Gearing up to fight money laundering

Recent breaches or alleged breaches of anti-money laundering (AML) rules in the banking sector have shown that banks’ involvement in money laundering can pose significant risks to the banks themselves and indeed to their viability. Over the past year, there have been significant initiatives at European Union (EU) level to strengthen the EU-wide framework for anti-money laundering and combating the financing of terrorism (AML/CFT). The EU’s fifth Anti-Money Laundering Directive entered into force on 9 July 2018 and is currently awaiting transposition into national law. In December 2018, the Economic and Financial Affairs Council endorsed an ambitious AML Action Plan to be implemented by the three European supervisory authorities – the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority – together with the ECB and the national prudential and AML/CFT supervisors.

These initiatives are designed to foster cooperation between the authorities responsible for AML/CFT and prudential supervisors, and to enhance supervisory convergence by providing common guidance on how to include AML/CFT-related aspects in the prudential supervisory process. Although the competency to supervise money laundering and terrorist financing matters and the responsibility to initiate criminal investigations into related allegations remains with the national authorities, the ECB needs to take the related risks into account, as AML/CFT issues may have significant prudential consequences and could even threaten the viability of a supervised bank.

This is further confirmed in the revised Capital Requirements Directive (CRD), which was adopted by the European Parliament in April. Recital 20 states that “(…) [Together with the authorities responsible for AML/CFT], the competent authorities in charge of authorisation and prudential supervision have an important role to play in identifying and disciplining [AML-related] weaknesses. Therefore, such competent authorities should consistently factor money laundering and terrorist financing concerns into their relevant supervisory activities (…)”.

The ECB is working with the European Banking Authority and with national prudential and AML/CFT supervisors on implementing the new regulatory requirements and the tasks set out in the Council’s AML Action Plan. It is also cooperating with the Basel Committee on Banking Supervision and other international authorities.

The role of the ECB

ECB Banking Supervision has also strengthened its engagement in the AML/CFT area and has set up a new horizontal AML coordination function consisting of a small team with three main responsibilities.

The first is to act as a “central point of contact” for AML/CFT issues related to significant institutions and facilitate information exchange with the AML authorities (including by signing additional memoranda of understanding with non-EU authorities). The second is to set up, in cooperation with the national competent authorities (NCAs), an AML network of prudential supervisors to achieve a consistent system-wide approach for better integrating money laundering/terrorism financing risk into prudential supervision. The third responsibility is to act as an in-house centre of expertise on prudential issues related to AML/CFT.

As mandated by the fifth AML Directive, the ECB signed an agreement in January 2019 establishing the practical arrangements for the exchange of information with around 50 national AML/CFT authorities in Europe. The agreement envisages a structured exchange of information between the ECB and these authorities. This means that the ECB will facilitate the timely sharing of information collected in the course of its direct prudential supervisory tasks with the national AML/CFT authorities for whom the information is relevant and necessary to perform their role. Conversely, the ECB will receive information from the national AML/CFT authorities that may have prudential implications. The ECB supervisors will assess the information, incorporate it in their prudential supervisory work and, if necessary, take the appropriate prudential measures.

With this enhanced framework of cooperation, ECB Banking Supervision, together with the NCAs and other EU stakeholders, will be in a better position to factor AML/CFT-related aspects into the prudential supervisory process.

The role of the banks

Increased regulatory focus alone will not be enough to successfully fight money laundering and terrorism financing in the financial sector. Banks too have a vital role to play. Europe’s banks need to ensure that they are not used for these purposes and that ALM/CFT issues attract proper management attention. Even more importantly, fighting money laundering and terrorism financing may require banks to re-define their risk appetite, enhance their governance framework and revisit elements of their business model, which may in the short term weigh negatively on profitability. However, the cost of building and maintaining proper safeguards compensates by far the financial and reputational damage a bank can suffer if suspicions of money laundering and terrorism financing arise.