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A proposed EU-wide anti-money laundering agency that many hope will improve the fight against financial crime, especially across borders, will very likely materialize after the bloc’s 27 nations gave initial support in a confidential resolution seen by ACAMS moneylaundering.com.

According to the resolution, which members of the European Council have yet to finalize, the proposed agency would first focus on supervising banks and other traditional financial institutions, as well as cryptocurrency firms, under a “staged approach,” but would operate under strict conditions that could seriously limit its power to intervene when national oversight fails.

The resolution outlines the proposed agency’s future tasks and the scope of its oversight, but its “current wording … neutralizes the opportunity for a strong, effective and respected supervisor to emerge,” Nicolas Veron, an analyst at Bruegel, a policy center in Brussels, told moneylaundering.com.

Nor does the resolution  settle the issue of whether officials should create a new AML supervisor or assign those tasks to an institution already in existence, such as the European Banking Authority.

Internal deliberations over its final wording follow a succession of large-scale, years-long schemes that confirmed that criminals had exploited variances in AML supervision and regulation across the EU to move hundreds of millions of dollars and euros in suspicious funds.

In May, the European Commission, the bloc’s executive branch, unveiled an “AML Action Plan” to address the vulnerabilities by the first quarter of 2021 after reaching agreement with the European Parliament and European Council.

EU lawmakers largely approved the Commission’s plan in August, but the Council’s approval would mark a more significant milestone because the institution represents the positions of the EU’s 27 national governments. The Council is expected to unveil its final opinion in November.

In an apparent response to the scandal that tanked Wirecard, a German payments firm whose complex corporate structure and business model led to poor supervision, the resolution asks the Commission to consider direct EU supervision over “financial holding companies with subsidiaries in various jurisdictions” that are not “classified as financial institutions themselves under current legislation.”

That description may cover fintechs and “decentralized finance businesses,” including certain types of lending and crowdfunding platforms, Jennifer Hanley-Giersch, managing partner at Berlin Risk, told moneylaundering.com.

The future agency would have “primary responsibility” for a strictly limited number of obliged entities exposed to higher risks because of their customer base, products, delivery channels and geographical exposure.

Restrictions and responsibilities

Because “national supervisors, based on a clear delineation of responsibilities, remain the first level of supervision by principle,” the future EU agency would intervene only “in clearly defined and exceptional situations based on objective and transparent criteria, and very restricted conditions,” the resolution states.

Such restrictions on the proposed agency’s power of oversight would reinforce the same vulnerabilities that the resolution seeks to address, said Veron, who is also a senior fellow at the Peterson Institute for International Economics in Washington, D.C.

“If EU law sets precise criteria for when the supervisor intervenes, criminals will immediately move their business to financial firms that are not in this perimeter,” Veron said. “The only way a European supervisor can be effective is if the selection of its scope of direct supervision is at its sole discretion, with proper accountability through governance and judicial review.”

Under these restricted conditions, the future supervisor would have authority to conduct onsite inspections of financial institutions, and request and review records.

The supervisor could also mandate that a financial institution hire an EU-approved compliance officer, “require regular reporting, and issue direct instructions with regard to enhanced due-diligence or high-risk transactions,” but these actions should “respect the specificities of national systems and enforcement setup.”

But the Council did not specify whether the agency would have authority to assess penalties or impose business restriction in response to AML violations.

“There is a risk that the supervisor could be a toothless tiger if cooperation between the EU supervisor and national supervisors is not fruitful, but one must remember that the EU must respect the principles of subsidiarity and proportionality,” Hanley-Giersch said, referring to the EU policy of only intervening only when an objective cannot be met at the national level.

As currently worded, the resolution approves the Commission’s plan to replace a substantial portion of the bloc’s AML directives with regulations that apply directly and uniformly throughout the bloc.

This partial harmonization should begin with a “uniform and high standard of customer due diligence,” according to the resolution, and later expand to cover recordkeeping requirements, enterprise-wide AML compliance, exchanges of information and reliance on third parties to perform compliance functions.

Contact Gabriel Vedrenne at gvedrenne@acams.org