Europe’s AML regulations…more changes on the horizon? | Wolters Kluwer Financial Services
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  • Europe’s AML regulations…more changes on the horizon?

    By Michael Imeson

    Published April 17, 2017

    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 Joint Opinion 

    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 objectives:

    • To help the European Commission assess the risks of money laundering and terrorist financing.
    • To help the ESAs assess the risks and ensure that member states adopt a common legal, regulatory and supervisory approach to these types of financial crime.

    The opinion found a number of problems that, if not addressed, “risk diminishing the robustness of Europe’s AML/CFT defences”. The problems include:

    • Firms failing to understand the money laundering and terrorist financing (CFT) risks they face.
    • Firms failing to implement effective systems and controls in areas such as customer due diligence (CDD).
    • Firms finding it difficult to access intelligence that might help identify and prevent terrorist financing.
    • Firms withdrawing services from customers considered higher risk and less profitable, thus driving higher risk transactions underground.
    • “National competent authorities” (NCAs) taking considerably different approaches to the problem.

    The opinion made several recommendations to improve AML and CFT defences, including:

    • Amending the 4th AML Directive to clarify the responsibilities of home and host supervisory authorities in the case of firms operating internationally.
    • The ESAs taking steps to improve co-operation between member states’ supervisory authorities, especially in the supervision of electronic money providers.
    • The Financial Intelligence Units (FIUs) and other law enforcement agencies of member states should work more closely with firms to help them identify risks.

    A lawyer’s opinion

    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 process.

    “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.”

    The cost of non-compliance 

    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.

     “As 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.

    Mark Steward, 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”.

    The Directive’s moving goal posts

    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 long.

    About the 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.

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