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Western EuropeOctober 1 2018

Supervisors or enforcers: who steers AML in Europe?

Even after several revisions, the EU’s anti-money laundering directive does not definitively answer the question of whether a unified EU approach to AML is needed and politically achievable. Stefanie Linhardt reports.
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Tom Keatinge

Tom Keatinge

Money laundering and the response to it are firmly back on the European agenda. After cases of alleged money laundering involving lenders in Latvia, Estonia and Malta in 2018, questions have been raised over the effectiveness of Europe’s anti-money laundering (AML) measures and if EU authorities, including the European Central Bank (ECB), require greater supervision and enforcement powers.

Indeed it is still often the US, mainly the US Treasury’s Financial Crimes Enforcement Network (FinCEN), that points the finger and highlights AML shortcomings, even in Europe. Latvia’s second largest bank by assets on year-end 2016 data, ABLV Bank, was a case in point.

When FinCEN issued its 311 Special Measures ruling in February 2018, pointing out alleged money laundering at ABLV, the spotlight fell not only on the lender and the country’s AML procedures, but also on the ECB. Its supervisory arm, the Single Supervisory Mechanism (SSM), was ABLV’s direct supervisor, yet it was FinCEN that launched measures related to the alleged money laundering.

Limited powers

The SSM, however, is not overseeing AML, which despite the SSM’s wide-ranging powers remains a matter for national supervisors. What the SSM does include in its Supervisory Review and Evaluation Process (SREP) assessments of banks it supervises is scrutiny of internal governance and the assessment of institutions’ compliance function and procedures, operational risk and the assessment of conduct risk and a bank’s business model “within the limits of its competence and in the light of the information available”, according to ECB supervisor and chair of the supervisory board Danièle Nouy.

“In the specific case of ABLV, the ECB was made aware on a number of occasions that the bank was struggling with anti-money laundering issues,” she wrote in a letter to member of the European Parliament (MEP) Sven Giegold on May 3. “While the ECB cannot itself investigate and determine AML breaches, within the limits of its competence and in the light of the information available, it took those issues into consideration, including in its SREP assessment, addressed them and followed up with supervisory actions to the extent possible,” she added.

The Latvian banking sector is uniquely complex, involving high levels of non-resident deposits and shell companies, often used in attempts to disguise the beneficial owners. This is a historic problem the country's government is seeking to address.

“Until 2015, there was a huge risk appetite within our banking sector to service non-residents and the business was skyrocketing,” says Latvia’s minister of finance, Dana Reizniece-Ozola. She adds that non-resident deposits then exceeded 50% of all deposits in the country, a figure that was reduced to just over 20% by May, thanks to numerous policy initiatives. 

“I cannot understand how the ECB is meant to judge the business model [of a bank] if it is neglecting AML risks that come with large amounts of non-resident business – ABLV was a centrally supervised bank with large amounts of non-resident deposits,” says Ms Reizniece-Ozola. “It does require a lot of capacity but a central European institution for AML issues should be established.”

So, because it was ABLV’s direct supervisor, should the ECB have spotted these issues?

Legislation vs supervision

Within the EU, AML issues are governed by the AML directive, which was passed in 1991. After several revisions, the fifth AML directive was adopted in July 2018.

Given that the measures come in the form of an EU directive rather than regulation, member states have longer to transpose requirements into national law – in this case, until January 2020 – and implementation can vary greatly.

Tom Keatinge, director of the Royal United Services Institute’s (RUSI's) centre for financial crime and security studies, believes that while awareness of the need to work on AML has improved over the years and that important new measures have been agreed in the fifth directive, the revision process is moving too slowly. “The directives take years to be agreed and then there is a long implementation period, by which time all sorts of new issues will have come along, which the directive does not address,” he says. “It is more or less out of date when it is agreed.”

Another issue is inadequate implementation of EU directives by member states and a somewhat lax sanctions procedure for late or inefficient transposition of directives into national law. As of mid-July 2018, the European Commission had referred Greece and Romania to the EU’s Court of Justice for not transposing the fourth AML directive into national law, and Ireland for not implementing it fully. It also sent so-called ‘reasoned opinions’ to Latvia, Spain and Malta because the assessment of the transposition of the directive into national laws by these countries was not deemed complete. The deadline to transpose the fourth directive was June 26, 2017.

In a bind

But would it be better to regulate instead of issuing directives?

“I think AML regulation has to become more binding,” says Ms Reizniece-Ozola. “These issues were discussed during the April Eurogroup meeting and the ECB was also very supportive of this.”

Robert Dedman, senior director in the global investigations and compliance practice at US consultancy Navigant, says: “The advantage of moving from a directive to a regulation [would be] that the EU would be imposing a single set of uniform standards directly on member states (as it has done with the general data protection regulation), rather than relying on member states to legislate themselves.

“However, the legal mechanism by which you impose the standards isn’t a silver bullet. Even if the EU were to move AML into a regulation, there would still be differences in how regulators supervise against it within member states, in part due to different levels of knowledge, experience and capability within member states’ regulators.”

An SSM for AML?

Given the seriousness of money laundering and its connection to other criminal activities, an increasing number of experts are advocating the introduction of a central European authority to tackle the issue across the region.

“The European Commission cannot hesitate any longer to bring forward a legislative proposal for a European AML authority that the European Parliament, several banking supervisors and national AML authorities have already called for,” said Mr Giegold, an MEP and economic and financial spokesman for the Greens/EFA group, in a statement on July 9.

Mr Giegold is a member of the European Parliament’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3), headed by Petr Jezek of the Alliance of Liberals and Democrats for Europe, which was set up in March to tackle financial crimes, tax evasion and tax avoidance.

MEPs in the TAX3 and Economic and Monetary Affairs committees are among those who have led the debate over whether and how the supervisory architecture regarding AML could be better designed. Mr Giegold believes that the ECB should “build up its own expertise in the area of money laundering” and should then “systematically take money laundering risks into account in banking supervision”. SSM chair Ms Nouy highlighted in 2017 that it was a “decision for politicians and legislators” whether money laundering should be supervised centrally.

Following the 311 announcement by FinCEN on ABLV, Ms Nouy said in a statement: “When creating the SSM framework, EU member states chose to keep the responsibility for combating money laundering at the national level. Breaches of AML can be symptomatic of more deeply rooted governance deficiencies within a bank but the ECB does not have the investigative powers to uncover such deficiencies. This is the task of national AML authorities. Only when such breaches have been established by the relevant national authority can the ECB take these facts into consideration for the purposes of its own tasks.”

A European approach

SSM deputy director general Roberto Ugena suggested in a public hearing on money laundering in the EU banking sector by TAX3 in April that a more European approach on fighting money laundering could be considered.

“Taking into account the dual nature of AML, at the crossing between supervisory and judicial spheres, the review of the AML directive might not suffice to ensure smooth and all-encompassing co-operation,” he said. “The spectrum contributing to an all-encompassing co-operation can go from having a formalised exchange forum between national competent authorities on money laundering or even go up to a centralised authority.”

Ms Nouy told a parliamentary hearing on March 26: “We need a purely European approach to money laundering… to ensure the consistent application of the rules from one member state to another.” 

The idea of a eurozone-wide AML supervisory body is also finding some support from EU leaders such as Lithuania’s finance minister, Vilius Sapoka. “Having recently consolidated banking supervision powers at eurozone level, AML measures remain the responsibility of national competent authorities, but if we consider money laundering a big risk, it should be managed seriously with a centralised solution,” he says. “European institutions, the European Commission and the ECB should devote sufficient attention to the lessons learned and, looking forward, submit a proposal covering current and possible future risks.”

Supervision and enforcement

But while a European regulatory framework and its supervision are key to tackling money laundering, the implementation and enforcement of these measures is even more important, according to RUSI’s Mr Keatinge.

“It’s a law enforcement issue,” he says. “It is definitely not something that supervisors or regulators should be leading because what you want is actions to be taken and what the supervisors and regulators do, they suck their teeth. They don’t really have the powers that we are looking for in this case.”

Law enforcement agencies in EU member states are having to rely on the goodwill of the authorities in other countries to help them with their investigations. Co-operation between national agencies is meant to improve with the fifth AML directive, because the new version of the directive requires states, among other measures, to introduce centralised bank account registers to help the work of security forces.

Still, Mr Keatinge notes more co-operation and information sharing is needed among EU states, something that was often highlighted by Europol’s former head, Rob Wainwright. “If you think how seamlessly money moves around the world, the response to money laundering definitely does not do that,” says Mr Keatinge. “The one thing that impedes money laundering cases most often is the inability of the [police] to cross the borders. When you get to the border, that is the end of your jurisdiction. You don’t have an overview of the money beyond your domestic environment.”

To be effective, AML supervision needs to balance both proactive supervision of financial institutions, and ex-post enforcement where breaches of regulations are identified, according to Navigant’s Mr Dedman. “In addition to punishing poor behaviour, enforcement serves as an indicator to the wider financial services industry as to how the regulator perceives failings, the regulators’ view as to the impact of them, and how they are likely to react in the future,” he says. “The risk-based nature of AML regulation makes it a good area for real, in-depth, proactive supervision – with the regulator working alongside the industry for the common purpose of interdicting financial crime.”

Next steps

So, what is next for AML? This year has not only seen the ABLV case in Latvia, but alleged money laundering at Danske Bank’s Estonian branch, Malta’s Pilatus Bank and a ruling by the Netherlands Public Prosecution Service that ING has violated the country's Anti-Money Laundering and Counter Terrorism Financing Act, for which the Dutch lender paid a €775m settlement.

Despite progress in the fight against money laundering with the fifth EU directive, the new rules do not address all the gaps exposed by this year's banking scandals, not to mention new and emerging risks.

“Criminality and the money laundering that inevitably follows is always evolving, and for that reason the fifth directive is unlikely to be the last word on the subject,” says Mr Dedman. “Taken together, the fourth and fifth directives provide a step forward within the EU, but more still needs to be done at a regulatory level to address the emerging risks of the digital economy, including crypto-currencies. Only crypto-exchanges are [so far] caught by the fifth directive.”

Another difficulty highlighted by the Danske Bank case is the interplay and division of competencies, not only between domestic and EU authorities, but also between home and host regulators and enforcement agencies.

“There is increasing recognition of the importance of AML but to make it more effective you would need Europol to provide a solution,” says Mr Keatinge. “So you would need the Brussels Eurocrats to turn to Europol and say ‘We are throwing you the ball. Show us what you can do.’ This has not happened yet.”

Eurogroup finance ministers highlighted in their April meeting the need for better information sharing, coordination and enforcement of AML provisions and agreed that discussions to strengthen the AML framework will continue at a technical level.

“These different initiatives will then be politically discussed and decisions will be made on the Eurogroup level,” says Ms Reizniece-Ozola. She adds that after the ABLV case, “Latvia was not regarded as a scapegoat” but as a lesson and an opportunity to revise systemically the AML monitoring and supervising issues in Europe. “The route to improvements sometimes hurts,” she concludes.

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