Banks Small in Stature, High in Risk Could Escape Direct EU Oversight

By Koos Couvée

The European Union’s planned new anti-money laundering agency will have broad powers to subject the bloc’s “riskiest” financial institutions—and their national supervisors—to rigorous scrutiny, a draft regulation obtained by ACAMS shows.

On July 20, the European Commission, the EU’s executive branch, will unveil a wide-ranging regulation to enhance the bloc’s defenses against financial crime, capped by a new Anti-Money Laundering Authority, or AMLA, that will have both a supervisory and a financial intelligence role.

EU officials foresee a staff of 250 employees for the agency, which will begin directly supervising a “limited number of the riskiest, cross-border” financial institutions in the EU by 2026, have power to pursue enforcement actions and multimillion euro fines for violations, and oversee national AML supervision across the bloc, according to the 93-page regulation.

However, despite the outsized role that ABLV Bank in Latvia, Pilatus Bank in Malta, Danske Bank in Estonia and FBME Bank in Cyprus and other small lenders played in many of the international money-laundering scandals that preceded the EU’s drive for wholesale AML reform, they appear to escape direct, bloc-wide supervision under the regulation.

The agency will instead focus the lion’s share of its attention on large lenders that have a footprint in at least seven EU nations and are classified as high risk by at least four of those jurisdictions.

Smaller banks viewed as high risk by at least four countries and that have been investigated for “material” AML breaches in at least one may also qualify for AMLA oversight, as may large money services business and other non-bank financial institutions that operate in at least 10 EU nations and engage in “sufficiently risky” commerce.

The agency will update and publish the list of institutions selected for direct supervision every three years, according to the regulation. To ensure that only institutions with “significant cross-border operations” and significant exposure to financial crime are selected, EU nations must first adopt a common set of factors to assess risk.

Those factors include the products and services they offer, the non-EU countries in which they operate and the types of customers they serve. Institutions with a large share of clients who hail from overseas or qualify as politically exposed persons, for example, may qualify for direct, bloc-wide supervision by the AMLA.

The agency will separately facilitate data exchanges between the bloc’s 27 national financial intelligence units, or FIUs, and help them pinpoint international money-laundering networks more quickly after the aforementioned scandals highlighted the obstacles they sometimes encounter in sharing knowledge of suspicious transactions and clients across borders.

Nicolas Veron, an analyst at Bruegel, a policy center in Brussels, described the regulation as a positive, noteworthy development, but said the proposed criteria for direct oversight fails by prioritizing the size of financial institutions over their respective exposures to illicit finance.

“You’ve got to start somewhere, but they haven’t fully empowered the agency to proactively supervise a range of institutions, in particular small banks,” said Veron, who is also a senior fellow at the Peterson Institute for International Economics in Washington, D.C. “It would be better … to leave the criteria to the discretion of the agency.”

EU officials acknowledged that some institutions may present great inherent risks but still not meet the requirements for regulator selection. In those circumstances, and where AML violations are suspected or have been confirmed, the AMLA can direct the national supervisor in question to address the issues within a “sufficiently short” time frame.

“Smaller banks may have a smaller footprint, but if their inherent risk profile is of concern, there’s no way they’re not going to be looked at,” said Peter Oakes, former director of enforcement and AML at the Central Bank of Ireland. “The question is what indirect supervision will be like. It could be so intrusive that it’ll feel like direct supervision.”

EU officials aim to empower the AMLA to step in and directly supervise financial institutions when national AML regulators fail to address non-compliance in a timely manner. EU nations can also request that the agency take such a step.

National supervisors of banks, money services businesses and other financial institutions, as well as of corporate services providers, lawyers, precious metal dealers and other non-financial firms, will also undergo regular reviews by the AMLA, which will assess whether they have the power and resources necessary to meet their responsibilities.

“We now have a regulatory big stick approach aimed at improving the effectiveness of pan-EU AML supervision,” Oakes, now a fintech consultant in Dublin, said. “You will see this regulation being tweaked and developed, and within the next decade the authority is probably going to capture a significant portion of the EU financial system.”

The planned agency will conduct onsite examinations of directly supervised institutions jointly with national regulators, and have authority to impose fines the higher of €10 million or 10 percent of a company’s annual turnover.

In the most egregious cases, the AMLA can assess periodic penalty payments, impose business restrictions, remove board members and recommend license withdrawals.

By 2023, the European Banking Authority, or EBA, will begin handing over its entire AML remit to the new agency, which will be led by an executive board of six “full-time, independent members” of “high repute,” and experienced in AML supervision and FIU-related matters.

The regulation arrives a little more than two years after the EBA controversially closed an investigation into Denmark and Estonia for their allegedly inadequate supervision of Danske Bank, which processed hundreds of billions of euros of suspicious transactions to and from non-resident legal entities from 2007 to 2015.

After the decision, German MEP Sven Giegold criticized the EBA’s board of supervisors, which consists of representatives of central banks and other national regulators in the EU, for allegedly letting national interests override their duty to clamp down on financial crime.

Giegold told in an email that the draft regulation’s proposed governance structure of six independent experts for the AMLA represents a “big step forward.”

“This means that the common interests of the EU are given center stage and the influence of member states is limited,” Giegold wrote. “This is important, because consistent action against money laundering is often inconvenient for the supervisory authorities at national level.”

Contact Koos Couvée at

Topics : Anti-money laundering , Counterterrorist Financing
Source: European Union
Document Date: July 13, 2021