EU AML Reform Plan Progress 2020/21

In the last week, the European Union's (EU) finance ministers have reviewed proposals from the European Commission to reform the EU's AML/CFT framework along more centralized lines. The Economic and Financial Affairs Council (ECOFIN) has endorsed the broad outlines of the proposed reforms, and the Commission is now expected to deliver more detailed legislative and regulatory plans in the first quarter of 2021.

• https://www.consilium.europa.eu/en/meetings/ecofin/2020/11/04/

The Reform Plan is, according to the Commission, a response to the "fragmentation of rules, uneven supervision and limitations in…cooperation," that currently exist in pan-European AML/CFT.

• https://ec.europa.eu/finance/docs/law/200507-anti-money-laundering-terrorism-financing-action-plan_en.pdf

First published in May 2020, and recently subject to industry consultation, it sets out 'six pillars' for action: The effective implementation of existing EU Anti-Money Laundering Directives (AMLD);

1. A single AML/CFT rule book for the EU;
2. EU level supervision and regulation;
3. Cooperation frameworks for national Financial Intelligence Units (FIUs);
4. Better law enforcement agency information sharing; and
5. Better global AML/CFT cooperation.

The proposals generating the most attention so far are the proposed single rule-book and a centralized, Union-level approach to financial services' oversight and regulation.

Under the current EU-wide arrangements, successive AMLD have set minimum standards that individual member states are required to transpose into national laws and regulations and implement in practice. However, countries have had substantial freedom to vary how they interpret the directives, leading to a range of different approaches that undermine the EU's aim to provide a "level playing field."

There has also been an ongoing issue with member states transposing laws on schedule, and the most recent, the 5th AMLD – due to be transposed in January this year – is still not fully on the statute books in all member states. And the 6th AMLD is scheduled to be transposed by 3 December 2020 and implemented by 3 JUNE 2021 – JUST OVER SIX MONTHS AWAY.

Under the Reform Plan, parts of the AMLD would be transferred into a regulation that would be directly applicable and binding on all member states, and would not require the current lengthy process of translation into national law. As a result, the future content of EU AML/CFT regulations is likely to become more detailed, granular, and prescriptive. Key areas likely of direct concern to obligated firms are likely to include:

1. Customer Due Diligence (CDD) requirements;
2. Provisions on Politically Exposed Persons (PEPs);
3. AML/CFT record-keeping and controls obligations;
4. Suspicious transaction reporting; and
5. Outsourcing of AML/CFT activities.

The other controversial theme is the need for a supranational AML/CFT supervisor, who would be responsible for overseeing the implementation of the single rule book at a national level, with a particular focus on a "selected number of obliged entities that have high inherent money laundering or terrorist financing risk."

How this will work in practice is not clear as yet, and the Commission has noted that the supervisory role could be situated either in the European Banking Authority (EBA) or a completely new agency.

The Commission has also noted the need to find better ways to share and use data both in public and private sectors and has prioritized the need to reconcile the stringent privacy requirements of the General Data Protection Regulation (GDPR) with the needs of the fight against financial crime. This is an issue well-known to many obligated businesses operating in the Union and has been a common theme in replies to the EU consultation.

As recognized by Olaf Scholz, German Finance Minister, there is an onus on the EU to demonstrate proactivity after a succession of recent AML banking scandals in the Baltic States, Scandinavia and Germany. Scholz commented that

• "RECENT ALLEGED MONEY LAUNDERING CASES…UNDERLINE THE URGENCY TO ACT.

More harmonized rules and EU-level supervision will allow us to be more effective and to strengthen the EU's anti-money laundering framework."

The Reform Plan is indeed a welcome and necessary step forward from the perspectives of prevention and enforcement. A large part of criminals' effectiveness comes from being able to disperse their activities across multiple financial institutions and jurisdictions, and any movement towards a more systemic overview of the European financial system will undermine that.

It will also potentially have a beneficial effect on the implementation of AML/CFT rules for individual obligated entities, especially those that operate in more than one EU jurisdiction. Greater granularity and consistency will increase firms' levels of comfort about what is expected of them, and will also reduce compliance costs and internal frictions.

These changes remain some way off, however, and in the meantime, obligated firms will continue to need to follow the requirements of the pre-existing directives as transposed into national laws and regulations. As noted above, the key item on the agenda is the 6th AMLD, the requirements of which all obligated entities are required to meet by 3 JUNE 2021 – JUST OVER SIX MONTHS AWAY.