Combating money laundering: new EU efforts

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Serious gaps concerning money laundering existed for a long time in the EU legal framework; now the Commission adopted a draft of regulatory package to plug these gaps. So far, existing varied rules in different EU states on money laundering (ML) have been largely ineffective, costly and without much success. New measures would include a better ML’s coordination and harmonisation with an established new EU-wide authority working closely with the national financial intelligence units. The Commission is serious about tackling “dirty money” and combating financial offences…

In order to get acquainted with the theme, it needs to reveal some basics on money laundering, ML; in definition, the ML is an illegal process of making large amounts of money (seemingly coming from a legitimate source) but in fact generated by a criminal activity, e.g. drug trafficking or terrorist funding, etc.

These assets are regarded as “dirty money” and therefore the whole process “to make it look clean” is called money laundering; thus the latter represents a serious financial crime performed by the various financial institutions as it damages national economies and peoples wellbeing. For example ML on a global scale accounts for about $ 800 billion to $ 2 trillion annually, or some 2% to 5% of global GDP. Hence, the “dirty money” and ML are considered a criminal activity terrible for both economies and societies; hence tackling money laundering is regarded as a priority in the EU’s political agenda.

Most financial companies have adopted anti-money-laundering (AML) policies to detect and prevent this activity. Money laundering is often used by criminal organizations in obtaining money illegally: as soon as dealing in large amounts of illegal cash is inefficient and dangerous, criminals need a way to deposit the money in legitimate financial institutions*); yet they can only do so if it appears to come from legitimate sources.

*) Note: a financial institution (FI) is either a state and/or private company engaged in dealing with financial and monetary transactions such as deposits, loans, investments, and currency exchange. Financial institutions encompass a broad range of business operations within the financial services sector including banks, trust companies, insurance companies, brokerage firms, and investment dealers. Actually, everyone in a modern developed economy has an ongoing or at least periodic need for the financial institutions’ services.

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The process of laundering money typically involves three steps: placement, layering, and integration: placement puts the “dirty money” into the legitimate financial system; layering conceals the source of the money through a series of transactions and bookkeeping tricks; and by integration, the now-laundered money is withdrawn from the legitimate account to be used for any activities.



Among money laundering (ML) methods the following three are most common: a) the ML’s method called smurfing (also known as “structuring”), in which a criminal breaks up large chunks of cash into multiple small deposits, often spreading them over many different accounts to avoid detection; b) ML can also be accomplished through the use of currency exchanges, wire transfers, and “mules”, i.e. cash smugglers, who sneak large amounts of cash across borders and deposit them in foreign accounts, where money-laundering enforcement is less strict; c) using “shell companies”, i.e. inactive companies or corporations that essentially exist on paper only, usually registered in off-shore jurisdictions.


Modern European initiative to combat ML

The EU has been worked on anti-money laundering (AML) for many years, with the first AML Directive issued thirty years ago. However, despite extensive international cooperation and increasingly sophisticated EU legislation, money laundering remains a serious problem: in Denmark, for example, ML started to be a political issue only in 2017.

As a rule, AML refers to the laws, regulations and procedures aimed at preventing obtaining/transferring funds/money as legitimate income though, in fact, it all has been illegally acquired. Hence, the AML regulations require financial institutions to monitor customers’ transactions and report on suspicious financial activities.

New Commission’s initiative includes several focal points:

= First, a new EU Anti-Money Laundering Authority, AMLA: it will strengthen the supervision of anti-money laundering and countering financing of terrorism in all EU countries; however, some experts already warned that AMLA should not turn into a “bureaucratic monster”.

Anti-money laundering in the world has been initiated in 1989, when a group of countries and organizations around the world formed the Financial Action Task Force (so-called FATF), with the aim of devising international standards to prevent money laundering and promote their implementation. In October 2001, following the 9/11 terrorist attacks, FATF expanded its mandate to include combating terrorist financing.

AML’s legislation has been slow to catch up to the modern financial challenges, e.g. new types of cybercrimes; most national regulations are still based on detecting “dirty money” when passing through traditional banks.

For example, professional financial dereference source, the Investopedia confirmed the right steps in the right direction: although “money laundering cannot be completely stopped but it can be reduced through constant vigilance”. Financial institutions can monitor customer deposits and other transactions to ensure they are not in any money-laundering scheme.

Global financial institutions (adherent to the FATF’s message) must verify the origin of large sums, monitor suspicious activities, and report cash transactions exceeding $10,000; besides, financial institutions must ensure clients about existing rules: e.g. be aware of the AML “holding period”, which requires that deposits have to remain in an account for a minimum of five trading days; “the holding period” is intended to help in anti-money laundering and risk management.

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ML activities generate billions of euros in dirty money every year: financial criminals are filtering at least some of their proceeds through the EU financial system. Experts estimate that around 1% of the EU’s annual GDP is linked to suspect financial activity; while the scale of laundering is difficult to assess, experts are talking about billions of euros in often invisible “dirty money” transactions.

= Second, the Commission suggests introducing a single rulebook to clarify, strengthen and align AML obligations in all EU countries.

= Third, financial institutions in the member states have to bring crypto-assets fully within the scope of EU’s expected AML rules; thus all transfers of crypto-assets must be accompanied by the details of sender and beneficiary.

= Fourth, the AML’s international aspects are vital as well, as it is a global challenge that demands a global response to ensure that illicit money flows from outside the EU do not threaten the European financial system. The new approach is taking into consideration the actual risks involved: regarding non-EU countries, a differentiated approach is taken with a black list and a grey list. The countries will be “listed” based either on the assessment of the international FATF or, if the Commission finds that a country poses a threat to the EU’s financial system, then the Commission will do an autonomous assessment.

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So, the EU is going to setup a system to connect national registers for bank accounts, which would provide a faster access for both the EU and the member states Financial Intelligence Units and other authorities to get access to key information; the EU will give law enforcement authorities access to this system, speeding up financial investigations and therefore preventing use of criminal assets.

Cash remains important for the EU’s citizens; however, the Commission wants cash “to be clean”. In this regard, a new system is installed with a limit of €10,000 in any transactions. Several EU states have already much lower levels and that will not change under the new system; others have no limits at all: both approaches would need a EU-wide compromise.

Besides, the whole financial system in the world is rapidly changing: e.g. crypto-currencies –often anonymous- are becoming a reality (e.g. FATF’s website has statistics on the growing criminals corrupt the crypto-asset marketplace). The EU is likely to install the same kind of rules for a new and modern financial system that would include the digital currencies too.

Finally, the EU will have a “grey list” for cooperative countries outside the EU (which have deficiencies in their systems but where the Commission will decide which enhanced due diligence procedures should apply); on the other hand, the EU will have a “black list” for non-cooperative countries, which will face not only the full set of enhanced due diligence measures, but also countermeasures decided by the Commission.

In addition to mirroring the FATF lists, the Commission will also be able to list countries outside the EU autonomously and decide whether to include them on the grey or the black list.

Reference to Commissioner McGuinness remarks at a press-conference in:

The EU is introducing a sophisticated mechanism for coordinating national financial intelligence units, which will form a backbone of a new system. These and other measures will be subject to strict rules for access to financial information; by the new package, the Commission is aware that the new legal rules will end regulatory fragmentation in the Union’s single market and therefore improve necessary work in addressing money laundering.

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