New Supervisory and Enforcement Regime on the Horizon: Practical Guidance for Financial Institutions on the European Commission’s Action Plan Regarding AML-CFT

The European Union’s money laundering and terrorist financing ("AML-CFT") framework has recently been subject to major developments, including the entry into force of the 5^th Anti-Money Laundering Directive ("AML 5")¹, the publication of the 6^th Anti-Money Laundering Directive ("AML 6")² and the establishment of a new comprehensive whistle-blower protection framework.³ Nonetheless, the European Commission ("the Commission") has noted that ''there is growing consensus that the framework needs to be significantly improved. Major divergences in the way it is applied and serious weaknesses in the enforcement of the rules need to be addressed." ⁴

Consequently, on May 7 2020 the Commission published a six pillar action plan (the “Action Plan") to strengthen the EU’s comprehensive policy to prevent money laundering. Along with the publication of the Action Plan, the Commission launched a consultation intended to collect feedback from "authorities, stakeholders and citizens"⁵ until July 29, 2020. The European Banking Authority ("EBA") also expressed its support and willingness to provide assistance and to fulfil its coordinating role after its "recently strengthened mandate to prevent [money laundering and terrorist financing]."⁶

The Action Plan sets forth the following six pillars:

• Ensuring the effective implementation of the existing EU AML-CFT framework;
• Establishing a single EU rule book on AML-CFT;
• Bringing about EU-level AML-CFT supervision;
• Establishing a support and cooperation mechanism for Financial Intelligence Units ("FIUs");
• Enforcing Union-level criminal law provisions and information exchange; and
• Strengthening the international dimension of the EU AML-CFT framework.⁷

I. Ensuring the effective implementation of the existing EU AML-CFT framework by European Member States

The Commission made the "effective transposition and implementation"⁸ of the AML directives a priority and will publish "country-specific recommendations on AML-CFT in Q2 2020."⁹ A study of the application of 4^th Anti-Money Laundering Directive ("AML 4") in EU Member States will be completed by mid-2021.¹⁰ Regarding AML 5, the Commission states that, besides infringement proceedings against Member States that did not meet the transposing measures deadline, it will also "closely monitor the setting up of the central bank account mechanisms and the beneficial ownership registers by Member States"¹¹ to ensure data quality.

Through its "Structural Reform Support Programme"¹² the Commission also provides technical assistance to Member States in order to address gaps in the EU AML-CFT mechanism related to understaffed competent authorities, "shortcomings in the application of the risk-based approach, and mitigating risks from the misuses of shell companies, golden visas and citizenship schemes."¹³

Finally, the Commission calls on the EBA to "investigate whether a national supervisor has breached Union law in carrying out its tasks."¹⁴

II. Establishing a single EU rule book on AML-CFT

The Commission notes that the current "fragmented [AML-CFT] legislative landscape across the EU"¹⁵ is impacting the cross-border provision of services, especially in the field of fintech. The Commission calls for a "more granular, [and] more precise [legislative framework]" that is "less subject to diverging implementations."¹⁶ Indeed, EU AML-CFT legislation should not exclude additional national requirements that could enhance the EU AML-CFT framework.

In Q1 2021, the Commission will publish legislative proposals "to deliver a single rulebook in the field of AML/CFT, based on a thorough impact assessment."¹⁷

III. Bringing about EU level AML-CFT supervision

The Commission points out the need to create "an EU-level AML/CFT supervisory system to integrate and supplement the national ones."¹⁸ The Commission will present its suggestions for the establishment of an EU-level AML-CFT supervisor in Q1 2021. The EU-level AML-CFT supervisor could either be the EBA or a new, dedicated EU body that might:

• have "exclusive or joint responsibility" to directly supervise certain obliged entities,¹⁹ including reviewing their "internal policies, procedures and controls as well as their effective implementation";²⁰
• "[assess] risks across the EU";²¹ and
• "monitor and […] support the implementation of asset freezes under EU restrictive measures (sanctions) across Member States."²² 

IV. Establishing a support and cooperation mechanism for FIUs

The Commission calls for the implementation of "an EU-level coordination and support mechanism"²³ intended to "coordinate the work of national FIUs."²⁴ The mechanism should facilitate, among other actions, "identification of suspicious transactions with a cross-border dimension, joint analysis of cross-border cases, [and] identification of trends and factors relevant to assessing the risks of money laundering and terrorist financing at [a] national and supranational level."²⁵ The Commission will present its proposals to establish such a mechanism in Q1 2021. The Commission also will take over the management of FIU.net (currently managed by Europol)²⁶ in Q4 2020.

V. Enforcing Union-level criminal law provisions and information exchange

The Commission will monitor the transposition and the implementation of AML 6. It is also making the "EU-wide interconnection of central bank account mechanisms"²⁷ a top priority in order to enhance cross-border cooperation. In December 2020, new measures will apply to "facilitate cross-border asset recovery and make the freezing and confiscation of criminal assets across the EU quicker and simpler."²⁸ Additionally, the Commission says it welcomes the Europol’s creation of the European Economic and Financial Crimes Centre ("EFECC"), which will be operational this year.

VI. Strengthening the international dimension of the EU AML-CFT framework

The Commission stresses that obliged entities need to mitigate geographical-based risks and apply enhanced due diligence when transacting with countries demonstrating "strategic deficiencies in their AML/CFT frameworks."²⁹ The Commission will help identify such countries through a methodology taking into account, among other elements, “the [country's] synergy with the FATF listing process."³⁰

VII. Practical considerations

Some key practical considerations for obliged entities will include:

• remaining aware of the developing Commission agenda regarding the implementation of its Action Plan in order to have sufficient time and resources to implement the new EU AML-CFT framework;
• complying with upcoming central bank account mechanisms as well as the beneficial ownership registers set up by Member States;

• taking into consideration the Commission's methodology for the identification of high-risk third countries when updating KYC files and assessing geographical risk;
• updating asset freezing procedures to ensure that they comply with the new EU framework that is to be implemented by December 2020; and
• remaining aware of enforcement, supervision and cooperation trends across the EU, including the potential impact of the close collaboration and cooperation between regulators across the world.