Preventing money laundering through European banks

Blog post by Edouard Fernandez-Bollo, Member of the Supervisory Board of the ECB

Frankfurt am Main, 28 February 2023

Imagine international drug traffickers use your bank to launder their illicit gains. Now imagine that the different supervisory authorities involved all take different approaches to tackling this risk and fail to sufficiently communicate with each other. This would result in too many money laundering and terrorist financing (ML/TF) activities slipping through the cracks, representing a major risk to the financial sector.

As Europeans and as banking supervisors, we do not want this to happen. That is why we hope for a timely agreement to create a new and strong EU Anti-Money Laundering Authority (AMLA).

The European Parliament will soon vote on the draft AMLA Regulation, after which the trilogue phase will begin. During this decisive stage in the legislative process, we think it is important to help ensure that AMLA can effectively fulfil its remit. The ECB is fully committed to contributing to this process. Based on our supervisory experience, this requires three main safeguards, namely that the new Authority has sufficient capacities to perform intrusive supervision, broad access to data and adequate cooperation channels with other supervisors.

The right supervisory capacities

To help ensure greater homogeneity and convergence in the European supervisory framework for anti-money laundering and countering the financing of terrorism (AML/CFT), AMLA needs to be a strong and independent authority. That is why the ECB has called for the new Authority to have a broad scope of direct supervision covering at least one entity – ideally a group – in each Member State. We therefore welcome the Council of the European Union’s proposal to significantly increase the number of entities under AMLA’s direct supervision to up to 40 (compared with 12 to 20 in the original proposal), also allowing for further expansion in the future.

It is now important to ensure that AMLA has sufficient capacities to fulfil its tasks, particularly in view of the scope of its direct supervision. This is relevant for AML/CFT off-site supervision, where AMLA’s staff will work in joint supervisory teams alongside staff from national supervisors. However, ensuring AMLA has sufficient staff is even more important for carrying out on-site AML/CFT inspections, which are the most intrusive supervisory tool at the Authority’s disposal and key to developing a feel for what is going on at supervised entities. This is particularly relevant for AML/CFT supervision, where access to individual transaction data and files is crucial. Consequently, it is essential that AMLA can count on a sufficiently large pool of qualified on-site examiners to effectively perform its supervisory tasks. Based on our own experience with prudential banking supervision, responsibilities for on-site examinations and off-site supervision should ideally be allocated to different teams, and the capacity to use cross-border teams is invaluable.

The right data  

For AMLA to be effective, it also needs to have broad access to high-quality data. It is therefore essential to develop a standardised way for the Authority to collect information to gain a consistent and comprehensive overview of AML/CFT across the EU.

Particularly during the set-up phase, AMLA will not yet have sufficient data on the entities it supervises to adequately perform its tasks. It is therefore indispensable – at least during this initial period – that AMLA can access information collected under the existing national AML/CFT reporting framework. Otherwise, AMLA’s ability to build its own expertise on ML/TF risks would be restricted.

From our experience as prudential supervisors, we believe that AMLA would benefit from having the full picture of the environment in which the entities it supervises operate. This could be achieved by granting the new Authority access to relevant financial reporting and prudential information, in addition to supervisory information from other types of authorities. Having access to the right data will also be key for AMLA’s indirect supervision given that most firms will not be supervised directly by AMLA. Against this background, the AMLA could act as the nucleus for the exchange of information between diverse supervisory authorities.

The central data hub

That is why AMLA needs a powerful central data hub to enhance the efficiency and effectiveness of cooperation and information sharing between authorities, which is key in combatting money laundering and terrorist financing.

In recent years the ECB has significantly enhanced its channels for AML/CFT collaboration. Specifically, the ECB exchanges information with AML/CFT authorities by acting as an observer in AML/CFT supervisory colleges, or through the “AML agreement” which the ECB concluded at the request of the EU legislators with more than 50 national authorities in the EU to foster information sharing. These tools are complemented by the European Banking Authority’s EuReCa database (the European reporting system for material CFT/AML weaknesses). Nevertheless, the unintegrated nature of these instruments can result in overlaps and reporting burdens that hamper the effective dissemination of information.

AMLA therefore has a unique opportunity to go beyond this and create a new central data hub to ensure improved collection and use of all available information on ML/TF risks. This AML/CFT database should facilitate information sharing between AMLA and AML/CFT authorities. In addition, non-AML authorities such as prudential supervisors should also have access to this database when required. This would maximise the utility of the AML/CFT-related information gathered by different authorities, allowing risks to be tackled from all relevant perspectives, and facilitating rapid action where needed. For example, prudential concerns raised by the ECB about a bank’s risk management framework could guide AMLA towards discovering inappropriate processes in customer due diligence.

The ECB would be a key beneficiary and contributor to information in such a database. We would therefore fully support the implementation of a Memorandum of Understanding between the ECB and AMLA to facilitate information sharing.

Conclusion  

The ECB welcomes the progress made towards the creation of AMLA.

Setting up AMLA as the centre of the new EU AML/CFT supervisory system should be a game changer in the EU’s fight against ML/TF. It is therefore vital that the EU co-legislators’ upcoming decisions on the creation of AMLA result in nothing short of a strong authority and an ambitious framework for cooperation, which effectively serves to protect all EU citizens from the outset.

Building on its experience with establishing the Single Supervisory Mechanism as an integrated system that brings together the ECB and national competent authorities, the ECB will continue to provide any support necessary to establish this milestone in the EU’s fight against money laundering and terrorist financing.