislation, such as EU Regulations, because Regulations do not need to be transposed into domestic law and are instead directly applicable.
Would changing the AML/CFT framework from being Directive-based to Regulation-based solve some of the current inefficiencies?
1. Ensuring the effective implementation of the EU AML/CFT framework.
2. Developing an EU single rule book.
3. Introducing EU level AML/CFT supervision.
4. Establishing a support mechanism for Financial Intelligence Units.
5. Enforcing criminal law provisions and information exchange at Union level.
6. Strengthening the international dimensions of the EU AML/CFT framework.
The European Union currently has three supervisory authorities: the European Securities and Markets Authority (ESMA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Banking Authority (EBA). These act as supervisors of supervisors and have a range of powers to deal with National Competent Authorities and individual firms wherever national supervision is proving insufficient or inadequate.
Even though the EBA’s mandate now includes AML/CFT monitoring and coordination for all EU supervisors and financial services providers, there is a strong possibility that the Commission’s Action Plan may lead to the establishment of a dedicated EU central supervisor to be responsible for AML/CFT across the Union.
The European Commission's Action Plan is open for consultation until the end of July. It will be interesting to see how Member States respond to the proposed plan and whether financial crime in Europe changes, in some measure, to be legislated in the form of an EU Regulation and whether a new supervisor of supervisors is established for AML/CFT purposes.
A more detailed account of the proposal was covered by XReg Partner, Ernest Lima, in this article.