2%-5% of global GDP that is estimated to be laundered annually, with an overall recovery rate of illicit assets at 1.1% in Europe. Anti-Money Laundering (AML) is a long standing policy priority, but apparently with a very limited rate of success. In the meantime, crime proliferates, citizens see rule of law does not work and societies fall apart. A new AML policy is high on the agenda of the EU policy makers this year, but a new holistic approach is needed, including all the different actors, and substantial progress needs to be achieved.
A new approach should consist of a truly risk-based regulatory framework, enhanced cooperation among financial and non-financial supervisors, among the Financial Intelligence Units (FIUs), and among judicial authorities. Enhanced cooperation tools need to be developed among the private sector to detect suspicious cases, and between the private and public sectors, making ample use of technology, but while respecting data privacy, respective competences and free competition. Existing identification tools require a much broader application and templates used by authorities need to be rendered uniform.
Curtailing money laundering has been around as a policy objective for a long time, but the target has broadened significantly. From crime and drug-trafficking-related proceeds, the mandate has grown over the past two decades to include tax avoidance, terrorist financing, human trafficking, state-sponsored and corporate bribery. At the same time, the breadths and means to launder money have also increased, facilitated by technological progress.
The EU Commission is aware of the urgency and has put AML high on its agenda for 2021, with a proposal expected for a single AML agency, and an AML regulation (instead or in addition to the five existing directives). However, we believe a fundamentally new approach is required to detect money laundering, as the successes of existing policies have been very limited.
Rather than the supervisory dimension, the regulatory side needs to be addressed first. Here, a radically new approach is needed, based on the EU’s principle of proportionality. A thorough benefit/cost analysis of the AML rules thus far could guide the way to a more measured and effective approach. The private sector is at the forefront in detecting cases and transmitting information to the authorities, at a huge cost and threat of multi-million fines. They transmit thousands of suspicious transactions to FIUs, 95-98% of which are false positives, and only very few lead to prosecution.
At the supervisory level, states need to put first their own house in order, and streamline AML supervisory structures. AML supervision requires the cooperation of a multitude of supervisory entities, financial and non-financial supervisors, FIUs and law enforcement officials. In the EU context, this means well in excess of 100 entities. At the level of the non-financial supervisors, no EU-wide supervision exists, such as with the audit or law profession.
A real bottleneck in AML effectiveness lies with the FIUs, which are designated to process both cash transaction reports (CTRs) and suspicious activity reports (SARs). The FIUs are organised, resourced and staffed very differently across the member state. More cooperation at the level of FIUs is more urgent than a single supervisory agency, but it raises the issue of EU competence. A single template for suspicious transaction reports (STRs) among FIUs may help.
FIUs and law enforcement bodies require greater capability and capacity need greater support, whether in terms of co-ordination, resources or training. There are some great examples of new training techniques having a significant effect. At the same time, many governments claim there is little funding available, which against the backdrop of eye watering fines levied on financial institutions seems to lack credibility.
Lastly, registries of corporates as well as ultimate beneficial owners (UBOs) need to be much better structured and Legal Entity Identifiers (LEIs) more widely used to facilitate identification. LEI was instituted after the financial crisis, but only have a utilization rate of 2% to 7% of all existing entities in the western world.
At this stage, creating a single AML agency will be like the Stockholm based European Centre for Disease Control (ECDC) in this crisis, which is supposed control chronic and epidemic diseases, without having the powers to do so. In the domain of AML, it will create the expectation that something will be done, while this requires more harmonisation of criminal offences and judicial procedures, which member states have been unwilling to do.
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