Enhancing cooperation in the fight against money laundering

Blog post by Elizabeth McCaul and Edouard Fernandez-Bollo, Members of the Supervisory Board of the ECB

Frankfurt am Main, 24 May 2022

Money laundering and terrorist financing issues pose a serious challenge to banks’ sound management and can even threaten a bank’s very survival. That is why these issues matter for the ECB as a prudential supervisor, even if we do not have mandated responsibility for checking how banks comply with the rules to prevent these illegal activities. Indeed, how a bank delivers sound management processes to properly govern anti-money laundering and anti-terrorism financing are relevant to prudential supervisors at each stage of a banks life-cycle from ”cradle to grave”. Prudential supervisors have responsibility throughout the life-cycle beginning with granting a banking licence, to assessing whether the bank’s managers are fit for the job, to reviewing how the business strategy risks are evaluated, how client and counterparty risks are overseen and managed in the everyday operations of the bank, and finally, whether and when a bank’s licence should be withdrawn.

To keep banks safe and sound, it is crucial that both supervisors responsible for anti-money laundering and countering the financing of terrorism (AML/CFT) and prudential supervisors work very closely with each other. Now that legislators are setting up a new European framework, including a dedicated EU anti-money laundering authority, we have a unique opportunity to enhance this much-needed collaboration.^[1] Competent authorities will only be able to effectively perform their tasks if all relevant information is shared, including through a central data hub. The new European anti-money laundering authority will have a key role to play in this effort, as discussed in a recent blog post.

In this blog post we will focus on three areas of supervision where enhanced cooperation between AML/CFT supervisors and prudential supervisors can improve the effectiveness of supervision, increase alignment on supervisory measures and thus help create a safer banking sector.

Granting authorisations and withdrawing licences

Within the Single Supervisory Mechanism, the ECB has the exclusive competence to grant banking licences, approve acquisitions of a qualifying holding in a bank and withdraw a bank’s licence if it does not comply with prudential requirements or for any other reason provided for in legislation such as in the case of serious AML/CFT breaches. To preserve the resilience of the banking sector, when assessing these procedures the ECB considers all AML/CFT risks, i.e. the extent to which the origin of funds, business model, governance arrangements, reputation of shareholders and management body give rise to ML/TF risks. Indeed, ML/TF risks pose a danger not only to individual banks but to the resilience of the financial markets as a whole.

Particularly when assessing whether to withdraw a licence due to serious AML/CFT breaches, the ECB must rely on the facts and findings identified by the competent AML/CFT authority. Close cooperation between ECB and AML/CFT supervisors is therefore essential. This cooperation should cover not only the exchange of information, but also the harmonised application of supervisory powers to prevent the uncoordinated imposition of administrative sanctions and measures. It is thus important to clarify in the AML/CFT package that while AML/CFT authorities have the competence to propose withdrawing a licence, for the banks in the Banking Union, it is another authority (the ECB) that has the exclusive competence to decide upon the licence withdrawal, which will be dependent upon close cooperation and exchange of information with the AML/CFT authority.

Assessing and reassessing board members

The ECB conducts fit and proper assessments of the suitability of directors for significant supervised entities. The primary objective of the assessments and the reassessments is that directors are managing and overseeing the bank in a prudent manner. In conducting assessments, we consider findings relating to AML/CFT which may have an impact on the suitability of the assessed individuals. We have recently reinforced the framework for reassessment with a special focus on AML/CFT findings. The new framework is outlined in the new Guide to Fit and Proper Assessments (published in December 2021). For example, the outcome of AML/CFT on-site inspections or the existence of ongoing legal proceedings related to AML/CFT, or court or administrative authorities’ decisions could provide grounds for conducting a reassessment. Cooperation between the prudential and AML/CFT supervisors through the exchange of information on any findings or sanctions in this respect is therefore vital.

The new AML/CFT legislative package is a tremendous opportunity to enhance this cooperation, especially for assessing the suitability of those board members and senior managers who will be responsible for compliance and AML/CFT topics. That is why it is essential to clarify practical rules where the competence for these suitability assessments is allocated to an authority other than an AML/CFT supervisor, such as the ECB. The respective AML/CFT supervisor should provide the ECB with any relevant information related to the required experience and skills of the board member responsible for AML/CFT matters, within an appropriate deadline. This will help the ECB to consider all the relevant information when performing the suitability assessment.

Identifying deficiencies in the control environment

Banks need to make strategic decisions about their business model with money laundering and terrorist financing risks and compliance requirements in mind. Bankers have a responsibility to ‘’know their customer’’ which means among other things having an understanding about the customer’s source of wealth and what constitutes normal business transaction activities that align with that business. If they don’t, they run several risks. For instance, banks risk being used as vehicles for money laundering or terrorist financing if adequate transparency about a customer’s wealth and business is not provided. Moreover, they may not be able to properly identify customers with a higher risk profile or that appear on sanction lists.

That is why they need to have a strong internal control environment in place to mitigate ML/TF risks. They also need to have appropriate governance escalation processes in place so that internal control deficiencies are visible to board and management reporting processes and thus can be corrected. The ECB has a significant role in assessing the functioning and governance of the significant banks’ compliance functions, for example in the Supervisory Review and Evaluation Process (SREP) or in on-site inspections.

Ultimately, when a bank’s deficiencies in its internal control environment amount to a breach of the governance requirements of the Capital Requirements Directive that are transposed in national law, or set out in an ECB supervisory decision, sanctions are a supervisory tool at the ECB’s disposal that can be deployed to achieve remediation of governance processes and a stronger internal control environment.^[2]

Cooperation between prudential and AML/CFT supervisors is essential – it enables them to see the full picture and raises their mutual awareness of existing deficiencies, for instance in relation to customer due diligence or know-your-customer processes. This also allows AML/CFT and prudential supervisors to take an aligned approach to governance related supervisory measures and helps to improve the safety and soundness of the EU banking system, also by ensuring proper deterrence.

Conclusion

An effective AML/CFT regime is important to foster confidence in the banking sector. Based on recent examples, AML/CFT issues can damage banks’ reputations, hamper their funding, affect customer relationships and even threaten their franchise. Therefore, these issues also matter for prudential supervisors of credit institutions. While AML/CFT supervisory authorities are primarily responsible for supervising credit institutions’ compliance with specific requirements set out in AML/CFT legislation, prudential supervisory authorities supervise their compliance with internal governance requirements set out in prudential legislation.

The ECB has significantly enhanced its toolkit to respond to these risks. But support and input from AML/CFT authorities is necessary for many of the prudential supervisory tasks. That is why the AML/CFT legislative package is a great opportunity to provide for enhancing cooperation between AML/CFT and non-AML/CFT authorities. The EU’s new anti-money laundering authority should play a key role in promoting collaboration and the exchange of information between the relevant authorities. The ECB looks forward to its involvement as prudential supervisor in the activities of this authority, as foreseen in the draft Regulation. We all stand to gain from it.