What is it about?
Several recent money laundering scandals have shown vulnerabilities and a potential for the improvements in the Anti Money Laundering (AML) framework. The proposed Commission’s AML legislative package (Proposal) is an important milestone for further enhancement and harmonization of EU rules on combatting money laundering and terrorist financing. The package strengthens, inter alia, the AML framework for crypto-assets by extending the scope of the existing fund transfer regulation to transfers of crypto-assets and obliging crypto-asset providers to provide information on the originators and beneficiaries of the transfers. We welcome this approach to address risks related to crypto-asset transfers and as a further step to create a level playing field in the financial sector.
What is the issue?
Many provisions of the Proposal are too indefinite (e.g. links with family members) therefore undermining legal certainty and level playing field. Additionally, some provisions are too far-reaching (e.g. the beneficial owner definition) or go beyond international market practice.
Besides, the Proposal doesn’t tackle some structural weaknesses of the AML framework, as the following topics aren’t yet sufficiently addressed:
- Information Exchange: Cooperation and information exchange between public and private sector and among banks is crucial for effectively combating ML/TF. The current proposal lacks additional mechanisms and provisions for an enhanced public-private cooperation and extended information exchange.
- Beneficial Owner Transparency: Currently, the quality of local Beneficial Owner Registries differs significantly. Registries don’t provide added value insofar as the underlying documents aren’t stored and obliged entities aren’t permitted to rely on the register information.
- Inefficiency of Transaction Monitoring: Currently, transaction monitoring is performed individually by each obliged entity, which is ineffective and inefficient, as financial institutions see only a snapshot of information about transactions. Thus, professional and cross-border ML/TF schemes often remain unidentified.
What could be done more?
A) Enhance legal certainty and level playing field by including international market standards:
- The beneficial owner definition in the draft AML/CFT Regulation should be restricted:The definition of ‘control by other means’ is too excessive: the relevant ‘significant influence’ should be further clarified and the indefinite term ‘links with family members’ should be deleted.Relevant participation/control thresholds: Instead of the proposed 25%-threshold on each level of the ownership chain only a 50%threshold (majority stake) should be regarded as relevant participation/control on the second participation level and subsequent levels.
- A maximum period of 5 years for updating customer data irrespective of the customer risk is ineffective. From a risk-based approach perspective, such a provision (in particular regarding low-risk private customers) would significantly increase red-tape for clients and banks without effectively reducing ML risks.
- A limit of EUR 10,000 to large cash payments for traders in goods and service provider leads to a gradual removal of cash and should be deleted. Furthermore, the reporting obligation for credit institutions for payments or deposits exceeding this cash threshold should further remain restricted on suspicious transactions, since even here currently the false positive ratio is disproportionately high.
B) In addition, the following structural improvements of the EU AML framework should be addressed soon:
- Information exchange: Further mandatory measures and mechanisms (e.g. further enhancement of Public Private Partnerships within the AMLA regulation) should be implemented to foster the cooperation and information exchange between public and private sector as well as information exchange among financial institutions (proposed implementation within the AMLD 6 and the AMLA regulation).
- Beneficial Owner Transparency: A central EU wide KYC registry for legal entities for the storage and verification of KYC documents should be implemented and banks should be permitted to rely on the registry information (proposed implementation by a new regulation).
- Inefficiency of Transaction Monitoring: A central EU authority should take over the monitoring of all EU-wide transactions as well as the examination of identified suspicious transactions (proposed implementation within the AMLA regulation or by a new authority/new regulation).