Europe's anti-money laundering legislative package
The European Commission's (EC) legislative package and the publication of new legislative proposals on 20 July 2021 aim to strengthen the fight against money laundering and terrorist financing.
Europe's anti-money laundering legislative package consists of four legislative proposals, which are listed below: [1]
- A regulation to combat money laundering and terrorist financing
- A regulation to create a new EU authority called AMLA (Authority for Anti-Money Laundering and Countering the Financing of Terrorism)
- The 6th Money Laundering Directive, which is intended to replace the existing directive
- A revised version of the Money Transfer Regulation.
The legislative proposals should be viewed as a whole and are all interconnected. In this blog post, we will focus on the first part of the aforementioned legislative proposal within the European legislative package: the regulation on combating money laundering and terrorist financing.
What is the goal of the European Commission?
The European Commission's overarching goal of harmonizing anti-money laundering measures across Europe was already announced in its Action Plan [2] , presented in May 2020. The Action Plan defined a total of six pillars designed to strengthen the fight against money laundering. The second pillar of the Action Plan consists of creating a uniform EU regulatory framework. A regulation, which, unlike a directive, is binding in its entirety and has direct effect, is essential for this.
The regulation governs, among other things, the internal guidelines, controls and procedures of obliged entities, their due diligence obligations with regard to customers, issues concerning beneficial owners, and measures such as how to deal with anonymous instruments.
The latter includes, for example, a cash limit of €10.000 [3] , which has not previously existed in Germany. However, the Federal Financial Supervisory Authority (BaFin) has, effective August 9, 2021, set a threshold of €10.000 for banks regarding cash transactions within a business relationship. [4] While it has not defined a cash limit, it requires banks to verify the origin of the funds. The German government has yet to comment on the cash limit. In contrast to Germany, Austria has announced its intention to reject a general cash limit.
In addition, the regulation expands the number of entities subject to due diligence obligations. From now on, due diligence obligations will also be extended to the entire crypto sector.
What is AMLA?
The regulation on combating money laundering and terrorist financing will establish the new EU authority AMLA . This authority will further implement two pillars of the action plan. Pillar three specifically consists of creating an EU-level supervisory body to combat money laundering and terrorist financing . Pillar four is based on establishing a support and cooperation mechanism for Financial Intelligence Units (FIUs).
The European Commission (EC ) cites several reasons why a European authority should be established in addition to the existing, exclusively national supervisory authorities. It argues that differing practices and available resources limit the quality and effectiveness of combating money laundering and terrorist financing. Furthermore, the competent authorities are unable to cooperate adequately with domestic and foreign stakeholders , and the methods used to identify risks vary across EU member states.
What Tasks has AMLA?
The tasks of the authority, with which these and other problems are to be addressed, are divided into four different areas:
- Selected obliged entities for whom AMLA is to conduct supervisory reviews, among other things, and thus directly supervises them.
- Financial supervisory authorities, for which AMLA is intended, for example, to ensure that they have sufficient resources. AMLA is also meant to facilitate communication between the authorities.
- Non-financial regulatory authorities, for which AMLA is to act as a coordinating body.
- Financial Intelligence Units (FIUs) are to be supported by AMLA, among other things, by developing appropriate methods for joint anti-money laundering efforts. Depending on its remit, the new authority will have the power, where provided for by regulation, to implement regulatory standards or to issue guidelines to obliged entities, supervisory authorities, and FIUs.
Consequently, in order to implement its tasks, competencies that previously lay with the European Banking Authority (EBA) are to be transferred to the new authority AMLA.
AMLA will be established in 2023 and its oversight is scheduled to begin in early 2026.
To enable AMLA to perform its tasks accordingly, supporting provisions have been included in the new sixth directive, which additionally aim to ensure the efficient integration of AMLA.
The regulation on the transmission of information in money transfers from Joh 2015
In May 2015, the European Parliament adopted Regulation 2015/847 on the transmission of information in connection with money transfers. It entered into force on 26 June 2017 and originated from a set of FATF (Financial Action Task Force on Money Laundering) recommendations from 2012. Its aim is to prevent the “[…] stability of the money transfer system and confidence in the financial system from being seriously damaged when criminals and their intermediaries attempt to conceal the origin of proceeds of crime or transfer money for criminal or terrorist purposes. ” [1] To prevent this, the regulation aims to make money flows traceable by transmitting and documenting the originator and beneficiary of a transfer. This ultimately makes it possible to identify the individuals through whom illicit money has flowed in order to launder it – that is, to conceal its origin. [2]
Because the concealment of money flows does not stop at national borders, but rather begins there. In order to take this guiding principle into account, but also to avoid significantly impairing the functioning of payment systems at the European Union level, Regulation 2015/847 establishes uniform rules for the Union regarding which information must be transmitted during money transfers. This would prevent significant harm to the internal financial services market from more than 20 different national solutions [3].
The regulation addresses the various actors involved in a money transfer, such as the payer's payment service provider (PSP), the beneficiary's PSP, and any other intermediary PSPs. For example, the payer's PSP must transmit the payer's and beneficiary's name, account number, and other personal details (address, date of birth, etc.) as part of a money transfer. The beneficiary's PSP, in turn, must verify this information for completeness. Furthermore, the regulation specifies how to handle missing information [4].
Proposed law to recast the regulation on the transmission of information in money transfers
The revised 2015 regulation is one of four legislative proposals in the anti-money laundering package. The reason for this is that the transfer of virtual assets such as cryptocurrencies is not covered by the original regulation [5] . Thus , it remains possible to conceal financial flows transferred in this way . Consequently, the draft legislation also obligates so-called CASPs ( Crypto -Asset Service Providers) and VASPs (Virtual Asset Service Providers) to transmit and retain information during the transfer of virtual assets, similar to PSPs [ 6 ] . The differences are largely technical in nature: For example, the client's CASP must transmit a unique transaction number or , if applicable, a wallet number instead of an account number if no conventional bank accounts were used in a transaction [7] . Similar to a bank account , CASPs offer digital wallets for managing crypto assets. With the help of CASPs, a money flow can once again be traced completely, even via crypto transfers.
The differences between traditional money transfers and Kcrypto-Transfers
While the electronic transfer of cash requires a PSP with the appropriate licenses, the transfer of crypto assets is possible directly from one person to another without an intermediary. This is the revolutionary characteristic of blockchain technology. Although a CASP greatly increases convenience, it is not technologically essential. The draft legislation to revise the regulation refers to service providers and excludes direct transfers between persons [8]. The challenge of tracing direct payment flows therefore remains for the time being.
The German version of the existing regulation from 2015 can be found here.
Sources
[1] Recital 1 of Regulation (EU) 2015/847
[2] Recital 9 of Regulation (EU) 2015/847
[3] Recital 3 of Regulation (EU) 2015/847
[4] Art. 4-12 Regulation (EU) 2015/847
[5] p. 3 COM(2021) 422 final
[6] p. 6 COM(2021) 422 final
[7] Art. 14 paragraph 3 COM(2021) 422 final
[8] Article 2(4) COM(2021) 422 final
Photo credit: Photo by Sean Pollock on Unsplash
Lisa Roczniewski