Since the early 1990s, the European Union (hereinafter referred to as the “EU“) has implemented a framework for combating money laundering and terrorist financing (hereinafter “AML/CFT“), which has been tested and strengthened over the years. These reinforcements have concerned both its scope and the obligations it imposes on obligated entities.
While the EU has worked to establish actual coordinated regulation among the 27 Member States, the May 2020 FATF report revealed that the health crisis had heightened fraud and money laundering activities, leading the Commission to submit a set of legislative proposals (European package) in 2021 aimed at improving AML/CFT within the EU.
On February 12, 2024, a provisional agreement was reached between the European Parliament and the Council regarding the final drafts of:
- a European regulation establishing a European Authority for combating money laundering (hereinafter the “AMLA Draft Regulation“),
- a regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (hereinafter the “AML/CFT Draft Regulation“), and
- a directive on the mechanisms to be implemented by Member States to prevent the use of the financial system for the purposes of money laundering or terrorist financing and repealing Directive (EU) 2015/849 (hereinafter the “AML/CFT Draft Directive“).
Choosing a European regulation as the instrument for implementing principles and institutional architecture (creating a new European authority), is a reaction to the uneven transposition of the current 5th anti-money laundering Directive by the Member States. This justifies the change in scale: coordination is entrusted to a European authority (as in the financial sector) and fundamental texts common to Member States are adopted.
AML/CFT Scope expansion
The AML/CFT Draft Regulation proposes to extend the application of AML/CFT obligations to new actors.
Firstly, and building on recent developments related to the regulation and traceability of operations involving crypto-assets, crypto-asset service providers (CASPs) will be subjected to AML/CFT provisions.
Secondly, while the currently in force Directive (EU) 2015/849 provides that “persons trading in goods to the extent that payments are made or received in cash in an amount of EUR 10,000 or more” are subject to AML/CFT obligations, the AML/CFT Draft Regulation intends (i) to apply a maximum limit of cash payment for goods or services up to EUR 10,000 and (ii) to restrict the scope of obligated entities to luxury goods dealers (e.g., precious metals, precious stones, jewelers, goldsmiths), luxury car dealers, plane and yacht dealers, as well as cultural goods dealers (artworks).
Finally, it should also be noted that professional football clubs and agents will be considered subject entities in accordance with the AML/CFT Draft Regulation. However, the latter allows Member States to exclude them from the list of subject persons if they present a low risk of money laundering and terrorist financing.
Strengthening AML/CFT Obligations
Beyond expanding the scope of the European AML/CFT framework, the AML/CFT Draft Regulation includes new obligations.
Specific enhanced due diligence measures are notably foreseen for cross-border relationships which, according to the Regulation, present a higher risk of money laundering and terrorist financing. Additionally, specific due diligence measures are required for cross-border relationships involving crypto-asset service providers.
Similarly, enhanced due diligence measures should be implemented by credit institutions and financial institutions[1] during business relationships with wealthy individuals[2] leading to the handling of a large volume of assets.
The obligation for subject entities to determine and verify the identity of any person conducting, on an occasional basis, a cash transaction valued between EUR 3,000 and EUR 10,000, is also worth noting.
Finally, a harmonized definition of beneficial owners has been included in the AML/CFT Draft Regulation. Two cumulative criteria apply: (i) direct or indirect control of the entity and (ii) direct or indirect ownership of at least 25% of the entity. These criteria are not novel, and some authors consider the proposed threshold to be too high.
Nevertheless, it should be noted that the AML/CFT Draft Regulation requires the Commission to assess the adequacy of the 25% threshold, and its potential lowering to 15%, for certain categories of entities associated with a high risk of money laundering and terrorist financing. This assessment should be conducted within 2 years following the AML/CFT Draft Regulation’s entry into force.
A National and European Institutional Framework
The AML/CFT Draft Directive provides Member States with the option to apply AML/CFT obligations to entities other than those expressly regulated by European instruments.
If Member States use this faculty (with a national margin of appreciation), they must notify the Commission of their intention and provide (i) their motivation, (ii) an impact assessment regarding this extension, (iii) the description of the obligations to which the Member State intends to subject the relevant entities, and (iv) the draft text the Member State plans to adopt. The Commission will then publish a list of all sectors to which Member States have decided to apply all or part of the AML/CFT regulatory framework. This faculty provided to Member States could (unlike the harmonization objective), depending on how the 27 Member States respond, create diversity in the scope of application of AML/CFT obligations.
The AML/CFT Draft Directive also provides that Member States must ensure that all relevant entities are subjected to a minimum registration level to enable their identification by supervisors.
There should be regular assessments of supra-national and national risks: the Commission is expected to submit a report within 4 years of the AML/CFT Draft Directive’s entry into force, the AMLA should issue an opinion within 3 years following the transposition of the AML/CFT Draft Directive (and every 2 years following that), and a national authority should conduct and update a risk assessment every 4 years.
A set of rules related to the register of beneficial owners is also provided in the AML/CFT Draft Directive (i.e., information to be included, control of, and access to, information). The Commission is also required to adopt technical specifications, including templates for requesting access to the register of beneficial owners, templates for validating or refusing access, and procedures regarding the mutual recognition of legitimate interest regarding access between Member States.
A sole and centralized system should be established by Member States in accordance with the AML/CFT Draft Directive to identify all holders or beneficial owners of bank accounts, securities accounts, accounts holding crypto-assets, and deposit accounts. Similarly, a sole system should allow the identification of real estate assets, their owners, and potential encumbrances on the property. Access to this information would be limited to competent national authorities and the AMLA.
Creating a Specialized European Authority
The Council and Parliament have reached an agreement on the creation of the AMLA, its powers, and modalities for establishing the location of its seat. On February 22, 2024, it was decided that the AMLA’s seat would be in Frankfurt, dashing French hopes to host this new authority alongside ESMA and EBA, whose seats are both in Paris.
According to the AMLA Draft Regulation, the AMLA would (i) have the power to supervise high-risk regulated entities in the financial sector, (ii) provide support for the supervision of the non-financial sector, (iii) coordinate financial intelligence units, and (iv) be able to impose financial sanctions on regulated entities.
Specifically, regarding the AMLA’s supervisory power, it would target a selection of credit institutions and financial institutions (including crypto-asset service providers) presenting a high risk of money laundering and terrorist financing. The AMLA is expected to supervise up to 40 groups and entities during the first selection process. Non-selected regulated entities will continue to be primarily supervised at the national level.
[1] Including entities other than credit institutions and investment firms performing leasing activities, portfolio management, order execution for own or third-party accounts, custodial services, or insurance intermediaries or CASPs.
[2] Whose assets represent a minimum amount of EUR 50,000,000.
