By Michael Imeson
Just when you thought it was all over, Europe’s anti-money
laundering regulations are likely to change again. The 4th AML Directive comes
into effect this June, but already the authorities are talking about future
amendments. Michael Imeson explains
The three European
Supervisory Authorities (ESAs) on 20 February published a “Joint Opinion on the
risks of money laundering and terrorist financing to the European Union's
financial sector”. The document – released by the European Banking Authority,
the European Insurance and Occupational Pensions Authority, and the European
Securities and Markets Authority – is intended to help the European Commission’s
risk assessment work, as well as assist the ESAs in their efforts to bring about
supervisory convergence and a level playing field in this area.
But the ESAs’ warning comes just a few months before the 4th Anti-Money
Laundering Directive (4AMLD) is due to be transposed into national laws by 26
June 2017. If their recommendations are heeded, the Directive will have to be
amended again in the near future.
The opinion also came just
three weeks after the UK’s Financial Conduct Authority fined Deutsche Bank a
record £163m for failings in its anti-money laundering (AML) controls. Not only
is money laundering a risk to the financial system, it poses a major regulatory
compliance risk to banks and other financial firms who, if their AML controls
are sub-standards, can be fined and suffer reputational damage that could be
more costly than the fine.
The ESAs are mandated to issue a Joint Opinion every two years
under the terms of the Directive, and nearly two years have passed since the
Directive was adopted by the European institutions, even though it has yet to be
transposed into most member states’ laws. The opinion has two
found a number of problems that, if not addressed, “risk diminishing the
robustness of Europe’s AML/CFT defences”. The problems include:
The opinion made several recommendations to improve
AML and CFT defences, including:
Finance expert Thomas Howard, of law firm Pinsent Masons, says the
ESAs’ Joint Opinion “underscores the importance of continued diligence” by
financial firms and national competent authorities. “The forthcoming deadline
for transposition of the 4th money laundering directive later this year will
bring a number of important changes, including a requirement for firms to
document their AML risk assessments and keep them up to date,” he says. “We
expect the FCA and other European NCAs will take a keen interest in such
documentation, and firms’ AML procedures, as part of the overall supervisory
“Firms who are unable to satisfactorily demonstrate
the appropriateness of their AML controls are at an increased risk of
enforcement action as NCAs will undoubtedly be looking to send a strong message
to the regulated community about the importance of AML. Firms would be well
advised to act now to proactively review, and where necessary improve, their AML
frameworks, rather than risk being caught on the back foot.”
Even the biggest
financial institutions cannot afford to be complacent, as Deutsche Bank found to
its cost when it was fined £163m by the Financial Conduct Authority in January
2017 for failing to maintain an adequate AML control framework. It was the
largest financial penalty for failures in AML controls ever imposed on a bank.
It showed that even some of the biggest and supposedly best run banks are unable
to comply with existing AML regulations, before even tougher requirements are
brought in under the 4th AML Directive.
a consequence of its inadequate AML control framework, Deutsche Bank was used by
unidentified customers to transfer approximately $10bn, of unknown origin, from
Russia to offshore bank accounts in a manner that is highly suggestive of
financial crime,” said the FCA in a statement.
the FCA’s Director of Enforcement and Market Oversight, added: “Deutsche Bank
was obliged to establish and maintain an effective AML control framework. By
failing to do so, Deutsche Bank put itself at risk of being used to facilitate
financial crime and exposed the UK to the risk of financial crime.
“The size of the fine reflects the seriousness of
Deutsche Bank’s failings. We have repeatedly told firms how to comply with our
AML requirements and the failings of Deutsche Bank are simply unacceptable.
Other firms should take notice of today’s fine and look again at their own AML
procedures to ensure they do not face similar action.”
Specific deficiencies uncovered by the FCA in the bank’s Corporate
Banking and Securities division in the UK included “inadequate customer due
diligence”, the failure of its front office to take responsibility for its KYC
obligations, the use of “flawed customer and country risk rating methodologies”,
“deficient AML policies and procedures” and a lack of “automated AML systems for
detecting suspicious trades”.
On the plus-side, the FCA
said the bank was “exceptionally cooperative with the FCA” during the
investigation and has committed “significant resources…to correct the
deficiencies in its AML control framework and customer files”.
HM Treasury is
in the final stages of implementing the 4th AML Directive and the accompanying
Fund Transfer Regulation in the UK, through the Money Laundering Regulations
2017. On 15 March 2017, it published a draft of the regulations for the industry
to comment on and they will come into effect by 26 June 2017.
However, nothing is set in stone. The UK regulations will have to be
changed again if the European Commission decides to act on the ESAs’ Joint
Opinion and amend the 4th AML Directive at some future date. As always with
financial regulation, the goal posts never stay in the same place for
author: Michael Imeson Chartered MCSI is
Contributing Editor of The Banker magazine; Senior Content Editor at Financial
Times Live where his role is to organise and/or chair events on financial
services; and the owner of editorial services agency Financial & Business
Publication. Michael is also a regular contributor to Wolters Kluwer’s
Compliance Resource Network.