European financial sector lacks understanding of money laundering risks, say ESAs

Out-Law News | 24 Feb 2017 | 4:50 pm | 2 min. read

European financial firms must improve their understanding and management of anti-money laundering (AML) and terrorist financing (TF) risk, the European Supervisory Authorities (ESAs) have said.

The ESAs, which include the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority, have published an opinion addressed to the European Commission on these risks.

As well as identifying a lack of understanding and management of risk, the opinion said that firms face difficulties in accessing information that would help them to identify and prevent terrorist financing. There are also "considerable differences" in the way national competent authorities (NCAs) work, it said.   

"These issues, if not addressed, risk diminishing the robustness of the EU's AML / TFdefences and more action is needed to ensure their effectiveness," the opinion said.

This will be particularly important as member states move towards a more risk-based AML / TF regime that requires a level of risk awareness and management expertise, "which not all firms and all sectors currently have", it said. 

Among other initiatives the ESAs are working on a common approach to risk-based AML / TF supervision, it said.

The opinion does not distinguish between the systems and controls firms have put in place for ML and TF risk, as they tend to overlap, the ESAs said.

"There are, however, important differences between ML and TF: whereas persons looking to launder money seek to disguise the criminal origins of their funds, a person funding terrorism may use legitimate, and often small, funds to pursue illicit aims. This means that at the time of writing, and in the absence of clear TF risk indicators, firms and competent authorities are unlikely to be able to detect or prevent terrorist finance before an atrocity is committed unless they are given specific information from law enforcement", the opinion said.

Attempts are being made at international, supranational and national levels to better understand TF risk and potentially develop more preventative approach, it said.

NCAs should improve awareness of their expectations, for example by providing guidance on key AML / TF issues they have identified in their sector, and should collect supervisory data in a more consistent way to aid comparisons and track progress, the opinion said.

Finance expert Thomas Howard of Pinsent Masons, the law firm behind said: "The ESA’s joint opinion underscores the importance of continued diligence on the part of firms and NCAs regarding anti-money laundering and terrorist financing risks."

"The forthcoming deadline for transposition of the fourth money laundering directive later this year will bring a number of important changes, including a requirement for firms to document their AML risk assessments and keep them up to date. We expect the FCA and other European NCAs will take a keen interest in such documentation, and firms’ AML procedures, as part of the overall supervisory process," Howard said. 

"Firms who are unable to satisfactorily demonstrate the appropriateness of their AML controls are at an increased risk of enforcement action as NCAs will undoubtedly be looking to send a strong message to the regulated community about the importance of AML. Firms would be well advised act now to proactively review, and where necessary improve, their AML frameworks, rather than risk being caught on the back foot," he said.