In the latest changes to the European Union’s (EU) anti-money laundering (AML) framework, the European Commission (EC) is finalizing the details of a package of proposals to strengthen the block’s ability to counter financial crime.
Emphasizing the significance of the package in a speech on Tuesday (Nov. 15), Mairead McGuinness, the EU’s commissioner for financial services, financial stability and capital markets union, said the new measures represent “a tectonic shift in our approach.”
First presented last year, the proposed new rules will close loopholes in existing legislation and harmonize oversight across the EU member states by creating a central AML authority, the AMLA, which will be tasked with ensuring enforcement of the rules.
The new European authority is being created to address perceived shortcomings in the current fragmented regime, the quality and effectiveness of which the EC has called “uneven, due to significant variations in resources and practices across Member States.”
Effective cross-border cooperation in the implementation of AML legislation is deemed important because money laundering itself is a cross-border affair.
For example, in a report published last month by Eurojust, the EU’s agency for criminal justice cooperation outlined some of the money laundering cases it has worked on and the challenges faced aligning different EU judicial systems.
In one instance, a criminal network was found to be stealing gold in one member state, where it would be melted down and minted as bars. The criminals would then place the bars on the official gold market in a second member state, erecting an elaborate scheme that involved companies in three EU jurisdictions, fictitious sales invoices and cross-border cash smuggling to cover their trail.
With the new AMLA, the EU has in mind the regulatory equivalent of Eurojust, which will coordinate efforts to enforce the AML rulebook that financial institutions are bound by.
Streamlined Compliance Benefits EU Payments
Beyond reconciling the work of different AML authorities, a more unified system also has advantages for European cross-border payments, thanks to the more streamlined compliance regime it erects for banks and other payment service providers (PSPs).
Related: Privacy-Enhancing Technologies Promote Greater EU Inter-Bank Collaboration in Fighting Fraud
In 2021, the Financial Action Task Force (FATF) conducted an industry survey of key players in the global payments space which identified some of the challenges of divergent international rules present for cross-border transactions.
When asked what the biggest downsides to such divergence was, in order of significance, the respondents listed increased cost, reduced speed, reduced access, and less transparency of transactions.
Accordingly, alongside the creation of the AMLA, the EC is also strengthening the common rulebook to create more detailed, clearer, and consistent requirements for financial institutions.
Bringing Crypto AML To Standard
Finally, the EU is expanding existing AML requirements for the financial sector to crypto asset service providers.
In June, EU lawmakers reached a provisional deal on a new bill aiming to ensure that crypto transfers can always be traced and suspicious transactions blocked.
Read on: EU Agrees on Strong AML Checks for Crypto With an Exemption for Unhosted Wallets
The agreement extends what is known as the “travel rule,” which already exists in traditional finance — to cover transfers in crypto assets. This rule requires that information about the source and beneficiary of an asset travels with the transaction and is stored on both sides of the transfer.
Regulated crypto firms will be then obliged to provide this information to authorities if an investigation is conducted into money laundering or terrorist financing.
In light of this, it was recently revealed that a draft version of the new bill contains a provision that will effectively ban firms from dealing in the untraceable cryptocurrencies, known as privacy coins or tokens.
Read more: Report: EU May Ban Privacy Coins
Under that proposal, “credit institutions, financial institutions and crypto-asset service providers shall be prohibited from keeping […] anonymity-enhancing coins,’ the draft, which was leaked to Coindesk, said.
That means the affected EU companies will be forbidden from engaging in transactions that involve the likes of Monero, Dash and ZCash, which enable users to obscure not just their real identity, as most cryptocurrencies do, but also the origin address of any given transaction.
Related: Swiss Financial Regulator to Cap Anonymous Crypto Transactions at $1,000 a Month
The proposed ban recognizes that when used by criminals, privacy coins act like the smelted gold that the money launderers Eurojust reported on used to convert stolen assets into clean money.
In a single transaction, privacy coins are able to completely disassociate themselves from whatever previous activity they were involved in, including illicit ones such as fraud, drug and arms dealing.
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