The EU’s “Fourth Money Laundering Directive”¹ (MLD 4), which was to be transposed by Member States by June 26, 2017 (together with the Revised Wire Transfer Regulation²), and the subsequent changes introduced by the EU’s “Fifth Money Laundering Directive”³ (MLD 5), which came into effect on July 9, 2018 and which will need to be transposed by Member States by January 10, 2020, have all aimed to strengthen the EU’s regulatory framework on preventing anti-money laundering, countering terrorist financing (CTF) and other forms of financial crime (together AML). These changes also aim to bring new business models and assets (such as virtual currencies and custodian wallet providers) as well as due diligence standards, the types of offences into the EU’s AML framework. The changes in MLD 4 and 5 also grant “Financial Intelligence Units” with new powers to request information as well as improved exchange of confidential information between AML/CFT supervisors and prudential supervisory authorities. ⁴

On December 2, 2018, the EU’s “Sixth Money Laundering Directive”⁵ (also known as the Eurocrime Directive) (MLD 6) came into effect with Member States now having to transpose its requirements by December 3, 2020. While MLD 4 and 5 aimed to expand rules and concepts, MLD 6 aims to improve harmonization of the definition of money laundering offences (with 22 predicate offences) and sanctions across the EU. It also contains provisions designed to improve both the investigation of money laundering offences and co-operation between authorities involved in combatting money laundering. Relevant firms and individuals will have to revisit existing policies, procedures and personnel training to not only meet MLD 4, 5, 6 and beyond but also meet the host of changes regarding who supervises AML compliance and how. 

While legislative efforts may have been quick to review and improve this ever-growing part of the EU’s Single Rulebook on financial services, the amount of very public AML failings in 2018 was an on-going theme for Banking Union Supervised Institutions (BUSIs), regardless of their complexity, size and business model inasmuch as it was for EU supervisory policymakers, national competent authorities (NCAs) and the European Central Bank (ECB), acting in its role as the lead of the Banking Union’s Single Supervisory Mechanism (SSM). Improvements to institutional improvements at NCA level—but more importantly at EU or ECB-SSM level—picked up their pace during the fourth quarter of 2018. This Client Alert assesses those institutional efforts and the impact this might have on BUSIs, other non-banking financial services firms and non-financial corporates operating in or through the Eurozone and how best to prepare. 

Consilium’s AML Action Plan and more proposed powers for existing EU supervisory authorities 

The 2018 outgoing Austrian helm of the rotating Presidency of the Consilium of the European Union, which is part of the EU bicameral legislature and represents the executive governments of the EU’s Member States, on November 26, 2018 presented its conclusions in what has been shortened to an EU “AML Action Plan.”⁶ This plan not only encourages swift adoption of MLD 5 by Member States ahead of the deadline but also of a host of short-term (non-legislative) actions⁷ to be advanced during 2019. These are set out in an Annex to this AML Action Plan and are being “operationalized” during 2019. 

In summary, delivery of most of the points in the plan require that the European Commission (as the regulatory policymaker and draftsmen) as well as the NCAs, ESAs and ECB-SSM cooperate with one another. To further complicate matters the NCAs in the AML field may be a mix of conduct of business as well as AML/CFT supervisors – as some jurisdictions have a split between designated authority i.e. the Financial Intelligence Unit and a conduct of business financial services supervisory authority. The ECB-SSM, as lead prudential supervisor in the Eurozone and its Banking Union also sometimes has competing interests with the NCAs as well as the relevant European Supervisory Authorities (ESAs). The ESAs, made up of European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA), each as gatekeepers of “their” part of the EU’s Single Rulebook and coordinators of NCAs are also undergoing a raft of change if proposed institutional reforms give them greater powers of direct supervision as well as NCA oversight. While their funding profiles might change, and that would be sensible, the proposal to grant the EBA the greater oversight over AML may put it at odds with its sister ESAs as well as the NCAs – some of whom may be reluctant to transfer resources and responsibility. This comes on top of the aforementioned authorities all needing to close rank, and do so during a difficult 2019 (of change and Brexit) and priori 2020 to deliver on the Consilium’s Action Plan points to:

1. Conduct a risk analysis of gaps leading to alleged AML cases involving EU BUSIs
2. Focus on AML risks and (incorporating) best supervisory practices in respect of AML by “prudential supervisors” and in the Banking Union, thus the ECB-SSM
3. Assess how to ensure effective cooperation between prudential supervisors and AML/CFT supervisors (i.e. the NCAs) and how to improve supervisory convergence
4. Specify how and when supervisors (in particular prudential supervisors) should take account of AML issues as part of the authorization process (including when authorization might be withdrawn), assess acquisitions of qualifying holdings, fit and proper assessments of management and key function holders as well as review the internal risk management framework in the context of the Supervisory Review and Evaluation Process (SREP) – which is a key supervisory engagement tool across the EU and notably in the Banking Union
5. Assess how to make better use of existing supervisory powers and tools… or in short – how to do better with the tools supervisors already have at their disposal

While the above does not quite yet call for MLD 7 (possibly conceivable and welcome as a directly applicable EU Regulation as opposed to Directive), it does serve as a comprehensive set of deliverables to overhaul the current institutional set-up of which supervisors do what and where in respect of AML supervision.

ECB-SSM looks to coordinate more with SSM AML Office 

Despite a tall order of deliverables it is important to note that there are multiple and prominent references in the Consilium’s Action Plan directing stakeholders to take note of the “prudential supervisory” aspects in relation to AML. This matters as firstly, AML has traditionally always been a conduct of business matter in the EU and secondly because a move to making this a prudential regulatory priority opens the door for a shift in who supervises compliance. That shift may have already begun, with the ECB-SSM’s announcement at the Introductory Statement from the then Chair of the Supervisory Board of the ECB, Nouy, on December 20, 2018⁸ acknowledging the current ECB-SSM shortcomings in respect of AML supervision. As a direct means of combatting shortcomings and improving supervision the ECB-SSM announced that it would be setting up of an SSM AML Office. This dedicated “coordination function” would be tasked with:

A. Acting as a single point of entry with respect to direct exchange of information between the ECB-SSM and AML authorities

B. Setting-up and chairing an “AML Network” amongst SSM Joint Supervisory Teams for those BUSIs with “high level of anti-money laundering risks”—not defined but one would imagine identifiable via the SSM run SREP as is already being done to date and will likely continue

C. Being a center of expertise on SSM related AML/CTF issues and assisting in the development of ECB positions on AML topics

As this SSM AML Office is being described as “a coordination function” as opposed to a (new) supervisory power, it is conceivable that the ECB-SSM is able to justify, within the existing supervisory mandate conferred upon it by its founding legislative instruments i.e. SSM Regulation and SSM Framework Regulation, that it does not require EU level legislation granting specific powers. This is rather innovative but in keeping in how the ECB-SSM seeks to broaden its mandate within existing primary EU legislation.

We would nevertheless expect that over time that the ECB-SSM, in its rulemaking capacity publish a non-public Guideline setting out how the SSM AML Office operates within the SSM (including processes in the non-public SSM Supervisory Manual) as well as a public Decision communicating terms of reference to BUSIs and other stakeholders.  Over time, this could evolve to a more wide-reaching ECB-SSM legislative instrument, especially if it becomes apparent that this ECB-SSM effort may need to distinguish itself from the EBA’s own expected efforts.  This may on the one hand serve to silence critics while at the same time reassure BUSIs and other stakeholders on what this SSM AML Office’s regulatory and supervisory role and tasks are. In many ways the ECB-SSM may have secured “first mover advantage” in relation to the on-going political and technical discussions to revise and improve the supervisory mandates (including funding models) of each of the ESAs more generally as well as specifically for the EBA.

EBA gets expanded powers

However, it is not just the ECB-SSM that is gearing up. On December 19, 2018 the Consilium announced⁹ that it had agreed a Compromise Text¹⁰ for an EU Regulation¹¹ (thus directly applicable) that would apply to “financial sector operators” (FSOs) and more generally grant the EBA, by amending MLD 4 as well as the EBA’ founding legislation, the EBA Regulation¹² (as well as corresponding technical amendments in equivalent “founding” legislative instruments for ESMA and EIOPA), with new powers (essentially similar to those in the AML Action Plan) to

1. Collect information from NCAs relating to suspected or actual deficiencies in AML supervision and/or breaches
2. Develop common standards of supervision and coordination of the NCAs as well as taking the lead in the AML committee set within the ESA’s Joint Committee – which already has a specific committee on AML issues as well as draft Guidelines on cooperation in development—further, the EBA would be tasked with taking the lead on international coordination issues
3. Performing risk assessments on AML strategies and resources of NCAs
4. Facilitating cooperation with non-EU countries on cross-border AML cases
5. As a “last resort”, if NCAs do not act, the EBA would be able to address supervisory directions in the form of Decisions, a legislative instrument, to individual FSOs directly

FSOs are (currently) defined in the Compromise Text as any entity (and this is a broad reach that covers most of the regulated market participants operating in or through the EU) that are:

A. Subject to MLD 4 and thus an “obliged entity” within the meaning of MLD 4 (as amended by MLD 5 and 6) which is either.

• A “credit institution” within the meaning of the CRR/CRD IV regime (as will be amended by CRR 2/CRD V)
• a “financial institution”, which in turn is any of the following:
  • An “undertaking other than a credit institution” which undertakes certain regulated activity listed CRR/CRD IV as well as currency exchange offices
  • An insurance undertaking – insofar as it covers life assurance activities as defined in the EU’s Solvency II
  • An investment firm pursuant to MiFID II (NB the Compromise Text has failed to update the legislative reference from MiFID I in MLD 4)
  • A collective investment undertaking marketing its units or shares (more specifically this would be any UCITS (represented by the UCITS Management Company) under the UCITS Directives or any AIF (represented by the AIFM) under the AIFMD/R Framework
  • An insurance intermediary except a tied-insurance intermediary as defined in the EU’s Insurance Mediation Directive which has now been repealed and replaced by the Insurance Distribution Directive (and the Compromise Text has failed to update that legislative reference), or
  • A branch, when located in the EU, of financial institutions referred to in points i. to and including v. above, irrespective of whether the relevant head office is situated in an EU Member State or a third country, or
• A “financial market participant” which means “…any person in relation to whom a requirement in [EU financial services legislation] or a national law implementing such legislation applies."

The Compromise Text however does not empower the EBA nor does it designate it to act as a centralized EU-wide Financial Intelligence Unit to whom FSOs would be obliged to file suspicious transaction reports in accordance with existing EU AML legislation. While that might be a missed opportunity at present, it is debatable whether the EBA could handle that activity with its current available resources.

While the ECB-SSM is responsible for the Banking Union, the EBA is responsible for the banking sector of the entire EU and also for crafting standards for other sectors of the EU financial markets. The Compromise Text is expected to be negotiated, adopted and applied during the course of 2019 – in line with the AML Action Plan, and, if passed, changes could apply within three months of entry into force. The EBA ran a vacancy notice for one (1) expert on AML from November 7 to December 6, 2018 and its 2019 Work Program (see our standalone coverage from our Eurozone Hub on this) allocated three full time equivalent positions and €777,000 in resources for the existing AML responsibilities of the EBA as well as the potential expanded mandate, if the Compromise Text is adopted. That does beg some questions on efficacy and adequacy – even if it marshals and builds off resources at the NCA level.

Outlook and next steps

With all the change that is being proposed to strengthen and improve the EU’s AML Framework as well as granting the EBA extended powers (but with no increase in funding or resourcing to discharge that mandate in a substantive form), and with the ECB-SSM, whose new SSM Chair of the Supervisory Board is the former EBA Chairperson, flexing its supervisory mandate into applying greater supervisory scrutiny to what are conduct of business matters—and this is not the first time this happens—some stakeholders might be forgiven to think that MLD 7, even as a Directive might be preferable and more clear cut over the patchwork of policy-driven fixes to plug problems. 

Even a recast i.e., consolidated version of respective legislative instruments relating to the EU’s AML Framework and/or more generally, the ever-growing mandates of the ESAs, would be welcome for many in the market. The same applies in terms of reflecting the ECB-SSM’s own efforts. In practical terms both EBA’s and ECB-SSM’s efforts will translate into the following for firms (regardless of whether they are BUSIs or financial sector operators):

1. A more intrusive supervisory tone of engagement, with expanded powers of on-site inspection  and/or coordination with NCAs, Financial Intelligence Units as well as actions by law enforcement  and/or state prosecutors. Expect efforts amongst EU components of the European System of Financial Supervision and other domestic authorities and/or international peers to be more joined-up even if visits are multiple and more frequent
2. A need to demonstrate beyond just governance, risk, compliance, legal and other control functions and relevant measures in how AML policies, procedures and prevention culture (including evidence of how decisions are justified) fit within a risk appetite and risk tolerance of a firm, but what safeguards there are in respect of also ensuring conduct of business failings do not translate into a prudential regulatory impact
3. How firms are preparing for change introduced by MLD 5, 6 and beyond at the governance and executive function level setting the strategic steering of the business as well as through each of the levels of operations and business levels in a three-lines of defense model that most regulated firms are required to maintain

Some of what is being proposed and/or advanced is of course to be expected by policymakers needing to respond to public shortcomings. Yet, what a revised EU legislative effort would still have difficulty doing, including in light of a difficult first half of 2019 with Brexit, EU Parliamentary Elections and a host of other legislative instruments reforming financial services across the EU during the Romanian Presidency of the Consilium, is the inter-institutional discussion of who “exactly” is in the lead. 

This is the case as the jury is still out as to whether the EBA or the ECB-SSM will truly set the tone on delivering stronger on AML. All of these proposed changes also come at a time when the EBA (a tenth in size of supervisory staff when compared to the SSM) is itself relocating to Paris from London and looking to secure appropriate subject matter experts for what is a very busy regulatory and supervisory cycle and is dependent on a legislative proposal. That being said, the ECB-SSM will not look favorably on firms that fail to prepare and will also, in its new coordination role through the SSM AML Office, perhaps convey its tone with efficiency well beyond just the Eurozone’s banking sector and its participants out to other FSOs. In short, the existing super-supervisors of the Eurozone and the EU’s have been handed greater powers to also step-up as the new sheriffs in AML. 

If you would like to discuss any of the items mentioned above, in particular how to comply with MLD 4, 5, 6 and beyond, or how the revisions to the institutional framework as well as the 2019-2021 supervisory priorities of the ECB-SSM, EBA and other ESAs (see also our standalone briefing on that) may affect your business more generally, please contact our Eurozone Hub key contacts.

1. Regulation (EU) 2015/849.↩
2. Regulation (EU) 2015/847 setting out mandatory information accompanying transfer of funds.↩
3. Regulation (EU) 2018/843.↩
4. Which includes the ECB-SSM notably falling the limitations that the failure of the Latvian Bank ABLV highlighted in prudential regulators lacking AML/CFT supervisory powers.↩
5. Regulation (EU) 2018/1673.↩
6. See: https://www.consilium.europa.eu/media/37283/st15164-en18.pdf ↩
7. In the form of 8 objectives and 28 “short-term” actions. ↩
8. See: https://www.bankingsupervision.europa.eu/press/speeches/date/2018/html/
   ssm.sp181120.en.html ↩
9. See: https://www.consilium.europa.eu/en/press/press-releases/2018/12/19/anti-money-laundering-council-agrees-position-on-reinforced-supervision-for-banks/ ↩
10. See: http://data.consilium.europa.eu/doc/document/ST-15569-2018-ADD-1/en/pdf showing changes to the original proposed Regulation.↩
11. Referred by some commentators as the “Omnibus Regulation”. ↩
12. Regulation (EU) No. 1093/2010).↩
13. See our standalone coverage on recent developments of the ECB-SSM’s own powers on this.↩
14. Certain systemic BUSIs have been subject to repeat investigative measures applied against them including on-site inspections, supervisory appointed monitors and dawn raids in respect of on-going concerns.↩