EU Watchdog Backs Standardizing Customer Due Diligence Rules Across the Bloc

By Gabriel Vedrenne

The European Banking Authority has recommended that the EU eliminate variances in anti-money laundering rules, supervision and enforcement across the bloc’s 27 nations.

Officials must “harmonize the EU legal framework … where evidence suggests that divergence of national rules and practices has had a significant, adverse impact,” the EBA advised in a 67-page report Thursday. “This is the case for customer due-diligence and wider systems and controls requirements, as well as for those rules governing key supervisory processes.”

Several EU nations continue to use a prescriptive, rules-based approach towards AML and CDD while other members expect that financial institutions in their jurisdictions tailor their compliance procedures to address the unique risks of each client, according to the EBA, which serves as the EU’s primary financial regulator.

The regulator’s report comes four months after the European Commission, the EU’s executive arm, published a wide-ranging plan for strengthening the bloc’s defenses against illicit finance following a series of money laundering scandals.

Separately, the EBA concluded Thursday that the EU’s delay in giving a clearer, more refined explanation of what qualifies as an “occasional transaction” for AML purposes has resulted in a patchwork of national requirements for vetting them. The bloc currently defines occasional transaction as a transaction “that is not carried out as part of a business relationship.”

The EBA also found that suspicious activity reporting in the EU too often consists of little more than “tick-box compliance checks.” Most EU nations require only that regulated institutions report potentially illicit payments and do not expect them to adopt a “holistic view” that focuses as much on broader patterns of criminal finance, the report found.

The EBA consequently advised that EU officials require financial institutions to identify broader suspicious activity as well as suspicious, individual transactions, but warned that such a paradigmatic shift should only be taken after each nation thoroughly analyzes and discusses the proposal with the private sector.

European authorities, including the European Commission, have warned for years that money launderers and terrorist financiers take advantage of the bloc’s variances to move and conceal funds, and Thursday’s report reiterates those concerns.

Perhaps more surprising is the report’s finding that financial institutions, especially those in the payment services and e‐money sectors, have also exploited the differences, including by establishing themselves in areas of the bloc they perceive as having the “most permissive” CDD policies and targeting customers in nations with comparatively stringent policies.

The report does not identify by name those EU jurisdictions that do not prioritize CDD.

Banks, fintechs and other financial institutions with operations that span EU national boundaries would benefit from the EBA’s recommendations, said Dan Benisty, Western Union’s head of AML for northern and western Europe.

“All EU members agree on KYC [know-your-customer], CDD and enhanced due-diligence concepts, but when it comes to going into operational details, supervisors’ opinions differ. As a result, for the same financial product, due diligence is not the same in France, Germany and Italy, which is absurd.”

The Netherlands has promulgated specific guidelines for conducting AML risk assessments, said Benitsky, but France and Belgium give financial institutions more leeway.

In addition to pitching the creation of a bloc-wide AML supervisor and more cooperation between financial intelligence units, the Commission proposed to harmonize key aspects of current AML directives, which member states currently transpose into national legislation in different ways.

The EBA recommended Thursday that the Commission also update the bloc’s standard list of entities that must fall under AML rules after finding that some EU jurisdictions exclude “certain financial institutions and undertakings” and have yet to clarify the status of others, including investment funds, insurance intermediaries and consumer-credit companies.

Regarding financial penalties and other corrective measures, the EBA found “no consistent approach” to holding financial institutions to account for violations.

AML risk assessments by EU national governments also represent another area of divergence. According to the regulator, “competent authorities in different member states might come to a different conclusion regarding the adequacy and effectiveness of the same financial institution’s AML/CFT [combating the financing of terrorism] systems and controls.”

The harmonization and standardization of rules and enforcement policies against illicit finance must be completed before the Commission moves forward with any plan to establish a bloc-wide AML regulator, according to the EBA.

Francois-Louis Michaud, the EBA’s director, told EU lawmakers in June that the agency was probably ill-suited for the role of permanent, bloc-wide AML supervisor.

Contact Gabriel Vedrenne at

Topics : Anti-money laundering , Counterterrorist Financing
Source: European Union
Document Date: September 11, 2020