EU Reaches New Provisional Deal on Anti-Money Laundering Rules

“Harmonising” of Rules Throughout the EU

EU reform of AML and CFT rules has been on the horizon since 2021, when the European Commission proposed a package of legislative proposals including:

• a new regulation to create an EU AML authority
• a new regulation setting out all AML requirements for the private sector
• a directive on AML mechanisms
• a revision of the regulation on transfers of funds

The agreement means that all existing rules (currently implemented across Europe by way of domestic legislation pursuant to the EU’s Money Laundering Directives) will be replaced by an EU-level regulation which will have direct effect in each Member State. It is hoped that clearer and more detailed rules relating to aspects of AML regulation such as customer due diligence (“CDD”) and beneficial ownership will lead to better enforcement of the rules and more consistency in how rules are currently implemented across the EU. It remains to be seen whether the application of the rules will result in an increase in the regulatory appetite for enforcement.

In addition, a new EU directive will improve the organisation of national AML/CFT systems at a national level within Member States. The directive will contain rules on beneficial ownership registers, national supervisors and the responsibilities of Financial Intelligence Units (“FIUs”).

The new regulation and directive, which will form a single EU rulebook, are designed to harmonise rules and bring cohesion to the EU’s AML and CFT framework to safeguard the EU’s financial system from illicit funds generated by terrorist financing and money laundering.

What changes will there be?

The new rules include the following amendments:

• The scope of entities obliged to comply with the AML regulation will be expanded to include most of the crypto sector, traders of luxury goods (such as trades in luxury cars, airplanes and yachts; jewellers and goldsmiths; and traders in precious metals and stones). This will be a significant departure from the current list of regulated entities and will create a very substantial compliance burden on previously-unregulated entities. No information has been provided as to the qualifying features for a luxury goods trader will be. It is not clear whether there will be a minimum transaction or turnover threshold (as with letting agents) or if this will be of blanket application (as with art market participants). Professional football clubs and agents (although member states will be able to exclude certain clubs on a risk basis) will also be obliged to comply.
• Specific enhanced due diligence (“EDD”) measures for cross-border correspondent relationships for crypto-asset service providers.
• EDD measures for business relationships with high net worth individuals with a net worth in excess of EUR 50m, though we note that most institutions will already be applying enhanced scrutiny to such relationships.
• An EU-wide maximum limit of EUR 10,000 for cash payments. It is unclear what this will mean in practice – whether this mirrors current UK arrangements relating to ‘high-value dealers’ and payments in cash, or if – more controversially - this means that payment over EUR 10,000 will be effectively prohibited even where CDD has been carried out. We anticipate further information being published in the text of the regulation.
• Harmonisation of beneficial ownership rules, with clarification on how the 25% threshold works in multi-layered ownership and control structures – this will no doubt be welcome and of interest to UK institutions as well as those operating in the EU.
• The registration of beneficial ownership of all foreign entities that own real estate, with retroactivity until 1 January 2014.
• Amendments relating to beneficial ownership registers and associated access rights, with a view to clarifying the status of who can access beneficial ownership registers. These changes respond to the judgement of the Court of Justice of the European Union (CJEU) in WM and Sovim SA v Luxembourg Business Registers, where it was held that giving the public free access to beneficial ownership registers resulted in the contravention of the right to a private life and personal data protection.
• Additional powers granted to FIUs, who will have immediate and direct access to financial, administrative and law enforcement information. This sounds to be a significant extension of the powers that FIUs currently enjoy, but very little information is currently available on what this will look like in practice. The European Council has stated that the FIUs will have access to tax information, information on funds and other assets that have been frozen pursuant to targeted financial sanctions, information on transfers of funds and crypto-transfers, national motor vehicles, aircraft and watercraft registers, customs data and national weapons and arms registers, among others.
  
  The intention behind this appears to be to enable FIUs to “disseminate” information to relevant competent authorities who are in charge of battling money laundering and terrorist financing. However, the devil will be, as it always is, in the detail. The practical impediments for the sharing of this information may well be very considerable. How shall financial institutions share ‘funds transfer’ information, if it is indeed firms’ data which is slated to be shared? With the myriad systems used by different firms to record customers’ financial data and transfers, is it envisaged that FIUs will somehow plug-in to firms’ systems? Or will the responsibility for allowing “immediate and direct access” to this information fall to firms to arrange? If so the financial outlay associated with arranging and implementing such access is likely to be very significant.
  
  Separately, it remains to be seen what the governance around access to this information will be, for instance, whether firms will even know if this information has been accessed, and/or will be permitted to record, and/or inform customers that their personal data has been accessed. It is also not clear whether this information will be capable of being used in criminal proceedings and whether it will be restricted to EU-level information or whether the FIUs will be able to access data on UK customers.
  
  
• The introduction of new supervisory colleges for non-financial sector supervision purposes. The EU’s Anti-Money Laundering Authority (AMLA) will be responsible for developing the draft regulatory technical standards which will define the general conditions for the operation of the supervisory colleges. Again, very little information on these colleges is available.

What does this mean for firms?

Those operating in the current regulated sector and in the crypto sector, traders of luxury goods and professional football clubs and agents will no doubt look upon these changes with alarm, given the very considerable burden of compliance which sits alongside membership of the regulated sector. This is a significant overhaul of the EU’s AML/CFT toolbox which will require – in due course and when we know more - reviews of existing AML/CFT compliance programmes and frameworks to ensure they remain fit for purpose.

In particular, the extent to which any of these changes will find their way to the UK AML Regime remains to be seen, but given the international and interconnected nature of most firms’ business, the impact will be felt far and wide by UK firms too, especially those firms with EU operations. Even without formal changes to UK money laundering regulation, CDD requirements in the UK for firms with an EU element are bound to be affected.

Next steps

The full text of the Regulation and Directive are yet to be finalised but the provisional agreement that has already been agreed means that the text is extremely likely to be approved and come into force.