The Joint Committee of the European Supervisory Authorities (ESAs) has published an opinion on the use of innovative solutions by credit and financial institutions when complying with their customer due diligence (CDD) obligations.

The opinion notes that innovation is not confined to new financial products and services. It also includes the development of new solutions to address specific compliance challenges, such as CDD, which is central to the anti-money laundering / countering the financing of terrorism (AML / CFT) regime. The opinion also notes that meeting CDD obligations can be challenging for firms, as this process is often associated with significant costs and customer inconvenience.

The ESAs are aiming to promote the development of a common approach across Member States to the use of innovative solutions by firms in their CDD processes. The ESAs believe that a common approach will prevent regulatory arbitrage, create a level playing field and strengthen Europe’s AML / CFT defences, while at the same time fostering the use of those innovations to make AML / CFT systems and controls more effective and efficient.

To this end the opinion:

  • highlights the factors that the ESAs believe Member State competent authorities should consider when: (i) assessing the adequacy of firms’ CDD measures where innovative solutions are used and the application of such measures by firms; and (ii)assessing controls in place at firms that enable them to mitigate any risks associated with innovative solutions; and
  • aims to develop common regulatory understanding of the appropriate use of innovative solutions.

Among other things the opinion states that Member State competent authorities should consider a number of factors when assessing the extent to which the use or intended use of innovative CDD solutions is adequate in the light of the money laundering / terrorist financing risk associated with individual business relationships and firms’ business-wide risk profiles. These factors are technology neutral and apply in addition to the customer, product, services, transaction, delivery channel and geographical risk factors firms should consider when assessing the risks associated with their business relationships, in line with Article 8 of the Fourth Anti-Money Laundering Directive (4MLD). In particular, Member State competent authorities should consider:

  • oversight and control mechanisms;
  • the quality and adequacy of CDD measures;
  • the reliability of CDD measures;
  • delivery channel risks; and
  • geographical risks.

View ESAs publish opinion on the use of innovative solutions in the customer due diligence process, 23 January 2018