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Dedicated EU AML authority to have supervisory powers over high-risk digital asset service providers

The European Union is moving ahead with its proposal to create a dedicated and independent Anti-Money Laundering Authority (AMLA), according to a newly released partial position paper by the European Council.

The establishment of a comprehensive AML/CFT authority in the EU has been telegraphed by European political leaders for some time and was formally proposed by the European Commission in July 2021.  This new paper, released Wednesday, sets out the EC’s newly agreed position on the Authority and its intended powers.

According to the 192-page paper, the Authority will “combine independence and a high level of technical expertise” to bring AML/CFT supervision “to an efficient and uniform level across the Union.”

Perhaps most importantly, AMLA will have direct supervisory powers over select high-risk financial entities—a list which can include digital asset service providers. In determining which entities are ‘high risk’, two categories should be considered: cross-border credit and financial institutions with activity in a significant number of member states, and entities whose “serious, systematic or repeated breaches of applicable requirements are not sufficiently or in a timely manner addressed by its national supervisor.”

This means that assuming the Authority is established in its current proposed form, it will amount to a toothy new layer of direct AML authority which sits behind local regulators. These local regulators often lack the ability to enforce compliance in digital asset service providers, such as digital currency exchanges, whose businesses are almost entirely cross-border. In fact, the lack of enforcement at the local level can form the basis for direct action by AMLA.

The list of high-risk entities will be maintained by AMLA. Any entity placed on the list will remain under supervision of the Authority for at least three years—even if that entity ceases to meet the high-risk criteria in the meantime.

With respect to the entities placed on this list, the Authority will have the power to require them to undertake specific actions to enhance compliance including the removal of members of management and the implementation of specific procedures for identified high-risk clients. It can also impose specific sanctions in the case of serious, systematic or repeated breaches of AMLA requirements, including fines and prison time.

Apparent throughout the paper is a recognition of one of the largest challenges in modern anti-money laundering enforcement: much of this kind of illegal activity takes place across borders, meaning even the best national AML initiatives are limited in their efficacy. According to the document, the Authority will supervise and harmonize AML approaches across the Union.

“Since there are no sufficiently effective arrangements to handle AML/CFT incidents involving cross-border aspects it is necessary to put in place an integrated AML/CFT supervisory system at Union level that ensures consistent high-quality application of the AML/CFT supervisory methodology and promotes efficient cooperation between all relevant competent authorities,” reads the paper.

This disharmony between jurisdictions is a common theme for AML and CFT watchdogs. Last year’s 12-month review by the Financial Action Task Force (FATF), which advises, monitors and reports on AML/CFT efforts around the world, highlighted that a lack of local implementation of AML controls—such as the much-discussed travel rule—has acted as a disincentive for private sector companies to invest in necessary compliance infrastructure.

As well as the direct supervision of selected entities, the Authority is intended to have the following powers:

  • Monitoring, analysis and exchange of information concerning money laundering and terrorist financing risks affecting the internal market;
  • Coordination and oversight of anti-money laundering/counter terrorist financing supervisors of the financial sector;
  • Coordination and oversight of AML/CFT supervisors of the non-financial sector
  • Development of AML/CFT technical standards

Though paper describes the EC’s ‘partial position’, in reality the only area yet to be decided is where in the EU AMLA will sit. The plan is for the Authority to become operational by 2024, with a target of 250 employees by 2025—100 of which will be responsible specifically for supervision.

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