EU’s Iron Fist – Europe authoritarianly steamrolls over national supervisors and obliged entities | AML package, AML, CFT

In July 2021 the European Commission presented proposals to harmonize the EU’s anti-money laundering and countering terrorism financing (AML/CFT) rules, the ‘AML package’ [1]. The package consists of the following legislative proposals:

a] AMLAR, a Regulation establishing a new EU AML/CFT Authority, ‘AMLA’.
b] AMLR, the AML/CFT Regulation, containing directly-applicable rules, also on customer due diligence and beneficial ownership.
c] AMLD6, a sixth directive on AML/CFT, replacing the existing Directive 2015/849/EU (the fourth AML directive as amended by the fifth AML directive), containing provisions that will be transposed into national law.
d] A revision of the 2015 Regulation on Transfers of Funds to trace transfers of crypto-assets.

What is worrying is that the rules will not only apply to financial institutions and its national supervisors [2].

Non-financial obliged entities / DNFBPs
So-called ‘non-financial’ obliged entities [3], also referred to as ‘designated non-financial businesses and professions’ (‘DNFBPs’) and their national supervisors will also be affected. Even worse: AMLA and other European institutions can create AML/CFT rules for DNFBPs without involving them and without taking their specificities and national characteristics into account.

The DNFBPs cover a large number of different types of companies, some regulated (such as notaries, lawyers and accountants), some unregulated [4]. The risk is that all these companies will be faced with one-size-fits-all rules devised for the financial sector and transposed to these other sectors without taking into account the specific characteristics of the latter.

Top-down
It is a top-down system with no opportunities for sector associations or national supervisors to play a role in shaping the rules. AMLA and other European bodies are not accountable for the applicability of the rules to specific industries and the costs involved. There is no system in which the European bodies are accountable to the sector associations and sectoral supervisors. They will only have informal influence and can participate in consultations if they are held. Given the importance of the AML/CFT rules and the damage that the current rules are already causing (visible in the banking sector as de-risking and exclusion [5]), it is essential that there is an accessible system whereby the European authorities can be called to order.

Complicated system
The new system will consist of a variety of rules that will prove unfathomable for obliged entities that are SMEs and their supervisors. Elements are:

    • The European made rules of AMLR itself, accompanied with very limited explanation on the the justification and reasons for certain choices and on the meaning of terms used.
    • Regulatory technical standards, drafted by AMLA and adopted by the Commission, on:
      # group-wide requirements (AMLR)
      # branches and subsidiaries (AMLR)
      # KYC (AMLR)
      # risk variables and factors (AMLR)
      # reporting of suspicious transactions (AMLR)
      # in the specific cases referred to in article 38 AMLAR (6-4-a AMLAR)
    • Implementing technical standards drafted by AMLAR in the specific cases referred to in Article 42 AMLAR (6-4-b AMLAR)
    • Guidelines by AMLA
      # on monitoring (AMLR)
      # on the money laundering and terrorist financing trends, risks and methods involving any geographical area outside the Union (AMLR)
      # on PEPs (AMLR)
      # on relying on information by another obliged entity, outsourcing (AMLR)
      # for supervisors and supervisory authorities (AMLR)
      # guidelines and recommendations, as provided in Article 43 (6-4-c AMLAR)
    • Opinions by AMLA on third countries posing a threat to the Union’s financial system (AMLR)
    • Opinions by AMLA to the European Parliament, to the Council, or to the Commission as provided for in Article 44 (6-4-d AMLAR)
    • Relevant information or guidance by AMLA (AMLR)
    • Recommendations AMLA to supervisors and supervisory authorities (6-2-b AMLAR) and requests to supervisors and supervisory authorities to act an instructions on measures 6-2-c AMLAR
    • Supervisory methodology by AMLA, 8 AMLAR
    • Practical instruments and convergence tools, methods by AMLA 10-1 AMLAR
    • List of countries by the Commission:
      # high-risk third countries (AMLR)
      # third countries with compliance weaknesses (AMLR)
      # third countries posing a threat to the Union’s financial system, countermeasures (AMLR)
    • Relevant information or guidance by the Commission (AMLR)
    • Recommendations by the Commission to Member States on rules and criteria to identify the beneficial owner (AMLR)
    • Supra-national risk assessments by the Commission (AMLR)
    • List of legal arrangements and legal entities subject to the same beneficial ownership requirements as express trusts, implementing act by the Commission (AMLR)

Delegated acts are only assessed by the Parliament and the Council (Article 60 (6), Article 86 AMLR). Evaluation is carried out only by the Commission, according to Article 88 AMLAR.

AMLA may be very expensive for the non-financial sector as it will collect a lot of data from the national supervisors (Article 6 (2) AMLAR) and it will keep these supervisors very busy, for instance by doing thematic reviews (Article 9 AMLAR). The costs will be passed on to the obliged entities.

Sector associations
The Council of Bars and Law Societies of Europe (CCBE) has been critical, first on 8 October 2021 in preliminary comments on the AML package. On 10 December 2021 CCBE presented its position paper.

ETAF, the European Tax Adviser Federation, in its position paper is critical as well: to their opinion the competences of AMLA in the non-financial sector should be limited to a coordinating and advisory function. They amongst others write:

Due to its more heterogeneous nature and the lack of harmonisation in terms of requirements, the supervision in the non-financial sector must remain decentralized at the level of Member States, since they can act much faster, more effectively and more appropriately.

I could not find whether the European legislator is going to take any notice of these criticisms. It is relatively quiet around the AML package, which makes one fear the worst.

Europe is going a wrong direction
It seems that Europe is in the process of creating a costly and complicated system based on AML/CFT control concepts from the financial sector. The non-financial obliged entities and their supervisors may suffer greatly from this, first of all because of the inaccessibility and incomprehensibility of the regulations (with high costs) and secondly, because the branch expertise is not formally involved in the formation of the rules.

It is high time for regulators to pay attention to the fact that concepts from the financial sector cannot simply be transferred to the non-financial sector, and that the quality of regulation must be high in order to ensure that it is understandable and workable for the target groups (including SMEs) and not unnecessarily expensive in relation to the results achieved by the rules.

Notes
[1] Press release Beating financial crime: Commission overhauls anti-money laundering and countering the financing of terrorism rules. Drafts: AMLAR, AMLR, AMLD6, revision of the TF regulation.
[2] In this article, I will not discuss whether the proposed system is appropriate for financial institutions. There may be more to say about that.
[3] The term ‘non-financial’ obliged entities is not found in the draft AMLR. In the definition article of AMLR, article 2, ‘non-financial supervisor’ means a supervisor in charge of obliged entities listed in Article 3 of draft AMLR, other than credit and financial institutions.
[4] Article 3 (3) of the AMLR draft:
“The following entities are to be considered obliged entities for the purposes of this Regulation:

(a) auditors, external accountants and tax advisors, and any other natural or legal person that undertakes to provide, directly or by means of other persons to which that other person is related, material aid, assistance or advice on tax matters as principal business or professional activity;
(b) notaries and other independent legal professionals, where they participate, whether by acting on behalf of and for their client in any financial or real estate transaction, or by assisting in the planning or carrying out of transactions for their client concerning any of the following:
(i) buying and selling of real property or business entities;
(ii) managing of client money, securities or other assets;
(iii) opening or management of bank, savings or securities accounts;
(iv) organisation of contributions necessary for the creation, operation or management of companies;
(v) creation, operation or management of trusts, companies, foundations, or similar structures;
(c) trust or company service providers;
(d) estate agents, including when acting as intermediaries in the letting of immovable property for transactions for which the monthly rent amounts to EUR 10 000 or more, or the equivalent in national currency;
(e) persons trading in precious metals and stones;
(f) providers of gambling services;
(g) crypto-asset service providers;
(h) crowdfunding service providers other than those regulated by Regulation (EU) 2020/1503;
(i) persons trading or acting as intermediaries in the trade of works of art, including when this is carried out by art galleries and auction houses, where the value of the transaction or linked transactions amounts to at least EUR 10 000 or the equivalent in national currency;
(j) persons storing, trading or acting as intermediaries in the trade of works of art when this is carried out within free zones and customs warehouses, where the value of the transaction or linked transactions amounts to at least EUR 10 000 or the equivalent in national currency;
(k) creditors for mortgage and consumer credits, other than credit institutions defined in Article 2(5) and financial institutions defined in Article 2(6), and credit intermediaries for mortgage and consumer credits;
(l) investment migration operators permitted to represent or offer intermediation services to third country nationals seeking to obtain residence rights in a Member State in exchange of any kind of investment, including capital transfers, purchase or renting of property, investment in government bonds, investment in corporate entities, donation or endowment of an activity to the public good and contributions to the state budget.”

[5] Euphemistically referred to by FATF as “Unintended Consequences of the FATF Recommendations” (article FATF on March 2022 meeting). The statement by FATF that they want to do something about de-risking and exclusion cannot be taken seriously, as this is a consequence of the concepts chosen by FATF.
The European legislators are aware of the problems. AMLR even includes a de-risking ban for the financial sector (Article 41a), which is not going to work because those responsible for the adverse rules (AMLA and banking regulator EBA) will have to further elaborate the ban in guidelines.

Much more can be said about the AML package. In this article I limit myself to the general structure.

 

This is part 4 of the series Horrors of European legislation against crime (AML/CFT) that describes the European plans to fundamentally change AML/CFT legislation.

 


Addition 11 May 2022
There is also a position paper by the Council of the Notariats of the European Union (CNUE).

CNUE is of the opinion that AMLA should only exercise supervision over certain obliged entities in the financial sector and limit its activities to a coordinating function with respect to obliged entities in the non-financial sector. Indeed, a clear-cut differentiation needs to be done between the financial and the non-financial sector. Unlike the financial sector, the non-financial sector is heterogeneous (or sui generis) and has specificities (or singular aspects) that are important to respect and maintain as they contribute to the efficiency of the system at national level.

Over Ellen Timmer, advocaat ondernemingsrecht @Pellicaan

Verbonden aan Pellicaan Advocaten, http://www.pellicaan.nl/, kantoor Rotterdam, telefoon 088-6272287, fax 088-6272280, e-mail ellen.timmer@pellicaan.nl ||| Weblogs: algemeen: https://ellentimmer.com/ || modernisering ondernemingsrecht: http://flexbv.wordpress.com/ ||| Motto: goede bedoelingen rechtvaardigen geen slechte regels
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