Legislators in Latvia and the European Union (EU) have been fighting with the ongoing issue of money laundering for a number of years, and the situation is not made any better by technological advancements that give fraudulent individuals additional avenues to legitimize illegally obtained funds. The legislative recommendations put out by the European Commission to improve the EU's fight against money laundering and terrorist funding are discussed in this article.

New EU's anti-money laundering and counter-terrorism financing package proposal in brief

The package of legislative proposals proposed by the European Commission in the area of ​​combating money laundering (AML) and terrorist financing (CFT) consists of mainly four proposals:

  • Supranational organization for AML/CFT prevention at the EU level. The Member States are currently in charge of AML/TF monitoring, and when EU credit institutions are involved, the attitude to cross-border circumstances is inconsistent. 
  • Directly applicable regulation. EU legislation in the area of ​​AML/CFT should become more detailed, precise and less dependent on different implementation methods.
  • The fifth AML/CFT directive will be replaced by the sixth. To create better consistency in the supervisors' and financial reporting entities' practices, significant adjustments are proposed.
  • Revised 2015 money transfer regulation. Transfers of virtual assets are supposed to be subject to the same regulations as transfers of cash and cashless funds.

Is money laundering and terrorism financing still a major threat to EU?

According to Europol, "identified as being related to illicit financial activity" equals 0.7-1.28% of the European Union's (EU) yearly gross domestic product, or roughly EUR 99.4-178.8 billion. As a result, the European Union has made the fight against unlawful money laundering and terrorist financing (AML/CFT) a top priority and a key component of building the secure environment throughout the Union.

In view of the need to act to continue the fight against money laundering, the European Commission adopted an action plan for a comprehensive Union policy to prevent money laundering and terrorist financing (hereinafter - the action plan).

The action plan is based on six following points:

  1. ensure that the current EU AML/CFT regulation is effectively implemented;
  2. create a single set of EU rules on AML/CFT;
  3. introduce EU-level supervision in the field of AML/CFT;
  4. establish a support and cooperation mechanism for financial intelligence units;
  5. ensure enforcement of criminal law rules and improve information exchange at the EU level;
  6. to strengthen the international dimension in EU AML/CFT regulation.

Taking into account the EU's objective, vision in the field of combating money laundering and the developed action plan, the European Commission presented an ambitious package of legislative proposals to strengthen EU anti-money laundering and anti-terrorist financing rules.

Main regulatory acts

The four legislative proposals that make up the European Commission's proposed anti-money laundering and terrorist financing legislation, abbreviated AML are as follows: 

  • a regulation establishing an institution for the prevention of money laundering and terrorist financing at the European Union level;
  • directly applicable AML/CFT regulation;
  • the sixth AML/CFT Directive, which will replace the existing one;
  • Revised 2015 Money Transfer Regulation.

Supranational organization for AML/CFT prevention at the EU level

The member states are currently in charge of overseeing AML/CFT in the European Union, and when it comes to circumstances involving EU credit institutions, the approach to cross-border scenarios is inconsistent. Despite advancements, not all national competent authorities are able to successfully engage with local and international stakeholders, according to the European Banking Authority (EBA) report on competent authorities' approaches to AML/CFT monitoring. Therefore, the new European authority is crucial to preventing the current oversight gaps in AML/CFT in the EU.

The Authority for Anti-money Laundering (AMLA) is expected to be established starting from January 1, 2023. The Authority is anticipated to have a number of powers in the area of AML/CFT, but it is important to emphasize that it should be able to monitor and evaluate the most significant AML/CFT risks in the internal market, monitor and evaluate the efforts and strategies of supervisors of financial entities, monitor and coordinate standards regarding supervisors of non-financial entities, and work with financial intelligence units in member states.

The new AML/CFT regulation

The European Commission identified the execution of certain directive provisions for the introduction of a tougher set of norms as an issue even before creating the action plan. EU legislation should become more specific, accurate, and less reliant on various implementation strategies. Some provisions of the AML Directive should be transformed into directly applicable rules specified in the Regulation in order to reduce the disparate interpretation and application of the rules.

In light of the foregoing, a proposal for a regulation to prevent the use of the financial system for money laundering and terrorist financing has been developed. This proposal not only transfers clauses from the current AML/CFT Directive to the regulation, but also makes a number of significant changes to achieve greater coherence and convergence in the application of AML/CFT rules throughout the EU.

The inclusion of directly applicable AML/CFT provisions in the regulation will not only contribute to the consistency of the application of AML/CFT measures in the member states, but will also provide a single system to be effectively used by the newly created EU supervisory authority.

Sixt AML/CFT directive

The existing AML/CFT Directive is expected to be replaced by this one. To create better consistency in the practices of supervisors and financial reporting entities as well as in regard to the collaboration of responsible authorities, the plan also calls for a number of major adjustments:

  • the powers and tasks of financial intelligence units are specified, as well as the minimum amount of information that should be available to financial intelligence units;
  • a joint analysis system has been established for effective cooperation between financial intelligence units;
  • clear rules are in place for feedback from financial reporting entities;
  • the powers and tasks of supervisors are clarified, the obligation of the state authority to supervise self-regulatory bodies acting as supervisors is introduced;
  • there is a harmonized approach to risk-based monitoring using a common risk classification tool;
  • AML/CFT boards are established and mechanisms are introduced to ensure cooperation in the field of supervision with regard to operators providing services across borders;
  • cooperation with other institutions is specified, determining specific cases when cooperation is required;
  • the powers of registers of beneficial owners are clarified;
  • interconnection of bank account registers is foreseen;
  • requirements for the processing of data of certain categories of persons are introduced.

Regulation of money transfers

In 2015, Regulation (EU) 2015/847 was adopted on information accompanying transfers of funds in order to prevent, detect and investigate the possible use of transfers of funds for money laundering and terrorist financing. However, the said regulation currently applies only to transfers of funds defined as "banknotes and coins, non-cash or electronic money" and not to transfers of virtual assets.

Virtual asset transfers have not been regulated by EU financial services legislation up until this point. The European Commission suggests using the same legal instrument to solve these common problems because virtual asset transfers should be subject to the same types of regulations as electronic financial transfers because they share the same dangers of money laundering and terrorist financing. In order to effectively address transfers of virtual assets, it is designed to complement the 2015 regulation.

What should we expect in future?

Unquestionably, AML/CFT is already and will continue to be one of the dangers that the EU must consider when supervising financial activities. Therefore, the set of legislative suggestions created by the European Commission is a step toward improving countries' capacities as well as their ability to come up with a cohesive solution to this issue. It will take time for normative acts to be introduced and, if necessary, adopted into the legislation of the member states. During this time, the industry will continue to grow concurrently.

The anti-money laundering and counter-terrorist financing legislation package will serve as the foundation for the formation and future growth of such a network. However, the battle against AML/CFT is a problem that EU member states must address together and in a single network.

Contact EU LAW FIRM lawyers in Latvia

For legal advice on AML matters and ensuring the compliance with existing EU and Latvian provisions do not hesitate to contact our lawyers in Latvia.

E-mail: info@eulawfirm.eu

Telephone: +371 26742086 (Available on WhatsApp/Telegram/Viber)

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