The European Parliament on 24 April , which is now awaiting the vote of the Council of the European Union and publication in the official journal of the EU. Stanislaw Tosza, associate professor in compliance and law enforcement at the University of Luxembourg, was one of the speakers during a livestream on the EU’s regulatory agenda organised by Luxembourg for Finance on 21 May 2024, during which he covered AML reform.
The new laws aim help the EU fight money laundering and terrorist financing while ensuring that people with a legitimate interest--civil society organisations, journalists, competent authorities and supervisory bodies--can access beneficial ownership information in national registries and interconnected at EU level, said a press release from the EU parliament. It also gives financial intelligence units (FIUs) more powers to analyse cases of money laundering and terrorist financing.
Three elements in new preventive framework
“The AML framework is composed of a repressive component and a preventive component,” said Tosza. “As to the repressive component, which is provided by the AML criminal law directive, it will in principle remain intact--except for a small amendment with significant consequences.”
On the preventive side, “the fourth AML directive provides for the duties of obliged entities, in particular, the know-your-customer obligations and duties to monitor and report suspicious transactions. It also sets up an institutional supervisory system.”
This AML framework, however, was criticised “mainly due to the ineffectiveness of cooperation and coordination between national supervisors and financial intelligence units in tackling cross-border financial crimes.” The proliferation of crypto-assets also proved to be a challenge, he added. “Despite amendments made by the fifth AML directive, not all possible scenarios of involvement of such assets were covered.” This led to the reform and a package of new legal instruments, which is now being adopted.
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“The new AML preventive framework will be composed of three elements,” Tosza explained. The first is an AML regulation with compliance duties; the second, an AML directive providing a supervision framework; and the third, the establishment of the anti-money-laundering authority (Amla), which will be set up in Frankfurt.
The first two instruments will start to take effect three years from now, he noted, while Amla should assume its tasks and powers in mid-2025, with direct supervision of selected obliged entities starting in 2028.
Main modification
“The main modification introduced in this new framework is the change of the legal instrument to a regulation, which comes after a succession of five directives,” argued Tosza. “The [European] Commission explains this choice by the lack of directly applicable rules and due to the differing interpretations of the directives, which resulted in a fragmented approach to regulation and supervision along national lines, contrary to the requirements of an integrated internal market.”
“A directly applicable set of rules at the EU level is also needed in order to allow direct, EU-level supervision by Amla. Otherwise, direct supervision [would] be hampered by the need for Amla to apply 27 different national legislations, comparable to the situation of the ECB within the single supervisory mechanism, which is prone to complexity and inconsistency,” he said. “The adoption of a regulation means that the rules will be directly applicable, and member states will not have discretion--even if limited--while implementing.”
The rules on due diligence, reporting duties, penalties for non-compliance stay in place
But the content of the AML regulation and its “philosophy” are not “revolutionary” when compared to the fourth and fifth AML directives, he added. “The rules on due diligence, reporting duties, penalties for non-compliance stay in place,” while other rules become more detailed, such as the scope-of-identity details collected to identify customers or information collected to verify business relationships.
Strengthening supervision
The AML directive that accompanies the regulation “strengthens supervision by clarifying the tasks and powers of supervisors to ensure that they all have the instruments to take adequate remedial actions and by establishing colleges of supervisors and mechanisms to improve supervisory cooperation in relation to institutions operating across borders,” said Tosza. To enhance cooperation between financial intelligence units, it also clarifies tasks and powers and sets out a framework for joint analysis of suspicious transactions or activities linked to different jurisdictions.
On top of this, “Amla will be responsible for overseeing and coordinating the work of national supervisors and FIUs, and it will assume direct supervisory competence over a limited number of credit and financial institution with high cross-border activities and a high money-laundering and terrorism financing risk profile.”
What is a more significant change is the inclusion of enforcement of international sanctions--known in EU law as restrictive measures--to the AML framework
But “these changes are not revolutionary, per se,” said Tosza. “What is a more significant change is the inclusion of enforcement of international sanctions--known in EU law as restrictive measures--to the AML framework.” Compliance with international sanctions is already part of the financial sector’s duties and has been incorporated into practices.
Small but “revolutionary” amendment
“However, the new system will significantly extend those duties in a manner that will create substantial burden and risk for financial institutions,” he argued, and analysis of its impact needs to take several elements into account. “The EU has just adopted a directive that harmonises definitions and sanctions for violations of EU restrictive measures.” It’s meant to ensure that courses of conduct that constitute such violations are “punished as criminal offences in national legal systems.”
“This directive contains a small amendment to the AML criminal law directive, and it is this small amendment--which, as I already signalled--proves to be revolutionary,” said Tosza. “This amendment adds violations of EU restrictive measures to the list of predicate offences in the definition of money laundering for the purposes of the AML criminal law directive. It would remain without impact for the preventive component of the AML, except the new AML regulation ends with a terminological dichotomy of different definitions of money laundering, for the purposes of prevention and repression.” Once the new AML regulation enters into force, “there will be only one such definition for both components, and it will be the one from the AML criminal directive.”
“Obliged entities will have to monitor their assets and verify their clients from the perspective of the risk of laundering assets that somehow proceed from circumvention of the restrictive measures,” he added.
“Striking” lack of “proper debate”
Once all this comes into force, the AML system can be seen as having “three pillars”: combating money laundering; combating financing of terrorism; and enforcement of international sanctions, also known as restrictive measures.
“You may already notice a lack of terminological coordination between the AML reform and the directive on restrictive measures, and the use of terms ‘restrictive measures’ in the latter directive and ‘targeted financial sanctions’ in the AML regulation,” said Tosza. “But what is even more striking is the lack of proper debate on the impact of the extension of the AML framework into enforcement of international sanctions, which will be significant for the obliged entities and for the clients.”
“While it is not my intention--by any means--to question the policy behind the sanctions, I’m wondering if the real impact of this framework will be felt in the economies of the countries subject to sanctions, as is the objective of those measures, or rather in the EU economy, with substantial everyday compliance burdens, with significant costs but limited results.”
“Finally, assets that are subject to sanctions may be blocked for different reasons. But per se, they do not constitute benefits from criminal activity, such as drug trafficking, which has been the reason for combating money laundering all along,” he concluded. “This new AML system seems to enter into new territories, the consequences and limits of which we can at this point only imagine.”
Find a replay of the LFF’s livestream .