On 19 August, 2020 the EBA published its response to the European Commission’s Action Plan for a comprehensive Union policy on preventing money laundering and terrorism financing (ML/FT), largely throwing its support behind the Commission’s Action Plan.
In its response, the EBA has provided technical input designed to better guide the Commission in its implementation of the Action Plan. In the EBA’s view, a comprehensive assessment of the current EU AML/CFT framework is necessary to ensure that the EU and the Member States are well-equipped with an effective set of tools in its AML/CFT arsenal.
In endorsing the Action Plan, the EBA has put forward the following recommendations:
- Harmonise the Union legal framework to bridge the various divergences persisting at the national level and replace the current largely fragmented approach with a common European approach;
- Combine an ongoing role for national AML/CFT authorities with an EU-level AML/CFT supervisor to function on a “hub and spoke” model;
- Leverage on the EU’s existing AML/CFT infrastructure, including the EBA’s policy, data and information technology resources as well as the EBA’s European and international supervisory cooperation network.
Implementation of the EU AML/CFT Framework – Call for greater harmonisation
In conjunction with the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA), part of the EBA’s work in this area is to identify ML/FT risks to the EU’s financial system and spearhead the development of common strategies and approaches to respond to such risks. The EBA is making full use of its statutory powers under EU law to further the development of a Union AML/CFT policy and support its implementation. As part of its mandate, the EBA carries out assessments of the national competent authorities’ (NCAs) various approaches to AML/CFT supervision and outlines recommendation for further action on the part of the NCAs under review.
Given the growth of the EBA’s statutory remit in this policy area since 2020, the EBA is of the view that its new mandate and powers will significantly boost the further development and improvement of the EU AML/CFT framework. However, the EBA notes, in its response, that the nature of the current framework is such that limitations are placed on the level and extentto which convergences can be attained. The EBA expressed the opinion that insofar as EU AML/CFT legislation is largely set out through the medium of a minimum harmonisation directive regime (which relies on subsequent transposition into national law), inconsistencies or “gaps” in the responses to ML/FT risks resulting as a consequence of divergent approaches by the Member States are almost inescapable. This has further strengthened the case for greater harmonisation of the EU AML/CFT legal framework through the adoption of directly applicable instruments of EU law. Opting for a direct application approach would, in the EBA’s conclusion, provide greater legal certainty and a consistent approach, while avoiding regulatory arbitrage by eliminating the need for national transposition.
Expanded EU-level supervision
In its Action Plan, the Commission proposed the setting up of a single EU-level AML/CFT supervisor. In the EBA’s view, without greater harmonisation of the legal framework one can expect an EU-level AML/CFT supervisor to fall short of its expected achievements. The absence of a harmonised set of rules means that a consistent approach, at the national level, in the enforcement of the EU’s AML/CFT framework cannot be guaranteed.
In its Action Plan, the Commission proposes to put in place an “integrated AML/CFT supervisory system” without favouring a particular model.Rather, the Action Plan sets out different ways for structuring the interplay between the EU-level supervisor and its national counterparts. In the EBA’s view, a single EU-level supervisor would be most effective if it were equipped with powers to oversee and direct the NCAs and intervene in the supervision of obliged entities (either directly or indirectly through the NCAs) as a common practice or on a needs basis.
The EBA advocates the adoption of a “hub and spoke” approach whereby the EU-level supervisor coordinates and exercises oversight over the work of the NCAs. Whilst the NCAs will remain largely responsible for the supervision of obliged entities, the EU-level supervisor would reserve the power to exercise direct supervision where high ML/TF risk obliged entities are concerned and retain indirect supervision over other obliged entities.
In making the case for this type of approach, a number of advantages with the hub and spoke model are set out:
- Pooling of expertise and competences – the hub and spoke approach can operate effectively, as it builds on the respective strengths of the NCA’s expertise and knowledge with respect to the detection and tackling of local ML/FT risks and the co-ordination and supervisory functions best discharged at the supranational level (which would be accomplished by the EU-level supervisor).
- Flexibility – this approach offers the flexibility required to carry out the AML/CFT supervision of a large and heterogeneous population of obliged entities across various sectors. Given the varying levels of ML/TF risks across a range of businesses and sectors, the EU’s AML/CFT strategy must be capable of adaptation as necessary with respect to the different supervisory needs, and of alternating between (or concurrently administering ) indirect supervision of some sectors with a more hands-on approach to EU-level AML/CFT supervision of other sectors.
- Resource Efficient – in contrast to a standalone single EU AML/CFT supervisor, which would require considerable levels of staffing and resources, a hub and spoke model could be designed purposely to draw on existing resources at the national level and complement these with a reduced “core” supervisory staff at the EU level. This would make such an approach a far more cost-effective option.
As the debate on strengthening the EU’s AML/CFT framework progresses, the EBA will continue to provide technical input. The EBA is expected to respond to the Commission’s call for advice on defining the scope of, and on the application and the enacting terms of, a Regulation to be adopted in the field of preventing anti-money laundering and terrorist financing by 10 September, 2020.
This document does not purport to give legal, financial or tax advice. Should you require further information or legal assistance, please do not hesitate to contact Dr. Simon Pullicino