In September 2018, against a back-drop of high profile banking collapses and concerns about insufficient anti-money laundering (AML) oversight at a national level, the European Commission published bold and ambitious proposals to strengthen EU-wide AML supervision.
If these proposals can be implemented successfully, this would mark a significant improvement in the AML regulatory framework and would represent a major step forward in the fight against financial crime.
A key aspect of the proposals is to strengthen the AML supervisory powers of the European Banking Association (EBA); making it a ‘datahub’ responsible for the collation and analysis of suspicious transaction reports and giving it new investigatory and enforcement powers.
The Commission also wants to see improved cooperation and information sharing between AML national supervisors, as well as greater coordination with prudential supervisors too, such as the ECB.
For the EBA to be effective in its enhanced role it will require a considerable degree of additional funding and resource. AFME has previously called for the resources of the ESAs to be increased appropriately to develop and acquire the necessary skills to perform their expanded roles.
There will also need to be careful coordination between the EBA and other relevant stakeholders. This requires a detailed plan and a realistic timetable for how the ESAs review proposal will be implemented in practice. In December 2018, the European Council published an action plan which set out what steps are required to achieve the Commission’s objectives. This is a welcome step, but further detail is still required.
Quick changes to AML practices could make a big impact
Once a new Commission begins its term in autumn this year it is likely that the pace of work on the AML proposals will increase; but in the meantime, there are three areas where relatively quick changes could have a dramatic impact on the fight against financial crime.
Suspicious transaction reporting
Estimates vary, but it is thought that up to 90% of suspicious transaction reports (STRs) are not useful to national AML supervisors. That is because the money laundering reporting officers within organisations feel pressure to overreport, for fear of enforcement action or personal liability if they omit information. The result is that regulators are normally swamped with information of questionable relevance, do not have the resources to analyse the information received and the most important information will not be shared between Member States. In short, the underlying threat is not addressed.
If the industry is to improve the quality and usefulness of its STRs, the current reporting cycle needs to be reset. A more collaborative approach is required. Organisations must be encouraged to report much more selectively, and regulators must provide feedback on the quality of the reporting.
There are several areas where technology can help in the fight against financial crime. Technology could be used to improve the efficiency of the client onboarding process for financial institutions. Rather than firms managing the full ‘know your customer’ (KYC) checking process, specialist information providers could gather information electronically from clients and then share this information with financial institutions when they need to undertake checks. Whilst there may be data protection concerns, if these can be overcome, this could significantly reduce the cost associated with client onboarding and help to target resources more effectively. We have been pleased to see the Commission’s expert group on electronic identification and remote KYC processes looking at this topic.
Technology could also be used to help address the issue of inefficient suspicious transaction reporting, already outlined. A single system could help to gather STRs in a secure central repository, analyse the information and allow for the effective and targeted sharing of information between Member States.
Financial institutions could also use technology to enhance their monitoring and surveillance of money laundering risk. Many financial institutions are already employing artificial intelligence and machine learning systems to spot complex patterns of behaviour which may not be discernible by compliance teams.
At present the AML rules and their enforcement vary significantly across the EU. For example, the format and practice for suspicious transaction reporting, the customer due diligence checks performed on clients and the application of penalties for AML breaches is different across Member States. This is inefficient and costly for businesses and makes it harder for Member States to fight money laundering effectively. A harmonised approach is crucial.
Whilst the Commission’s proposal (particularly the role of the EBA) aims to increase harmonisation across the EU, one quick and effective means to address this inefficiency would be to transform the Anti-Money Laundering Directive into a Regulation. This would remove any latitude for varying implementation of the rules across Member States and could create significant administrative savings.
AML will continue to be a priority
AML is already an important area for compliance teams in financial institutions. This looks likely to continue and indeed become an even bigger priority in the coming period as the EU’s proposals develop further, and public interest in this area continues.
While this may pose challenges to businesses there are also potentially significant benefits to organisations in the form of cost savings and more effective AML procedures.