Following the spate of money-laundering cases against banks and further digital developments within the last two years, it has become apparent that the current European Union (EU) framework needs to be profoundly reformed if the fight against financial crime is to yield meaningful successes in the future. The EU has gone some way towards improving the current situation in its latest mandate by further tightening the fifth Anti-Money Laundering Directive (AMLD5), with supervisory powers now anchored in the European Banking Authority (EBA), and by developing an AML (anti-money laundering) action plan. Yet, with an estimated 2 to 5 percent of global gross domestic product (GDP) being laundered annually (according to estimates of the United Nations Office on Drugs and Crime) and only 1.1 percent of criminal proceeds being caught in Europe, the fight against financial crime can barely be called a success. Below are five key areas in which more could be done to strengthen the effectiveness of the current framework—with little or no added costs for supervisors or businesses:
- EU-wide assessment of the threats posed by financial crimes in the EU;
- Increased and more structured information sharing between public and private sectors;
- Continued and thorough assessment of potential new threats arising from new technologies;
- Greater clarity on the interaction of the General Data Protection Regulation (GDPR) and the “public interest” test under AMLD5; and
- An ambitious international strategy to harmonize the naming conventions related to sanctions regimes.
The current state of affairs
- Almost $3 trillion is either lost or spent on fighting financial crime by the private sector. This is greater than any individual country’s GDP, except the five largest;
- In Europe, only 1.1 percent of criminal profits are confiscated at the EU level;
- Suspicious reports are growing by 11 percent annually across major financial centres;
- 97 percent of suspicious reporting is of no immediate value to financial intelligence units (FIUs).
It is important to note that financial crime is not simply an issue of compliance; it also has significant consequences for financial stability and safeguarding citizens. Europe has developed very significant and important initiatives to create a prudential and market regulatory framework to prevent the next financial crisis. Yet the possibility of a large financial institution becoming insolvent due to money laundering is real; it has the potential to become one of the most important sources of financial instability and erosion of the public’s trust in the banking system itself.
This new legislative mandate offers EU leaders a unique opportunity to further reform Europe’s AML framework and become a global leader in the fight against financial crime, which, as explained further below, also links to Europe’s ambitions to lead globally on both the digital revolution and the fight against climate change.
- To combat financial crime more effectively, the EU must be fully informed of the threats posed to its legislative framework.
According to a recent report published by Refinitiv in May 2019, 72 percent of the firms in the private sector had been victims of financial crime within the past 12 months. The European Commission (EC) should be commended for its supranational risk assessment, which provides a systematic analysis of the money-laundering or terrorist-financing risks of specific products and services. Without EU authorities having a full overview of the levels of financial crime and where it takes place in the system, any legislative changes will have limited impact.
This approach is crucial for any longer-term measures to be successful. However, it should not be a one-off assessment focused on recent cases only. EU authorities should conduct regular assessments of threats to the AML framework through close collaboration not just with EU member states’ authorities but also with the private sector. This should include a cooperative framework with a detailed analysis of what information concerning financial crime has already been collected and held by the public and private sectors so that a full picture of its levels is understood. Following this, key performance indicators should be developed by the European supervisory authorities in collaboration with private-sector organizations so that levels of financial crime—and, in turn, EU legislative actions—can be measured appropriately.
One vulnerability acknowledged by the European Commission is the lack of transparency through public registers of beneficial ownership for companies and publicly available registers for trusts. According to research conducted by Refinitiv, out of 237 jurisdictions in which companies can be incorporated, only 51 percent provide director information and only 57 percent disclose shareholders.
A second potential vulnerability is “citizenship by investment” schemes (e.g., “golden visas”). Together with then Member of the European Parliament Ana Gomes (Progressive Alliance of Socialists and Democrats), Refinitiv co-hosted a roundtable on the topic in January 2019 with representatives from the European Commission, the European Parliament, Global Witness and Transparency International. The Commission presented a key finding of its non-legislative report, which stated that the absence of a proper due-diligence framework leaves open the possibility that these schemes could be used by criminals for illicit activities.
A third potential vulnerability is the risk identified within the digital revolution, such as that of virtual assets and the ability to purchase a certain number of assets with limited identification and verification processes in place. An investor can backfill his investments without necessarily informing the virtual-asset company about the origin of the funds. During an eventorganized by Refinitiv, a poll was conducted that revealed that 90 percent of participants thought virtual assets posed a financial-crime risk; and 98 percent thought that there was a limited understanding of the different business models and a lack of understanding of the actual risks.
The AML framework could easily be enhanced with respect to proper identification and monitoring of investors. In fact, the Financial Action Task Force (FATF) specifically refers to risk indicators as including factors that would further obfuscate transactions or inhibit virtual-asset providers’ ability to identify customers.
- Fighting financial crime requires greater collaboration between all relevant stakeholders, both public and private. Only by becoming a network itself will Europe be able to effectively stop the highly sophisticated financial-crime network from functioning.
Money laundering and other types of financial crime do not happen in isolation. They are often global in nature and part of a much wider criminal operation—with real societal impacts, ranging from the funding of terrorism to modern slavery, child-related crime and even environmental degradation. As such, Europe needs to be a global leader also on the fight against financial crime if it aspires to be a global leader in the fight for a greener and more sustainable future.
As often the first line of defense against financial crime, the private sector has a key role to play in helping to reduce current financial-crime figures if utilized properly—i.e., if there is more collaboration between both the public and private sectors. A few public-private intelligence-sharing forums currently exist, such as Europol’s Financial Intelligence Public Private Partnership and the Netherland’s FIU-led Terrorist Financing Platform, which allow for information exchange, feedback on Suspicious Activity Reports (SARs) and consultation on risk profiles. The EU could be at the vanguard of enhancing the fight against financial crime if it could establish or facilitate the emergence of a similar and EU-wide public-private information-sharing arrangement. This was called for by the previous European Parliament in recommendations from its special committees on tax and terrorism (TAX 3 and TERR committees). Insufficient information sharing between the public and private sectors has also been noted as a vulnerability by the European Commissionin its supranational risk assessment of AML and terrorist-financing risks affecting the EU.
A particular benefit of such an arrangement would be the regular feedback that the private sector would receive on the information it sends to competent authorities (FIUs and law enforcement), enabling the private sector to improve the types of Suspicious Transaction Reports (STRs) it sends and typologies it uses, reducing inefficiencies in the system and freeing up resources for high-priority cases. The European Commission itself recognized in its “Communication: Towards better implementation of the EU’s anti-money laundering and countering the financing of terrorism framework” that some FIUs “fail to engage in a meaningful dialogue with obligated entities by giving quality feedback…”.
Ultimately, the obligation to report suspicions of financial crime should provide value to law-enforcement investigations and enable criminal-justice outcomes. However, available data indicates that the vast majority of reports filed by the private sector are not used to support active investigations. Across Europe, Europol found that from 2010 to 2014, just 2.3 percent of the estimated proceeds of crime were provisionally seized or frozen by investigating authorities. In addition, the volume of STRs submitted by banks and others across key financial centers is growing by 11 percent each year. However, a study conducted by the Future of Financial Intelligence Sharing (FFIS) program found that between 80 and 90 percent of this reporting is not useful to active law-enforcement investigations.
- A stronger European AML framework will require clear support to market participants from the EU General Data Protection Regulation (GDPR).
Over the past number of years, citizens have rightly demanded both strong data-privacy rules and better risk-intelligence tools to better identify and address financial crime, particularly following the recent terrorist attacks across Europe. In May 2017, the Council of the European Union identified the fight against criminal finances as one of the 10 EU priorities of the EU policy cycle 2018-2021. As a result, the EU has modified the AMLD to broaden the scope of activity and responsibility of firms and regulators, and it has also introduced more robust data-protection rules through the EU GDPR.
However, in the recent Refinitiv “Report on Innovation and Financial Crime 2019”, 81 percent of companies surveyed globally cited data-protection laws as restricting their ability to collaborate in the fight against financial crime.
The battle against financial crime is a global challenge and one that needs clear support from a privacy perspective to ensure that data can be effectively and safely shared for that purpose, not only between regulators and law-enforcement agencies but by and with firms that are at the forefront of financial services and corporates engaging with customers.
- A robust AML framework is essential for Europe’s competitiveness vis-à-vis the digital revolution.
As the EU seeks to embrace the digital revolution, it is paramount that its AML framework is equipped to deal with new, emerging technologies. An independent survey of more than 3,000 managers in compliance-related roles shows that significant advances in technology facilitated by innovations such as artificial intelligence, machine learning, cloud computing are already underway.
It is widely accepted that the rise of new digital products has assisted in the proliferation of financial crime. It has made it much easier for criminals to conceal the identity of the ultimate beneficial owner (UBO) of a company or financial asset, while at the same time, making it much more difficult for organizations to carry out swift due-diligence assessments. Furthermore, if we look at the use of instant-payment systems, the possibility of instant fraud is evident without robust AML due-diligence checks in place. The same can be said of anonymous crypto-assets. Close attention should also be paid to the development by certain large non-financial-services platforms of their own digital currencies. At the heart of this dilemma is the fact that too often, counterparties are unaware of who they are doing business with. For instance, Europol points to increasing evidence that crypto-assets are being used to launder money and to finance terrorist activities.
With a move towards a more digital economy, mandating some form of legal-entity identification in the EU AMLD—such as the globally recognized Legal Entity Identifier (LEI)—would, therefore, also be welcome. The LEI has already been endorsed by the G20 and mandated in a number of post-crisis pieces of financial-services legislation [e.g., European Market Infrastructure Regulation (EMIR), Markets in Financial Instruments Directive(MiFID), Securities Financing Transactions Regulation (SFTR)], with industry experience being positive.
At this point in time, however, there is no one consistent digital legal identity being used for AML purposes—rather, the landscape is fragmented and cluttered. This means that businesses often use several different digital identities for the same purpose, depending on with whom they are transacting. Mandating one global standard to act as the EU digital legal identifier will bring greater levels of efficiency and security to the EU framework. It is encouraging that one of the priorities of China’s Xiangmin Liu, the new FATF president, is to issue guidance on the use of digital identity. The aim is to support supervisors and help the private sector realize savings and improve effectiveness.
References: The United Nations Office on Drugs and Crime estimate that between 2% – 5 % of global GDP is laundered annually, https://www.unodc.org/unodc/en/money-laundering/globalization.html  Europol, ‘Does Crime Still Pay?’, Press Release, 1 July 2016.https://www.europol.europa.eu/newsroom/news/does-crime-still-pay  https://www.future-fis.com/thought-leadership.html  https://www.refinitiv.com/en/media-center/press-releases/2019/may/refinitiv-report-finds-global-companies-to-ramp-up-innovation-as-72-percent-fall-prey-to-financial-crime  https://europa.eu/rapid/press-release_IP-19-526_en.htm  A supranational risk assessment of AML and terrorist financing risks affecting the EU  Communication from the Commission ‘towards better implementation of the EU’s anti-money laundering and countering the financing of terrorism network’, page 4.  https://www.refinitiv.com/en/resources/special-report/innovation-and-the-fight-against-financial-crime