The European Commission issued its action plan for a comprehensive European Union (EU) policy on preventing money laundering and terrorist financing in May 2020.¹ The action plan focuses on harmonizing, effectively implementing and reinforcing the existing anti-money laundering/counter-terrorist financing (AML/CTF) framework at the EU level.

The Financial Crime Ecosystem

The European Commission’s new initiative comes amidst increasing regulatory requirements and dissuasive fines to tackle financial crime globally. According to the United Nations Office on Drugs and Crime (UNODC), less than 1% of global illicit financial flows were being frozen or seized in 2011.² In September 2020, the executive vice president of the European Commission, Valdis Dombrovskis, stated that criminal proceeds potentially represented billions of euros, or “…around 1% of the EU’s annual GDP.”³ These shortcomings cannot be blamed on an inadequate anti-financial crime (AFC) framework, as guidance, regulations, recommendations and evaluations are revised regularly to address new trends and adopt necessary measures to tackle financial crime.

Member states, however, currently have some leeway in transposing regulations into national law. There are also EU countries that have yet to transpose the Fourth AML Directive (4AMLD), which has been in effect since June 2017.

At the European level, there have been several legislative developments to strengthen the existing AML/CTF framework. To name a few, the Fifth AML Directive⁴ (5AMLD), which came into force in January 2020, extended the scope of its requirements to include crypto assets, custodian wallet providers and estate agents, and it imposes more transparency on ultimate beneficial ownership (UBO).⁵ Despite public authorities’ responsiveness in adapting their AML/CTF frameworks to new challenges, illicit financial flows continue. A slew of news reports based on the Financial Crimes Enforcement Network (FinCEN) Files shed light on the lack of action taken by banks and law enforcement despite the exchange of information between the public and private sectors on suspicious activities.

The European Commission Action Plan

The European Commission built its action plan (which should be delivered in early 2021) on the following six pillars:

• Effective implementation of existing rules
• A single EU rulebook
• EU-level supervision
• A support and cooperation mechanism for financial intelligence units (FIUs)
• Better use of information to enforce criminal law
• A stronger EU in the world

The European Commission concluded its public consultation with a conference that stressed the need to “shut off remaining loopholes, remove weak links, and coordinate better between EU countries.”⁶

The European Commission has proposed to turn part of the Anti-Money Laundering Directives (AMLDs) into directly applicable provisions set out in regulation. In other words, member states will be bound to apply and enforce them into local legislation immediately with no further deliberations. Regulations come into effect as soon as they are ratified by the European Parliament. The AMLD provisions on beneficial ownership registers are among those that would be subject to this kind of regulatory treatment.⁷ While the disparity in legal definitions within member states is a prime example of the lack of uniform application, the action plan hopes to limit divergences in the interpretation and application of the rules.⁸

Impact on Regulated Entities

The European Commission has been working toward interconnecting beneficial ownership registers across the bloc since the 4AMLD.⁹ The 5AMLD requires member states to set up beneficial ownership registers for corporate and other legal entities by January 10, 2020, and for trusts and similar legal arrangements by March 10, 2020. The directive also mentions that the interconnection via the European Central Platform should be operational by March 10, 2021.¹⁰

The main challenge of complying with the 5AMLD’s UBO requirements is, however, that there is a discrepancy in the definition of beneficial ownership across the world and within the EU. Countries vary in scope and threshold on their definitions of beneficial ownership. In Malta, companies define an ultimate beneficial owner as, “a natural person who directly or indirectly holds 25 percent or more of the shares….” In the United Kingdom, to qualify as a UBO “an interest of more than 25 percent is required.”¹¹ As PwC noted in “The UBO register: update 2019,” the 4AMLD prescribes a threshold of “more than 25%,” however, six member states opted for a percentage of “25% or more.”¹² Financial institutions (FIs) must consider this subtle difference to ensure the accuracy and reliability of their beneficial ownership data.

There is a discrepancy in the definition of beneficial ownership across the world and within the EU

The other challenge for obliged entities is the increased scrutiny from the European Commission on the setup of beneficial ownership registers. In fact, the European Commission “will closely monitor the setting up of […] the beneficial ownership registers by Member States in order to ensure that they are populated with high-quality data.”¹³ To ensure quality, member states will have to put in place verification mechanisms of the beneficial ownership information collected by the registers, as provided by the 5AMLD.¹⁴ Therefore, it is not sufficient to have a UBO register without appropriate checks and regular updates. FIs must raise any discrepancies to the register with the local authoritative body. They need an information gathering process to bridge existing gaps in their beneficial ownership data in their jurisdictions, if they have not done so, to comply with the European regulation.

Impact to FIUs

The action plan will be impactful to FIUs and supervisors as well. The action plan recognizes that while FIUs are required to provide feedback to reporting entities, in practice, feedback is limited. Another limiting factor is the lack of robust technology. While obliged entities have been increasingly investing in technological advances to make their controls both effective and efficient, it is well-recognized that FIU.net (the EU system for information exchange among FIUs) requires significant software and hardware upgrades and completely new features to facilitate cooperation.

Time Pressure and Poor Implementation

Member states and obliged entities will have to comply with the new regulation in a timely manner. Under the current directive regime, member states adapt their national law often on their own time as recently reported by Global Witness. In March 2020, the nongovernmental organization stated that only five member states out of the 27 have introduced a public beneficial ownership register in time, while the European Commission wrote to the eight countries—Cyprus, Hungary, the Netherlands, Portugal, Romania, Slovakia, Slovenia and Spain—that failed to comply with the 5AMLD within the timeframe.¹⁵

More recently, in September 2020, the European Commission published a report assessing how member states complied with the 5AMLD requirements related to trusts and similar legal arrangements. The Commission concluded that the member states did not include all the “similar legal arrangements” to trusts when transposing the directive into national law. This again reflects a lack of common approach to what features define similarity with the common law trust.¹⁶ The European Commission’s report stresses that the lack of common approach could create further loopholes, which can be used in money laundering schemes. Such divergences in interpretation within the bloc translates to further challenges for FIs in complying with an already complex regulatory framework. If directive provisions were to be set out in a regulation, this would put further pressure on obliged entities in terms of how quickly they will have to comply with them. However, without multiple interpretations of the law, fewer loopholes would be exploited.

Results of the Consultation Process

Following a public consultation on the European Commission’s action plan, the European Council published its conclusions from the consultation on November 5, 2020.¹⁷ The conclusions support the view that harmonization is essential and included:

• Requesting the EU-level supervisor oversee a selected number of high-risk obliged entities as well as have the authority to take over for a national supervisor in clearly defined and exceptional situations
• Clarifying minimum information required for identifying natural or legal persons, (remote) identification processes and ensuring a technologically neutral solution
• Clarifying reconciliation of the AML/CTF framework with the applicable data protection legislations, notably with the General Data Protection Regulation (GDPR), to reconcile, e.g., inconsistencies between data protection provisions and the tipping-off ban
• Urging implementation of the “travel rule” (Financial Action Task Force Recommendation 16 on wire transfers updated to include virtual asset service providers)
• Calling for further enhancement to the framework for anti-money laundering supervision of the nonfinancial sector, especially as professional legal requirements and licensing criteria are not harmonized

These conclusions present a lofty set of recommendations for the European Commission to implement.

Will the action plan improve the current ecosystem?

The European Commission’s action plan is a step toward achieving a harmonized AML/CTF framework at the EU level. Adopting a uniformed regime will benefit the entire ecosystem with the application of a single rulebook, especially when it comes to beneficial ownership. In addition, this common framework will help obliged entities have better operational efficiency with standardized definitions and thresholds. However, obliged entities will probably be subject to further fines if they are unable to deliver the expected results in a timely manner. Ultimately, the European Commission action plan, if enforced, will increase the pressure on obliged entities and member states but will also provide a clearer, more unified rulebook. This clarity is much needed for increased transparency and improved implementation across the EU. 

Shilpa Arora, CAMS, AML director—Europe, Middle East and Africa, ACAMS

Sandra Saadi, AML researcher and writer, ACAMS

1. “COMMUNICATION FROM THE COMMISSION on an Action Plan for a comprehensive Union policy on preventing money laundering and terrorist financing,” European Commission, May 7, 2020, https://ec.europa.eu/finance/docs/law/200507-anti-money-laundering-terrorism-financing-action-plan_en.pdf
2. “Illicit money: how much is out there?” United Nation Office on Drugs and Crime, October 25, 2011, https://www.unodc.org/unodc/en/frontpage/2011/October/illicit-money_-how-much-is-out-there.html
3. Valdis Dombrovskis, “Speech by Executive Vice-President Valdis Dombrovskis at the high-level conference on anti-money laundering and counter-terrorist financing,” European Commission, September 30, 2020, https://ec.europa.eu/commission/commissioners/2019-2024/dombrovskis/announcements/speech-executive-vice-president-valdis-dombrovskis-high-level-conference-anti-money-laundering-and_en
4. “DIRECTIVE (EU) 2018/843 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU (Text with EEA relevance),” Official Journal of the European Union, May 30, 2018, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L0843&from=EN
5. “Anti-money laundering and counter terrorist financing,” European Commission, July 19, 2018, https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-supervision-and-risk-management/anti-money-laundering-and-counter-terrorist-financing_en
6. Valdis Dombrovskis, “Speech by Executive Vice-President Valdis Dombrovskis at the high-level conference on anti-money laundering and counter-terrorist financing,” European Commission, September 30, 2020, https://ec.europa.eu/commission/commissioners/2019-2024/dombrovskis/announcements/speech-executive-vice-president-valdis-dombrovskis-high-level-conference-anti-money-laundering-and_en
7. Ibid.
8. “COMMUNICATION FROM THE COMMISSION on an Action Plan for a comprehensive Union policy on preventing money laundering and terrorist financing,” European Commission, May 7, 2020, https://ec.europa.eu/finance/docs/law/200507-anti-money-laundering-terrorism-financing-action-plan_en.pdf
9. “COMMUNICATION FROM THE COMMISSION on an Action Plan for a comprehensive Union policy on preventing money laundering and terrorist financing,” European Commission, May 7, 2020, https://ec.europa.eu/finance/docs/law/200507-anti-money-laundering-terrorism-financing-action-plan_en.pdf
10. Ibid.
11. “The UBO register: update 2019,” PwC, December 2019, https://www.pwc.nl/nl/assets/documents/the-ubo-register-update-december-2019.pdf
12. Ibid.
13. “Communication on an action plan for a comprehensive Union policy on preventing money laundering and terrorist financing,” European Commission, May 7, 2020, https://ec.europa.eu/finance/docs/law/200507-anti-money-laundering-terrorism-financing-action-plan_en.pdf
14. “The impact of the Fifth Anti-Money Laundering Directive,” Zeta Financial, July 23, 2018, https://medium.com/@analytics_92512/the-impact-of-the-fifth-anti-money-laundering-directive-c0408224e657
15. Rúben Castro, “Only five member states meet key money laundering deadline,” Euractiv, March 20, 2020, https://www.euractiv.com/section/economy-jobs/news/only-five-member-states-meet-key-money-laundering-deadline/; “February Infringements Package: Key Decisions,” European Commission, February 12, 2020, https://ec.europa.eu/commission/presscorner/detail/en/inf_20_202
16. “REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL assessing whether Member States have duly identified and made subject to the obligations of Directive (EU) 2015/849 all trusts and similar legal arrangements governed under their laws,” European Commission, September 16, 2020, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020DC0560&from=EN
17. “Video conference of economics and finance ministers, 4 November 2020,” European Council, November 4, 2020, https://www.consilium.europa.eu/en/meetings/ecofin/2020/11/04/’anti-money/