The AML Race Across the Pond: A Comparison between the AML Compliance and Supervision Systems in US and Europe
In July 2021, the European Commission launched an extensive AML Package which plans on completely changing and harmonizing the AML framework. This package has several legislative proposals which first and foremost establish the first European AML Authority as well as several changes in the legal provisions establishing the AML rules.
In light of these new Regulations we want to dive into the way they will change the European framework with a focus on the comparison with the US System and the already established US AML supervisory authorities
The current European Framework
From a legislative perspective, the fight against Money Laundering has been fought through European Directives, with the latest and most important adopted being the 4th and 5th AML Directives (1) and the AML Criminal Law Directive (2). These are supplemented with guidance from supervisory bodies and regulatory technical standards.
The issues of the current legal framework stem from the transposition mechanism and the differences in interpretation.
If every Directive needs to be transposed by each Member State, this means that the Union gives the discretionary power to 27 countries to change in certain ways the act before it actually gets adopted. The Directives set some general limits, but many aspects are left to the control of the Member States. This means that it’s impossible to not have differences, to not have variations on the same topics, and the topics relating to AML are too important to have different interpretations.
A very fitting example of this issue is the current regime of Crypto-Assets Service Providers. Based on the 5th AML Directive the CASPs are obliged entities and have to be registered (3). The Directive does not elaborate clearly on the limits of registration and licensing and allows countries to set their conditions. This led to certain Member States having a licensing regime (Germany, Estonia), others having a registration regime (Ireland, Belgium) and countries like the Netherlands having a registration regime so strict that virtually transforms it into licensing. These differences ultimately defeat the purpose of having a harmonized European legislation.
From a supervisory perspective, at the moment the European Union does not have an overarching authority responsible for monitoring and supervising the fight against Money Laundering. The AML responsibilities fall upon the Financial Intelligence Units of each Member State and the European Supervisory Authorities (ESAs) of the financial sector, EBA (Banking), ESMA (Securities and Markets), EIOPA (Insurance and Pensions).
The FIUs and national supervisors have disproportionate activity in different states because the resources allocated are also different, such as the resources for implementation and enforcement. Which is also why some supervisors are more active than others, offer more guidance to their relevant financial entities and also impose more fines.
There is a clear need for an entity that can coordinate the activity of the FIUs, offer guidance, and focus exclusively on AML.
The US System
In some perspectives we can look up to our US counterparts which have had certain aspects under control for many years. The Bank Secrecy Act sets the rules clearly, and needs to be respected exactly how it was adopted.
The US also has clear overarching supervisory authorities with clear tasks relating to the AML fight.
FinCEN (Financial Crimes Enforcement Network) is the primary AML/CFT regulator. It is responsible for combating money laundering, the financing of terrorism and other financial crimes by monitoring banks, financial institutions and individuals and analyzing suspicious transactions and payments. FinCEN works with state and federal law enforcement agencies, sharing information to assist in the fight against financial crime (4).
FinCEN also administers the Bank Secrecy Act and also serves as the US Financial Intelligence Unit. The BSA also authorizes FinCEN to issue regulations that financial institutions need to respect.
The other relevant US Authorities are:
- OFAC (Office of Foreign Assets Control) – responsible for administering and enforcing US sanctions.
- OCC (Office of the Comptroller of the Currency) – responsible for supervising and regulating the national banks, federal savings associations and federal branches of foreign banks.
- SEC (Securities and Exchange Commission) – responsible for regulating the securities markets and protecting investors.
- DOJ – Money Laundering Asset Recovery Section – responsible for prosecuting and coordinating high-profile investigations, providing legal assistance to lower level prosecutors.
Although the Union also has the European Supervisory Authorities (EBA, ESMA, EIOPA) – which operate in similar fields, the main difference is that FinCEN, OFAC, OCC and SEC also have powers to investigate and impose fines in the cases where needed.
We’ve seen developments being made in the EU as well, with OLAF the Anti-Fraud Office or EPPO the European Public Prosecutor’s Office, which investigates crimes against the interest of the EU budget, but there is still a need for a special over-arching entity for money laundering specifically.
The future of AML in Europe
In light of the discussed differences, needs and issues of the EU, this is where the AML package comes into play.
The package proposes a new Anti-Money Laundering Authority. The AML Authority is comparable with the US FinCEN. It will have two main responsibilities, AML/CFT Supervision and coordination and support of the Member States’ FIUs (5). It will directly supervise high-profile institutions which are exposed to the highest-risk of money laundering. It will also have the power and responsibility to draft Regulatory Technical Standards as well as impose fines as a form of enforcement.
The authority will be established at the beginning of 2023, and the activity of direct supervision will begin in 2026.
The package also discusses the introduction of a EU single rule-book which includes an AML Regulation and the 6th AML Directive.
Having an AML Regulation (6) changes the legal framework fundamentally because the Regulation needs to be adopted by the Member States exactly how it was written, without modifications.
This is why the Regulation will concern the most important aspects which refer to CDD measures, Risk Assessments, reporting obligations and other provisions dealing with the implementation of an AML Compliance Framework, which are now present in the 4th and 5th AML Directives. All the rules applicable to the obliged entities of the private sector have been transferred exclusively to the AML Regulation.
The other side of the rule-book will be the 6th AML Directive (7) which will mainly concern the administrative aspects, such as rules concerning national supervisors and the Financial Intelligence Units of Member State, which will still be subject to transposition.
The AML package is still in the stage of proposal, being negotiated by the Parliament, Commission and Council, and we hope to see updates soon so we can reach the coordination and supervision level we’ve seen in the US and so each financial institution can already think of the way the new framework will affect their activity and how can they comply better with the upcoming changes.
1. Directive (EU) 2015/849 on preventing the use of the financial system for money laundering or terrorist financing (4th AML Directive) | Directive (EU) 2018/843 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing
2. Directive (EU) 2018/1673 on combating money laundering by criminal law
3.Art 47, 5th AML Directive
5. Proposal for a Regulation establishing the Authority for Anti-Money Laundering and Countering the Financing of Terrorism
6. Proposal for a Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing
7. Proposal for a Directive on the mechanisms to be put in place by the Member States for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing andrepealing Directive (EU) 2015/849