Today, more than ever, the EU needs an effective regime to tackle money laundering and terrorist financing. Almost 30 years after the adoption of the first anti-money laundering directive, it is now time for fundamental reform.
The need for better and more coordinated policies has been an ongoing issue, but now that need is essential. COVID-19 has triggered the most severe economic recession in nearly a century. It is causing enormous damage to people’s health, jobs and well-being.
In its June 2020 economic outlook, the OECD estimated that, even if a second wave is avoided, global economic activity will fall by six percent in 2020 while unemployment in the OECD countries could double to more than nine percent. Five years of income growth across the economy will be lost by 2021. To overcome this crisis, massive recovery plans have been set up.
Apart from the political discussions over their size and the way money will be allocated, a critical issue is financing. And a more robust and effective anti-money laundering regime could play a key role here. Public authorities are losing a shocking amount of money to financial crime.
“Almost 30 years after the adoption of the first anti-money laundering directive, it is high time for a fundamental reform”
According to the European Commission, around one percent of the Union’s annual gross domestic product is involved in suspect financial activity. This means that around €160bn is enmeshed in money laundering connected to corruption, arms, human trafficking, drug dealing, tax evasion, fraud, terrorism financing or other illicit activities.
All this affects EU citizens in their daily lives and distorts competition in the markets. According to Europol, around two percent of the estimated proceeds of crime were provisionally seized or frozen between 2010- 2014. However, just one percent of criminal profits were finally confiscated at EU level, meaning that the remaining 99 percent wasn’t and remains at the disposal of criminals.
In March 2019, the European Parliament voted on an ambitious resolution on financial crimes, tax evasion and tax avoidance. Parliament concluded that there was a need for a major overhaul of existing EU antimoney laundering rules. After this decision, the Commission adopted in May 2020 an action plan for a comprehensive EU policy that would prevent money laundering and terrorism financing.
Following this action plan, and in order to feed into a public consultation, MEPs voted on an ambitious resolution last month, setting out Parliament’s priorities for the reform of the anti-money laundering directive and countering the financing of terrorism (AML/CTF) framework. The new legislative proposal is foreseen for early next year.
Over the last 30 years, all EU Member States have implemented, in varying ways, the five different AML directives. This obviously does not help us enhance what should be a common EU-wide approach. A clear EU regulation is urgently needed to harmonise some essential measures and allow for an effective response. It is essential that beneficial owners - those who ultimately own or control a company, trust, or foundation - are identified in a uniform way across the Union.
In this respect, it is crucial that we lower the threshold for identifying beneficial owners and tackle the loopholes that shield them. There is also a clear need for a uniform list of obliged entities and their reporting obligations. It is important that the scope of obliged entities is widened, notably to integrate new and disruptive market sectors as well as technological innovation.
Customer due diligence requirements, including those related to politically exposed persons, still differ too much from Member State to Member State. This needs to change.
“It is critical that the Commission considers creating a financial intelligence unit to support the identification of suspicious transactions with a crossborder nature”
Finally, there is an urgent need for a more harmonised set of sanctions at EU level. This should be applied based on a percentage of the annual turnover of the companies involved in the money laundering.
Strict, uniform rules can be an important weapon in the battle against money laundering and terrorism financing. However, they can only work if these rules are properly applied and supervised.
Therefore, the European Parliament calls for the creation, within the next 12 months, of a new EU institutional architecture for AML/ CTF, led by an EU-level supervisor. Effective supervision can only work properly if the data around suspicious transactions are well collected.
Therefore, it is critical that the Commission considers creating a financial intelligence unit to support the identification of suspicious transactions with a cross-border nature and to carry out joint analysis of cross-border collaboration.
It’s clear that the system is not working effectively. A new report found that global financial institutions spent $181bn on financial crime compliance worldwide last year, with European firms spending three to four times more than their counterparts in North America. Therefore, more cooperation between the public and private sector towards a more effective system could be considered.
The credible long-term recovery of Europe’s economy is at stake, together with citizens’ trust in the financial market. Important recovery plans have been announced and the AML/CTF reform is one of the best ways of finding more funding. If done properly, it will allow Europe to recover economically and become a safer place to live.