EU watchdog: Insufficient transposition of legislation results in unlevel playing field against money laundering
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EU watchdog: Insufficient transposition of legislation results in unlevel playing field against money laundering

Credit: Unsplash/Markus Spiske

EU has a fragmented approach to countering money laundering and terrorist financing and fails to ensure a level playing field in the member states, according to a new special audit report with focus on the banking sector and published on Monday by the European Court of Auditors (ECA).

“EU-level weaknesses with regard to money laundering and terrorist financing need to be addressed, and the EU’s supervisory role significantly strengthened”, said Mihails Kozlovs, the Latvian ECA member responsible for the report at a press briefing (28 June). “Much more needs to be done to ensure that the EU law is implemented promptly and coherently.”

For a start, the EU should use regulations in preference to directives wherever possible, given the need for legislation to be implemented coherently at member state level, he added.

Money laundering is the practice of “legitimising” the proceeds of crime by filtering them into the regular economy to disguise their illegal origin. Within Europe, Europol estimates the value of suspicious transactions in the hundreds of billions of euros – at an equivalent of 1.3 % of the EU’s gross domestic product (GDP).

In an audit preview outlining the current legal framework and the roles of member states and the EU in fighting money laundering, the European Court of Auditors (ECA) writes that there is a renewed policy focus in EU on fighting money laundering to preserve the integrity of the internal market and the stability of the EU financial system.

Against the background of banking scandals in some EU member states, the European Commission adopted in July 2019 a Communication on improving implementation of EU’s regulatory framework on anti-money laundering (AML) and countering the financing of terrorism (CFT).

On 7 May 2020, the European Commission adopted an action plan for a comprehensive EU policy preventing money laundering and terrorism financing.

Currently it is up to each member state to individually supervise EU rules in this area and as a result, gaps can develop in how the rules are supervised. According to its recent action plan, the Commission will propose to set up an EU-level supervisor. To close loopholes in the rules, a single EU rulebook will also be proposed.

According to the new ECA audit, the most recent Eurostat figures show that over 75 % of suspicious transactions reported came from credit institutions in more than half of  the EU member states.

Asked by The Brussels Times, if ECA had carried out the audit according to the plan in the preview report last year, Mihails Kozlovs replied that it even had done more. The auditors also followed the development of the Commission’s action plan but the audit should be seen as an independent exercise which should influence new EU measures to address the main finding – the lack of a level playing field.

The audit covered the Commission (mainly the Directorate-General for Financial Stability, Financial Services & Capital Markets Union, DG FISMA), the European Banking Authority (EBA) and the European Central Bank (ECB).  Findings were also cleared with the European External Action Service (EEAS), which had been involved in the listing of third countries which pose a money-laundering threat to the internal market.

The audit scope did not cover an assessment of the implementation of AML legislation in the member states but ECA conducted an electronic survey amongst the 27 member countries on aspects of policy implementation at national level, such as risk assessment and transposition of the EU AML directive.

Answers were received from 20 countries. ECA declined to disclose the names of the non-responding countries and claimed that it should not impact the findings and conclusions in the audit and that the response rate was reasonable.

ECA did not look specifically at the need of a list of EU countries that also pose a risk to the financial system in the EU but was of the opinion that intra-geographical risks should also be addressed in the risk assessments. “Such risks aren’t homogenous,” according to the audit team.

Directive or regulation

The EU’s legal framework for the prevention of money laundering is almost entirely in the form of directives, which must be implemented in the legislation of member states, rather than regulations. For a directive to take effect at national level, EU countries must adopt a national measure, usually a piece of legislation.

While ECA found shortcomings in the performance of EBA and EEAS, the main shortcoming in the EU AML framework was in the transposition of the directive. The transposition is complex, and in most cases, member states were slow to transpose the directive and did it in piecemeal manner.

ECA found that the Commission was slow to assess member states’ transposition of directives due to poor-quality communication by them and limited resources at the Commission. The number of infringement procedures speaks for itself.

The directive entered into force in July 2015 and the member states were obliged to transpose it into national law by June 2017. Despite guidance by the Commission, it had to start infringement procedures against all countries for non-communication or incomplete communication. By March 2019, only 6 countries had declared complete transposition.

The Commission has launched infringement procedures against all member states for gaps in the transposition of the 4th Anti-Money Laundering Directive. So far, it has also opened 23 infringements against different member states in relation to gaps in the transposition of the 5th Anti-Money Laundering Directive.

In the report, ECA did not argue against or for the choice of a directive or a regulation and left this to the Council and Parliament to decide. There is already a directive so a regulation would be a new departure for the EU. ”There is a certainly a need to add speed and consistency in the implementation,” the audit team told The Brussels Times. “In this regard using regulations would have an advantage.”

The Commission accepted all the recommendations in the audit report and commented that, “the forthcoming legislative package will provide for more harmonisation in the form of an AML Regulation accompanying a revised AML Directive.” Will the Commission go for a regulation in reforming the AML legislation?

“The Commission is strongly committed to the fight against money laundering and terrorist financing both within the EU and globally,” a Commission spokesperson replied.  “While the EU has developed a solid regulatory framework over the years, there is growing consensus that this framework needs to be improved with the view to achieve a comprehensive EU policy.”

“The upcoming AML legislative package will lead to an overhaul of EU’s AML system: common EU rules, but also an effective implementation through common structures and increased cooperation,” he added. “Enforcement is extremely important for the Commission. The first pillar of the action plan focused on making sure that the rules are applied adequately, and that they result in an effective system.”

The spokesperson recalled that the member states are responsible for transposition of directives into national law. “Bringing about full and accurate transposition, and enforcement is a priority.”

It remains to be seen what will be proposed in the Commission’s AML legislative package but judging by Commissioner Mairead McGuinness’ speech last May EU is currently rethinking its AML strategy. “At the heart of our plans are more harmonised rules and a new AML Authority at EU level,” she said.

“Rules for the private sector will be laid down in a directly-applicable EU regulation. There will be the same rules across the EU in the most substantial areas.”

In other areas, there will be some margin for the member states in relation to how they want to organise their system, especially as regards the details about how national supervision and Financial Intelligence Units work. The enforcement of the current rules remains, and will continue to remain relevant also in the light of the forthcoming proposal, according to the spokesperson.

M. Apelblat
The Brussels Times