New ECB opinions on EU anti-money laundering package

Background

On 20 July 2021, the European Commission adopted its new package of legislative proposals designed to strengthen and modernise the EU anti-money laundering (AML) and counter-terrorist financing (CTF) framework (the Package).

The Package will modify, expand and revise the current framework by establishing a new central EU AML/CFT authority (the AMLA), as well as creating a new EU single rulebook on AML/CFT rules (the AML/CFT Single Rulebook) that is distinct from the single rulebook containing prudential standards for the banking sector.

As the first key proposal, Regulation establishing the authority for AML and CTF (AMLA Regulation) will establish the AMLA. Described as the “heart” of the Package, the AMLA will be the centrepiece of an integral AML/CFT oversight system, comprising the AMLA itself and national authorities and covering both the financial and non-financial sectors. This set-up is similar to the Single Supervisory Mechanism a central pillar of the banking union.

The AMLA will have a combination of direct supervisory authority (over high-risk financial institutions) and indirect supervisory authority (over other financial and non-financial institutions). For certain high-risk financial institutions, it will become the direct supervisor. Otherwise, it will coordinate national supervisors to increase their effectiveness in enforcing the AML/CFT Single Rulebook to ensure homogenous and high quality supervisory standards, approaches and risk assessment methodologies.

The AML/CFT Single Rulebook, the second key proposal in the Package, is a unified regulatory framework including directly applicable rules imposed on obliged entities. It is designed to ensure that the AML/CTF rules are applied more consistently, and are better enforced, throughout the EU. Three of the Package’s legislative proposals relate to the AML/CTF Single Rulebook:

• Proposed Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the AMLR) would, for the first time, introduce an EU-wide single rulebook of AML/CFT rules that is directly applicable to obliged entities;
• Proposed Directive on the mechanisms to be put in place by member states for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and repealing Directive (EU) 2015/849 (the AMLD6), complements the AMLR containing rules for institutional AML/CTF measures at the national level; and
• Proposed Regulation on information accompanying transfers of funds and certain crypto-assets (recast) (the recast revised WTR), which will ensure that crypto-asset transfers can be traced for AML/CTF purposes.

ECB Opinions

On 16 February 2022, following its opinion on the recast revised WTR, the ECB has published two new opinions addressing the remaining proposals of the Package. Generally, it welcomes the establishment of the AMLA and the AML/CFT Single Rulebook and supports the intended legislative and regulatory changes to the AML/CTF regime.

Opinion on the AMLA Regulation

While the ECB’s own mandate does not include AML/CTF supervision, money laundering has been included as an element in ongoing prudential supervision (as the ECB makes clear on its website). Hence, the introduction of more harmonised rules and a new authority to enforce them is a very significant development for the ECB, mainly in its role as prudential supervisor but also in relation to its central banking tasks. The ECB ‘warmly welcomes’ the proposal and in addition to the opinions published a blog post (by Édouard Fernandez-Bollo) and speech (by Frank Elderson).

Broadening the pool of entities under direct supervision

Drawing on its experience as an EU-level supervisor, the ECB advocates increasing the number of entities that would become subject to direct AMLA supervision. To be strong and credible, the AMLA needs to directly supervise a sufficiently large number of entities headquartered in each of the member states. The relatively strict selection criteria set out in AMLA Regulation might not produce such a pool of entities. Only approximately 12 to 20 institutions would meet the proposed criteria and these are unlikely to be spread across all member states.

The ECB recommends amending the criteria for identifying the entities to guarantee EU-wide coverage and make them as objective as possible. It also cautions against tying the selection to a “high-risk” status as this approach means indirectly disclosing confidential supervisory information. It could lead to reputational damage for the entities in question with negative prudential consequences.

The importance of a smooth cooperation framework

While the ECB welcomes the AMLA Regulation’s broad coverage of the cooperation between the AMLA and non-AML/CFT authorities, it should provide added value rather than adding additional layers of complexity.

In this respect, the ECB makes the following key points:

• In its current form, the AMLA Regulation makes cooperation by the AMLA contingent upon its need for the fulfilment of its tasks; this should be broadened to include a general cooperation duty within the boundaries of the AMLA’s mandate.
• The AMLA is to build an AML/CTF database that could play a central role in enhancing cooperation between prudential supervisors and AML/CFT supervisors. It should, however, make use of already existing distribution channels to avoid duplication of efforts. Additionally, the AMLA should be required to provide information not only upon request but also on its own initiative to ensure a smooth exchange of information within the new cooperation framework.
• As there will likely be regulatory products, such as guidelines and technical standards, coming out of the new regime that affect also prudential supervisors, the corresponding cooperation requirement should be amended to include a broader range of EU regulatory bodies.

Issues concerning direct and indirect supervision

The ECB raises two principal concerns regarding the envisaged process for direct supervision:

1. The ECB addresses the set-up of the envisaged Joint Supervisory Teams (JSTs) that will take over the direct supervision and are made up of staff from both the AMLA and national supervisors. The ECB shares some of its best practice and, inter alia, recommends that JST staff be based at the AMLA’s headquarters rather than individual member states and to split off-site and on-site tasks between different teams.
2. The ECB argues that it is crucial for the AMLA to coordinate its supervisory actions with the other relevant authorities to limit the risk of an uncoordinated exercise of supervisory powers leading to unintended consequences. 

As for the AMLA’s indirect supervisory role, the ECB expresses the following concerns:

1. Under the current proposal, the AMLA can request a transfer of supervisory powers from a national supervisor to itself only in the case of non-compliance of the concerned supervisor. The ECB recommends incorporating an option that allows for a transfer of powers also outside of such cases if requested by the respective national authority.
2. The oversight toolkit for indirect supervision does not sufficiently provide for the means to gather information on non-selected obliged entities. The ECB especially stresses, that effective indirect supervision requires a balance between fostering supervision convergence and institution-specific supervision. Under the current provisions, however, national supervisors are required to provide information on obliged entities under indirect supervision in only a very limited number of cases. 

Opinion on the AMLR and AMLD6

In its second opinion, the ECB comments on the AMLR and AMLD6, such as certain prudential supervisory aspects, the limit to cash payments, and the definition of crypto-assets.

Compliance functions within obliged entities

The AMLR introduces two new categories of senior managers: the “compliance manager” (CM) and “compliance officer” (CO) that will form part of the credit institution’s internal control functions.

The CM must be an executive member of the board of directors (or an equivalent governing body) and will be responsible for implementing the obliged entity’s policies, controls and procedures to ensure compliance with the AMLR. The ECB stresses that a bank’s ‘management body’ (a term used on other legislation which the ECB suggests to use in the AMLR, as well) collectively approves and reviews strategies and risk management policies and recommends for the AMLR to clarify that appointment of a CM does not absolve the management board from this collective responsibility.  

The CO, on the other hand, will be a member of the obliged entity’s senior management and be appointed by the management body. They will be responsible for the day-to-day operation of the entity’s AML policies, as well as reporting suspicious transactions to the financial intelligence units.

Where obliged entities are subject to checks on their senior management, the CM and CO will be subject to a suitability verification. The ECB suggests several clarifications as regards this verification, including:

• When a verification is performed by an authority other than an AML/CFT supervisor, the respective AML/CFT supervisor should provide that authority with any necessary input needed for the verification within an appropriate deadline.
• AML/CFT supervisors should be able to prevent an appointment to a CM or CO role if they consider the relevant person not to be fit for this role. They should have this power even when the overall verification is performed by another authority and without it affecting such authority’s power to issue a positive decision regarding appointment of the appointee to functions other than CM and CO for which they are deemed to be fit.
• The input (i.e. the assessment regarding knowledge, skills and experience of the appointees) that is given by the AML/CFT supervisors should become part of the decision of the authority performing the overall verification.
• The AML/CFT cooperation guidelines envisaged in the AMLD6 should include practical modalities of how AML/CFT supervisors will cooperate with the ECB and national authorities with respect to the process of suitability verifications.

Preventing uncoordinated imposition of administrative sanctions and measures

As in its opinion on AMLA Regulation, the ECB expressed concern regarding the uncoordinated exercise of supervisory powers by different supervisory authorities. That is especially relevant when it comes to imposing administrative sanctions and measures on obliged entities and the withdrawal of authorisations.

Under the AMLD6, AML/CTF supervisors have access to a plethora of administrative sanctions and measures, including the power to withdraw or suspend authorisation of obliged entities. According to the ECB, to prevent such sanctions and measures imposed by other supervisory authorities from coinciding or interfering with those of other authorities, such as the ECB itself, an appropriate coordination mechanism should be created.Where another authority has the power to withdraw the authorisation, the AML/CTF supervisors should only be competent to propose supervisory action to the former.

Cash payment limit and legal tender status of the euro

The AMLR introduces a general prohibition on traders accepting cash payments exceeding € 10,000. While such limits (varying between €500 and €15,000) already exist in the majority of member states, the AMLR would introduce the first EU-wide limit on cash payments. The ECB generally welcomes the high threshold for the limit so as not to threaten the economic viability of cash as a widely accepted means of payment. The ECB notes that “cash continues to play an important role in society” and refers to the European Court’s case law on the proportionality of limitations of the legal status of Euro banknotes to argue for the inclusion of exceptions; these should cover cases in which alternatives to cash payments would not be available. It generally cautions not to endanger the legal tender status of the euro.

New terminology “crypto-assets”

The AMLR replaces the term “virtual currencies” with the term “crypto-assets”. The ECB welcomes this change, as the old terminology could lead to misperceptions as to the nature of those types of assets, which are not currencies. It notes, however, that the new terminology may not cover all types of virtual assets and suggests considering an even broader and more technology-neutral definition (for example the definition provided within the Recommendations of the Financial Action Task Force).

Outlook

The Commission envisages adoption of the AML/CFT Single Rulebook in 2022, with the full regime coming into force three years later. This will give the AMLA, that is to be established on 1 January 2023 and will start most of its activities on 1 January 2024, time to prepare the necessary technical standards to begin its direct supervision in 2026.

The new opinions provided by the ECB will certainly have an impact on the Package’s ongoing legislative progress, given the ECB’s experience as a supranational prudential supervisor and the fact that the success of the SSM influenced the set-up of the AMLA supervision. As for the question of how many of the ECB’s proposed changes – which, as usual, are set out in legislative detail in annexes to its Opinions – will be implemented in the final version, this remains to be seen.

Further Reading

Read the full ECB opinion on the AMLA Regulation here.

Read the full ECB opinion on the AMLR and AMLD6 here.

Read more on the EU AML/CTF package here.

Read here how the ECB approaches money laundering and terrorist financing concerns.

Read more in the blogpost and speech accompanying the ECB’s opinions.