European finance ministers are expected to urge the European Commission to set up a new anti-money laundering authority. Whilst optimistic, RegTech stakeholders expect challenges to come.
The EU is taking off the kid gloves against money laundering. European finance ministers have flagged that they intend to urge the European Commission to establish an anti-money laundering (AML) authority when they meet up in December. By doing so, the idea is that they will put extra pressure on banks and other financial services organisations to do their due diligence to prevent illegal money from being funnelled through their services.
Money laundering is a huge problem. Failing to prevent it not only mean criminals can access money made through illicit activities and enable the funding of terrorism, financial institutions failing to prevent their infrastructure being used for illegal purposes can expect severe sanctions from regulators and losing the trust of its customers.
Several banks around the world have experienced this first-hand over the past few years. In Australia, the revelation that some of the country’s biggest banks had failed to do their due diligence to prevent money laundering being made through their companies led to regulators and lawmakers stepping in to give the whole industry an overhaul, tightening the legal confides that could operate in. This also created an opportunity for challenger banks and other FinTech startups to launch Down Under.
In the EU, the financial sector was rocked to its core in 2017 when it was revealed that Danish Danske Bank’s Estonian office had been used to launder roughly €200bn ($223.05bn). Danske Bank has lost two-thirds of its value since the scandal broke.
Deutsche Bank and Swedbank were also pulled into the scandal as both had allegedly facilitated some of the transactions. For Swedbank, both the chairman and the old CEO were sacked as the consequence to the affair. All three banks are still dealing with fallout and the costs of continuous scrutiny from regulators.
Another European scandal involved the now defunct Latvian bank ABLV. In February 2018, US authorities accused the bank of being used to funnel illegal money and was promptly denied US dollar funding. Depositors consequently rushed to empty their accounts until the European Central Bank froze all payments going out of ABLV. About a week after the US authorities made their accusations, the bank was forced to shut down.
Just like in Australia, Latvian lawmakers have responded to the scandal by trying to introduce reforms to ensure this does not happen again.
Given these European scandals, it is easy to see why the European finance ministers want to put an end to the practice once and for all. In a draft proposal, they are expected to mandate the European Commission to make recommendations for a new AML authority to police financial institutions, ensuring they comply with the EU’s AML laws and regulations.
Some in the RegTech industry are optimistic about the initiative. “I am a very strong supporter of an anti-money laundering authority – it’s something I’ve been suggesting for many years,” Remonda Kirketerp-Møller, founder and CEO, muinmos, the onboarding RegTech company, tells RegTech Analyst. “The regulators simply do not have the bandwidth to cover this in addition to their other supervision work.
“In order to create investor protection and stability in the financial services sector, we need more than just regulation and supervision, not just in AML but in all areas in which the investor deserves to be protected. I believe it’s important that any new authority not only provides supervision, but also provides tools and technology to aid financial services organisations in addressing these critical areas.”
The news about the AML authority has been framed as serious ramping up against the money launderers. Dean Patzer, director of solutions engineering at Ascent, the regulatory analysis provider, agrees with that.
“From the perspective of a financial firm, the formation of a new AML authority certainly adds pressure because it’s yet another body of regulation that must be tracked, read, analysed, and properly applied to the business,” he tells RegTech Analyst. “This is why it’s critical for firms to have a strong framework that includes technology as a solution, so that risk and compliance teams can keep abreast of what the new committee is doing and what it requires of firms.
“It’ll also be interesting to see what the scope of this new committee’s regulatory reach will be, and how much it overlaps with other regulating bodies. While this potential new authority will undoubtedly generate a greater lift for businesses, it’s a net positive for the industry if it effectively fights financial terrorism and bad acts.”
However, not everyone is as easily enthused about the potential new authority and the impact it might have. Stephen Platt is an adjunct professor of law at Georgetown University, author of Criminal Capital and chairman of KYC Global Technologies, the RegTech company. He does not think the new authority will give financial services organisations in the EU any “sleepless nights”
In fact, Platt believes the push for the new authority is just empty words from European politicians. “It’s a classic Eurocrat reaction to criticism for lack of action by some EU member states and most national regulators to date,” he tells RegTech Analyst. “What is a pan European authority going to do that national regulatory authorities should be able to do but can’t or won’t?
“Effective AML supervision and enforcement is a question of political will. The energy that’s going into establishing yet more ‘window dressing’ should be expended in giving existing national authorities more resources and some backbone.
“Full EU member states, like Malta, continue to be hotbeds for illicit activity and there is simply no excuse for that, particularly when the EU sits in judgement on non-member states that are taking AML seriously.”
Creating a new regulator also comes with some challenges. “As with the formation of any new regulatory organisation, there are a number of things to consider,” Brian Clark, founder and CEO of Ascent, tells RegTech Analyst. “Appropriately identifying the scope of the conduct for which the regulatory body has oversight is one important challenge.”
However, Clark believes this can be more easily said than done. “In today’s hyperconnected world, the law of unintended consequences makes this difficult,” he explains. “It’s easier to classify by conduct and actions, rather than by entity type as entity type is a nebulous classification.
“After properly scoping the authority, it’s important to set up a good regulatory structure, which includes the breakdown of responsibilities among the different players. It’s also critical to consider practicality – focus on this conduct should ensure regulators are focusing on larger risks and issues in the marketplace [as well as] intentional behaviour first.
“Accidental conduct, while still a violation, does not maintain a mental intent to intentionally harm, or recklessly harm, others. While this is a legal lens usually reserved for criminal courts, it is helpful to make sure regulators are focusing on the severe issues. Lastly, clarity is key when regulating markets, as it allows governments to properly draw the boundary conditions around the conduct that is acceptable. This certainty helps businesses reduce risk and innovate inside the sandbox of capitalism.”
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