The European Commission acted in its July 2020 infringement package against eight more Member States that have failed to implement the fourth money laundering directive.
In total 11 Member States now face anti-money laundering (AML) infringement procedures relating to the directive.
The directive should have been transposed by 26 June 2017 following a two-year implementation period.
The fact that this action is required is clear evidence (if it were needed) that Member States current approach and proposed plans to counter money laundering are both ineffective and futile.
The Commission continues to apply a rules- and not a risk-based approach to self-evident issues.
Infringement procedures brought by the Commission have three stages ranging from a ‘letter before action’ (formal notice), pre-action proceedings (reasoned opinion) eventually leading to proceedings before the Court of Justice of the European Union (CJEU).
Austria, Belgium and the Netherlands are now to be referred to the CJEU for incomplete transposition of the directive.
Ireland and Romania are already in proceedings before the CJEU for incomplete transposition of the directive.
Six other Member States are at stage one or two.
So, what does it look like and why?
The Member States involved account for 33 per cent of the EU population and 36 per cent of MEPs.
None has a larger population than the UK and only four are more populous than London.
More interestingly, those Member States account for 54 per cent of EU per capita GDP (measured on a PPP basis).
More astonishingly, those Member States account for:
135 per cent of average EU27 per capita GDP
121 per cent of average eurozone per capita GDP
The alleged offenders are rich nations, six of them have per capita GDP greater than the EU or eurozone average.
These are crude but informative measures which neglect the size of the relevant local financial services markets or assets under management and ignore product or market risks.
The Member States subject to infringement procedures account for about 22 per cent of the EU’s land area – 15 per cent if Italy is excluded – which is of itself irrelevant.
Luxembourg is an interesting case as it accounts for 0.1 per cent of EU geography (only Malta is smaller) but has the highest per capita GDP at 329 per cent of the EU average and 295 per cent of the eurozone average.
It is at the first stage of infringement procedures for failing to fully implement the directive as are Slovakia and Slovenia.
The number of super yachts moored in the South of France registered in Luxembourg is interesting given the country is landlocked – none could navigate the river flowing past the Grund.
Luxembourg was reported on the 13th March 2020 to have assets under management (AUM) as follows:
It is also at the first stage in concurrent but separate infringement procedures for failing to protect the euro and other currencies against counterfeiting as are Croatia, Malta, Slovakia and Slovenia.
Italy is already at stage two of infringement procedures for not fully implementing the directive as are Czechia and Denmark.
Italy also faces concurrent but separate stage two procedures for failing to make fraud against the EU budget a crime.
Member States such as Cyprus and Malta which are notorious for money laundering are smart to be in ‘box ticking’ compliance with the directive so avoiding infringement procedures.
Danske Bank Estonia - 2007-15
Everything in the AML space in the EU must be seen against the context of the Danske Bank EUR 200 billion money laundering scandal which related to suspicious transactions involving non-resident accounts held in Estonia.
The amounts involved were more than the Estonian annual GDP.
The accounts were allegedly opened by Russian kleptocrats as well as others from former Russian republics – eight per cent of accounts were Russian but accounted for 35 per cent of the profits at the branch in Tallinin.
Everyone in the AML world will be familiar with the facts but it is worth recalling that nothing effective was done in Estonia or Denmark to investigate this situation
The European Banking Authority (EBA) opened an investigation but closed it early without publishing any findings.
Danske Bank in Copenhagen was in complete denial at the time.
Eventually a whistleblower alerted the US Department of Justice and other US regulators such as the SEC and FinCEN which then took swift and effective action
Danske Bank attempted to discredit the whistleblower.
The branch manager for the Baltic States was found dead on 25 September 2019 from reported suicide.
As a practical matter, the US correspondent banking stranglehold on USD payments is the only tool US regulators require to bring banks into line on AML matters.
Whistleblowing is incentivised in the US by the payment of rewards by (for instance) the SEC ranging from 10 to 30 per cent of the money recovered.
On 4 June 2020, the SEC made on award of nearly USD 50 million to a single individual.
This firm’s conclusion is that KYC should mean Know Your Colleague as the most exiguous money laundering takes place with the assistance of complicit bank executives.
New role for the EBA to counter money laundering
The new EU ‘charter’ for the EBA gives it extensive responsibilities for coordinating the EIOPA and ESMA efforts relating to anti-money laundering.
A statutory objective is the convergence of supervisory rules and practice throughout the Member States.
It is a ‘supervisor of supervisors’ although it may not be involved with individual ‘obliged entities’ which remain the responsibility of national supervisors.
Anecdotally, this initiative is in part fuelled by the wholly egregious conduct of Danske Bank in Estonia which revealed a lack of joined up thinking amongst Member State AML supervisors.
The EBA will be in contact with Member State AML supervisors to draw on their experience and to provide guidance based on ‘lessons learnt’.
The EBA is expected to hold domestic AML supervisors to account.
It has published a lengthy fact sheet and work plan detailing its new AML responsibility and how it intends to go about the work.
Revision of The Risk Factor Guidelines
The EBA has (in consultation with EIOPA and ESMA) has published a draft of an extensive revision of the Guidelines.
Proposal for a pan-EU27 AML regulator
The new solution is to set up a new EU institution (perhaps based on the EBA) to regulate ‘obliged entities’ directly for AML purposes.
The existence of these infringement procedures really give rise to serious questions about the practicability of these ambitious and ill-thought proposals.
From 31 December 2020, both the UK and the EU27 Member States become third countries from each other’s standpoint and so will need to seek an ‘equivalence’ determination from the other on AML and other matters in the financial services space.
There was an ambitious stated goal of 30 June 2020 to resolve this issue.
Each of the ESAs has the power to make input to the Commission with respect to ‘equivalence’ rulings.
The EBA has a statutory objective of seeking convergence of supervisory rules and practice.
The UK and EU have differing positions on how the ‘equivalence’ assessment process will proceed.
The stated public position of the EU is that the UK and the EU are far apart on this issue so far as it concerns AML.
UK departure from the EU
As a consequence of leaving the EU, the UK has legislation in place to ‘onshore’ where appropriate financial services regulation to remove references both to EU institutions such as the ESAs and their guidance.
They are replaced with references to UK institutions.
Associate Director at Lysis Group
EU infringement procedure
Proceedings before the CJEU
Other infringement proceedings
There are still inflight proceedings against these Member States for failure to notify transposition of the fourth money laundering directive.
Fourth money laundering directive consolidated text [EU 2015/849 amended by 2018/843]
Anti-money laundering directive IV (AMLD IV) - transposition status 2 June 2020
EC press release 2 July 2020
EC July infringement package: key decisions 2 July 2020
Financial Times 3 July 2020