In Q3 of 2021, the European Commission presented a package of four legislative proposals to strengthen the EU’s anti-money laundering and countering the financing of terrorism (AML/CFT) rules.

By taking into account the new and emerging challenges linked to technological innovation, such as virtual currencies, more integrated financial flows in the Single Market and the global nature of terrorist organisations, these proposals will help to create a much more consistent framework to ease compliance for operators’ subject to AML/CFT rules, especially for those active cross-border.

The four legislative proposals are as follows:

• a Regulation on the prevention of the use of the financial system for the purposes of money laundering (ML) and terrorist financing (TF);
• a Directive establishing the mechanisms that Member States should put in place to prevent the use of the financial system for ML/TF purposes, and repealing Directive (EU) 2015/849;
• the recast of Regulation (EU) 2015/847 expanding traceability requirements to crypto-assets;
• a Regulation creating an EU Authority for anti-money laundering and countering the financing of terrorism (‘AMLA’).

 

1. Regulation on the prevention of the use of the financial system for the purposes of money laundering (ML) and terrorist financing (TF)

The proposal transfers provisions from the existing AML/CFT Directive to a Regulation but with a number of changes of substance in order to bring about a greater level of harmonisation and convergence in the application of AML/CFT rules across the EU, such as:

– in order to mitigate new and emerging risks, the list of obliged entities is expanded to include crypto-asset service providers but also other sectors such as crowdfunding platforms and migration operators;

– to ensure consistent application of rules across the internal market, requirements in relation to internal policies, controls and procedures are clarified, including in the case of groups, and customer due diligence measures are made more granular, with clearer requirements according to the risk level of the customer;

– the requirements in relation to third countries are reviewed to ensure that enhanced due diligence measures are applied to those countries that pose a threat to the Union’s financial system;

– requirements in relation to politically exposed persons are subject to minor clarifications, particularly as regards the definition of a politically exposed person;

– beneficial ownership requirements are streamlined to ensure an adequate level of transparency across the Union, and new requirements are introduced in relation to nominees and foreign entities to mitigate risks that criminals hide behind intermediate levels;

– to guide more clearly reporting of suspicious transactions, red flags raising suspicion are clarified, whereas disclosure requirements and private-to-private sharing of information remain unaltered;

– in order to ensure full consistency with EU data protection rules, requirements for the processing of certain categories of personal data are introduced and a shorter time-limit is provided for retention of personal data;

– the measures to mitigate the misuse of bearer instruments are strengthened and a provision limiting the use of cash for large transactions is inserted in light of the proven low effect of the current approach relying on traders in goods for implementing AML/CFT requirements in relation to large cash payments.

Having directly-applicable AML/CFT rules in a Regulation, with more detail than at present in Directive (EU) 2015/849, will not only promote convergence of application of AML/CFT measures across Member States, but will also provide a consistent framework against which AMLA will be able to monitor the application of such rules in its function as a direct supervisor of certain obliged entities.

2. Directive establishing the mechanisms that Member States should put in place to prevent the use of the financial system for ML/TF purposes, and repealing Directive (EU) 2015/849

As a starting point this proposal takes the existing Directive (EU) 2015/849, as amended by Directive (EU) 2018/843. While it follows the current risk-based and comprehensive approach, it deepens and enhances it with a view to bringing about greater effectiveness and cross-border consistency of application of AML/CFT requirements. Building on the amendments introduced by Directive 2018/843, it streamlines beneficial ownership transparency across the internal market, addressing those aspects where a lack of granularity had created possibilities for criminals to exploit the weakest link.

This proposal is consistent with the latest amendments to the recommendations of the Financial Action Task Force (FATF), and in particular in relation to the expansion of the scope of entities subject to AML/CFT requirements to include crypto-asset service providers and measures to be taken by obliged entities to assess and mitigate the risks of evasion of targeted financial sanctions. In line with FATF standards, this proposal ensures a consistent approach across the Union to the mitigation of risks deriving from bearer shares and bearer share warrants. Going beyond FATF standards, it tackles risks that are specific to the Union or that have Union-level impacts, such as those deriving from migration schemes or from large cash payments.

3. Recast of Regulation (EU) 2015/847 expanding traceability requirements to crypto-assets

Regulation (EU) 2015/847 was adopted to ensure the full traceability of transfer of funds. However, it only applies to those transfers which are defined as banknotes and coins, scriptural money and electronic money, according to Directive 2015/2366. Only in 2018 new international standards were adopted to create requirement for information sharing in transfer of virtual assets of the same nature that the ones existing for information sharing in transfer of funds. Virtual had so far remained outside the scope of EU law on financial services, exposing holders of crypto-assets to money laundering and financing of terrorism risks.

These amendments will ensure full traceability of crypto-asset transfers, such as Bitcoin, and will allow for prevention and detection of their possible use for money laundering or terrorism financing. In addition, anonymous crypto asset wallets will be prohibited, fully applying EU AML/CFT rules to the crypto sector.

4. Regulation creating an EU Authority for anti-money laundering and countering the financing of terrorism (‘AMLA’)

At the heart of this legislative package is the creation of a new EU Authority which will transform AML/CFT supervision in the EU and enhance cooperation among Financial Intelligence Units (FIUs). The new EU-level Anti-Money Laundering Authority (AMLA) will be the central authority coordinating national authorities to ensure the private sector correctly and consistently applies EU rules. AMLA will also support FIUs to improve their analytical capacity around illicit flows and make financial intelligence a key source for law enforcement agencies.

The legislative proposal provides a very detailed list of tasks of AMLA which can be divided into five areas:

– AMLA will be the direct supervisory authority for a limited number of the riskiest cross-border financial sector obliged entities (i.e., credit institutions and other financial institutions that operate in several Member States). The AMLA will have the powers to adopt binding decisions, administrative measures, and pecuniary sanctions towards directly supervised obliged entities.

– AMLA will have various tasks to ensure the effective and consistent functioning of the AML/CFT supervisory system in the EU.

– AMLA will provide support to Financial Intelligence Units (‘FIUs’) and coordinate certain activities of various FIUs of Member States.

– AMLA will also be responsible for the oversight of supervisors in the non-financial sector with regard to compliance with AML/CFT requirements.

– AMLA will promulgate regulatory technical standards and implement technical standards where this is provided for in the applicable AML/CFT legislation. Additionally, it will have a broad power to adopt guidelines or recommendations addressed to obliged entities, AML/CFT supervisors or FIUs.

The Commission plans for the AMLA to be established in 2023and become operational in 2024. Full staffing (approximately250) should be reached in 2026. In 2026, the new authority should also start direct supervision of certain high-risk financial entities.

The creation of an Anti-Money Laundering and Anti-Terrorist Financing Authority, as well as the implementation of the previous proposals in the current legislative package, will form the legal framework governing the AML/CFT requirements to be met by obliged entities and underpinning the Union’s AML/CFT institutional framework.

At present, the above is still at the stage of a proposal by the European Commission and has not been finally adopted. However, it is the fact that the latter has been initiated by the EU’s main executive body that shows its importance and the need to follow up on it.