On 10 September 2020, the European Banking Authority (EBA) published its response to the European Commission’s (EC’s) call for advice on the future of the EU anti-money laundering (AML) and counter-terrorist financing (CTF) framework.
The EBA set out a number of recommendations, in summary these include:
- Harmonising specific aspects of the Fifth AML Directive, including:
- Customer Due Diligence (CDD) measures – focus should be placed on financial institutions using CDD measures as a means to identify and assess the risks in relation to the particular customer or transaction, while the requirements should be more technologically neutral to promote and support innovation and development of secure and reliable digital identification technologies.
- Occasional transaction threshold – “occasional transaction” and “linked transactions” should be defined, while the current threshold should be lowered or even removed for financial institutions or sectors associated with higher money laundering (ML) / terrorist financing (TF) risk.
- AML/CTF systems and controls requirements – financial institutions should be required to directly report to the board all cases of material weaknesses in their AML/CTF systems and controls, while AML/CTF policies and procedures should be better streamlined within group structures and should allow for AML/CTF-related information sharing within the group. Interestingly, the EBA proposes to introduce an exemption from the requirement to appoint an AML/CTF officer for smaller businesses or those with a limited ML/TF risk.
- Clarifying the scope and types of entities which should be caught by Fifth AML Directive: the EBA specifically requests clarification on the scope of AML/CTF obligations for entities such as crowdfunding service providers, virtual asset service providers, investment firms and investment funds or (non-life) general insurers and general insurance intermediaries.
- Aligning AML/CTF provisions with relevant provisions in sectoral financial services legislation: the EBA recommends a comprehensive review of financial services legislation in relation to authorisation, passporting, ongoing supervision and cooperation between prudential, AML/CTF competent authorities and other public stakeholders.
The EBA’s proposals are quite ambitious, but definitely welcome. We have seen first-hand firms’ struggle with identifying occasional transactions and differentiating these from a business relationship scenario, especially in the context of third party payments. Furthermore, the COVID-19 pandemic has placed obstacles for firms on the conventional methods of CDD and accelerated the drive towards the adoption of digital verification tools. Any additional, Financial Action Task Force-style, guidance or clarification on the use of technology for CDD purposes or ML/TF monitoring more generally is much needed. Finally, divergence in approaches to AML/CTF, in particular, AML/CTF policies and procedures, can occur across groups. An express regulatory requirement would send a clear message to firms on the importance of having a unified, group-wide approach towards AML/CTF, especially managing the ML/TF risks.