The European Union’s AML/CTF Action Plan

May 4, 2020

Over the next few days, we are expecting the publication of an Action Plan from the European Commission which will outline an EU-wide supervisory framework for combatting money laundering (ML) and terrorist financing (TF). This follows on from November 2019, when six Member States, namely, Germany, France, The Netherlands, Latvia, Spain and Italy, issued a joint position paper calling for reform in this area. The proposal has seen growing support across the EU. It has gained traction with the European Commission to the extent that the Commission’s Action Plan is anticipated to provide greater clarity about future treatment of these matters.

What do we already know?

Due to the cross-border nature of financial services and the differences in ML and TF supervision across the EU, the position paper provides that there is a need for greater harmonisation. It proposes to address this through the establishment of an EU central ML/TF supervisor, creating a new layer of supervision. The central supervisor would closely collaborate with national supervisors and have the necessary powers of intervention where national supervision is considered insufficient or inadequate.

As well as enhancing the EU’s AML/CTF framework, it has been reported that the Action Plan will introduce a fundamental shift from a Directive (the fifth money laundering Directive, 5MLD) to a directly applicable Regulation. This would ensure a greater degree of standardisation across the EU. The potential timeline for the EU to publish a legislative proposal is early 2021.

What is yet to be determined?

An EU central supervisor and the move to a Regulation would bring about significant changes to the EU’s AML/CTF landscape and the approach taken by national supervisors in ensuring compliance with the Regulations. It will be interesting to see how the EU proposes to deal with the different types of institutions that are within the scope of 5MLD and whether there is a distinction between firms that can ‘passport’ their services and those that cannot. Will the ‘new’ central supervisor be responsible for all entities, regardless of their relevance in some Member States? We would expect that it would take a risk-based approach to supervision, focussing its efforts and resources on firms that pose the highest ML/TF risks.

How might it affect Gibraltar?

Given the UK’s decision to leave the European Union, Gibraltar is in a unique position, and it remains to be seen how the jurisdiction will implement future EU requirements if it decides to do so. With the move to a Regulation which would have direct effect in Member States, Gibraltar would have to legislate for this specifically. However, even though Gibraltar may choose to align itself to future EU requirements, there will be areas such as membership to a new EU central supervisor that are unlikely to apply to Gibraltar.

How might it affect Virtual Asset Service Providers (VASPs)?

What impact could this have on VASPs established in the EU that currently comply with 5MLD, when we consider the differences in treatment to crypto-asset activities across the EU? In this regard, the EU has recently consulted on a proposed framework for crypto-assets, and this will no doubt be taken into account when reforming its AML/CTF regime. A move to harmonisation can only be beneficial to the industry and will help reduce the regulatory arbitrage that currently exists.

What happens next?

We will keep you informed following the release of the Action Plan, which is likely to have a three-month consultation period.

Ernest Lima