European Union: Europe's New AML Action Plan

On the 7^th of May 2020, the European Commission (EC) formally announced its new AML/CFT action plan. The reforms seek to create common standards, common application, and common supervision of EU rules, as it should be in a single market. The six pillars of the AML action plan include; the enforcement of existing rules, a single rulebook for EU Member States, a new EU AML authority, coordination and support mechanism for FIUs, law enforcement and information sharing and a role for the EU at a global level.

Single EU rulebook applicable to all Member States:

Rules for the private sector will be laid out in a directly applicable EU regulation and the same rules will apply across the EU in the most substantial areas. The system will follow a risk-based approach, meaning that when risks are relevant for the EU as a whole, they will act at an EU level. However, they do acknowledge that some risks only occur or are more prevalent in certain member states and therefore some flexibility will be allowed to add extra rules at a national level.

The rulebook will also review the list of sectors covered by the existing AML rules, aligning it with the latest FATF standards and covering all types of Virtual Asset Service Provides (VASPs) as obliged entities. This also means ensuring the traceability of transfers of virtual assets. VASPs will be added to the scope of the existing transfer of funds regulation (EU) 2015/847 - meaning any transfer of virtual assets will be accompanied by the full details of sender and beneficiary.

Another part of the plan is to increase the detail in some areas already included in the AML directive, such as Customer Due Diligence (CDD) and Beneficial Ownership. There will be legally binding technical standards to be developed by the future AML authority. Rules will also cover higher risk factors such as bearer shares and cash.

EU-level AML supervision through the establishment of a new authority:

The new EU AML authority will have a regulatory role, that involves preparing technical standards (such as the rulebook) and relevant guidelines. The authority will be the direct supervisor of certain financial sector entities which operate cross border and in the highest risk category. It will also be able to review internal policies, procedures and controls, and their effective implementation, whilst also reviewing and documentation on customers and transactions. The EU-level supervisor will have the power to impose supervisory measures and administrative sanctions, where required, and also, in exceptional situations, take over supervision from a national supervisor.

It will act as a coordinator and overseer of national supervisors for other entities including those outside of the financial sector and will also coordinate and provide support to Financial Intelligence Units (FIUs). The new supervision authority will oversee obliged entities such as banks, insurance, securities, and estate agents.

A limited number of financial institutions will be directly supervised by the authority – relieving national authorities of such duties. The supervisor will also have some indirect powers over the non-financial sector and may in exceptional circumstances take over supervision of entities that are deemed too risky and pose a problem for the integrity of the union's financial system.

Important to note that the new authority will not replace any existing national authorities, but instead will complement their efforts – by reducing workload and coordinating their work.

Essentially, the greatest advantage of the new supervisory authority would be its ability to act much faster than the EBA in the current AML regime. Multinational institutions and their clients also stand to benefit the most from the new reforms, as these will no longer have to consider different AML requirements across each member state.

The authority hopes to be up and running in 2024, achieving full staffing in 2025 and begin to fully operate in 2026. Part of the funding is expected to derive from the obliged entities. It is yet to be seen whether this will be a stand-alone authority or form part of the European Banking Authority (EBA) in Paris. However, the likelihood is that it will be separate from the EBA, given the numerous responsibilities already under its remit. The full details of the plan are to be revealed on the 6^th of July 2021.

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