Regulators will be flexing their muscles over money laundering

Robin Henry

Robin Henry

In a recently published joint opinion, the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA), which collectively make up the three European Supervisory Authorities (ESAs), have outlined what they consider to be the present and emerging risks of money laundering and terrorist financing (MLTF) affecting the European Union's (EU) financial sector.  

Drawing on data from each of the 58 Competent Authorities (CAs) responsible for supervising firms’ compliance with anti-MLTF obligations across the European Economic Area, the ESAs identified ongoing concerns about weaknesses in the monitoring and reporting of suspicious transactions, particularly in sectors where a financial institution's business model is based on high frequency transactions.

Overall, the opinion indicates that credit institutions, payments firms, bureaux de change and e-money institutions face the highest risk of exposure to MLTF activities.

Guarding the EU’s financial integrity is largely dependent upon the ability of individual firms to detect potential breaches.

In their report, the ESAs highlighted a number of cross-sectoral threats that are shaping the current risk landscape and making it more difficult for firms to identify, assess and manage MLTF threats.

One of key areas of focus was the UK’s impending withdrawal from the EU, in regard to which concerns were raised about the ability of CAs to adequately supervise the changing population of firms relocating from within the UK.

If and when Brexit materialises, financial services firms authorised in the UK and providing services to the EU might look to establish themselves elsewhere.

Concerns were expressed about CAs in some Member States lacking sufficient resources to assess the MLTF risks associated with the business models, ownership and control structures of a potentially vast number of applicant firms.

It was also noted that financial institutions will need to update their anti-MLTF policies and procedures following Brexit, to account for the UK becoming a “third country” under the EU Anti-Money Laundering Directive.

Other cross-sectoral risks identified by the ESAs included:

  • the emergence of new technologies in FinTech and RegTech, which, whilst they may offer improved weapons to fight MLTF, could also give rise to additional vulnerabilities if firms place an over-reliance upon them without ensuring proper oversight;
  • the rapid growth and adoption of virtual currencies;
  • divergence in the manner by which Member States transpose EU law into national legislation;
  • divergent anti-MLTF supervisory practices across the EU (noting that in 2018 the European Banking Authority concluded its first ever case involving a breach of EU law against the Maltese Financial Intelligence Analysis Unit); and
  • weaknesses in the internal systems and controls employed by financial institutions. In particular, the ESAs identified that the development of adequate customer risk assessments remains a challenge for financial institutions across all sectors. It was noted that this area in particular would benefit from additional guidance from CAs.

In line with the ESAs’ recommendations, firms can expect CAs to begin taking a more active role in assessing the adequacy of their anti-MLTF controls.

The ESAs will be expecting CAs to  bolster their engagement with the private sector in order to develop a better understanding of new technologies, products and services available to financial institutions.

To ensure that they are in keeping with best practice in this area, firms are encouraged to revisit guidelines published by the ESAs in 2007, which set out how credit and financial institutions can significantly mitigate MLTF risks by (in particular) adjusting their customer due diligence measures (see Joint Guidelines under Articles 17 and 18(4) of Directive (EU) 2015/849).

The ESAs have also developed an interactive tool, which firms can use to gain valuable insights into the most common MLTF risks faced by institutions operating in their particular sector. That tool can be accessed using the following link:

Robin Henry is a partner, head of the Dispute Resolution team at Collyer Bristow