Following the creation of an EU AML watchdog, Jack McRae speaks to a number of firms across the industry about their thoughts on the new regulatory body
The challenges the financial services industry has faced when tackling money laundering and the financing of terrorism has changed over time. As technologies shift to defend against financial crime, the criminals have also adapted to continue their operations.
As criminals continue to find ways to innovate and circumvent the law, the regulatory bodies are now establishing a base for their defence, and adding a new player to the industrial game of cat and mouse — a watchdog.
The European Union (EU) is introducing new anti-money laundering (AML) and combating the financing of terrorism (CFT) measures by establishing a central watchdog.
The Authority for Anti-Money Laundering and Countering the Financing of Terrorism, better known as AMLA, has found a home in Frankfurt, Germany.
The watchdog has set itself the goal to “monitor risks and threats within and outside the EU, coordinate national supervisors and financial intelligence units (FIU), and directly supervise specific financial institutions depending on their risk level,” according to Mairead McGuinness, commissioner for Financial Services, Financial Stability and Capital Markets Union at the European Commission.
But how has AMLA been received by the industry?
A logical step
The move from the European Commission to introduce a central watchdog has been greeted with optimism from members of the asset servicing industry.
Steve Marshall, director of advisory services at FinScan, explained that having the watchdog will “ensure the consistent application of the new EU AML rulebook across the member states. Also, under its mandate to directly supervise those high-risk institutions that have operations spanning multiple member states, it will ensure consistency in the approach to and conduct of supervisory activities.”
Marshall continues to add that, “the new authority will facilitate information sharing across FIUs in the member states thereby ensuring more effective law enforcement in the bloc.”
John Bedford, partner at Dechert, shares the optimism for the new authority. Bedford is pleased that there will be a degree of consistency in the application of EU AML standards across the union.
He says: “It is beneficial for the industry to have a good idea of the expectations of their supervisors so that the industry can calibrate their policies, procedures and resources accordingly.
“In addition, AMLA will facilitate cooperation between Member State financial intelligence units and the identification of best practices. That should inevitably trickle down across the industry such that there is better information sharing and use of information across the EU.”
He continues to explain the importance of AMLA choosing Frankfurt as its centre. There were nine different cities — Brussels, Dublin, Madrid, Paris, Riga, Rome, Vilnius, Vienna, and Frankfurt — in the running to host AMLA and it took two years to come to the decision of Frankfurt.
Bedford believes it was the right choice, saying: “The selection of Frankfurt was apparently the first time that EU co-legislators jointly agreed on where the seat of a decentralised agency should be located.
It should be beneficial for AMLA to be based in a city which is a strong financial centre where there will already be a large number of professionals with industry knowledge and AML compliance expertise.”
For Andy Schmidt, global lead for banking at CGI, the benefits are clear and obvious.
He says simply: “The creation of a central AML watchdog is the next logical step in helping the European Union operate as a common bloc by harmonising efforts between country-level regulators and rolling out a common AML rulebook.”
Fighting back
Despite this optimism, there are a multitude of challenges the new watchdog will have to overcome.
For CGI’s Schmidt, the magnitude of AML and CFT globally will make the task of AMLA difficult, at least initially.
“The first is that money laundering is a global concern, amounting to somewhere between two and five per cent of global GDP, as per the UN Office on Drugs and Crime (UNODC),” he explains.
“For context, if money laundering were a nation, and funds laundered were its GDP, money laundering would be a top 10 economy of between US$2 trillion and US$5 trillion, placing it on par with Italy on the low end, and greater than Japan at the high end.”
Dechert’s Bedford believes that the reason why the financial services industry is on the frontline of anti-money laundering is because of the “volume and value of transactions that are processed on a daily basis.”
He continues: “Given the significant increase in sanctions activity since February 2022, there is likely to be more crossover between AML and sanctions issues and, in particular, the financial services industry will need to focus on potential circumvention of sanctions.”
With the scale of the task at hand, the issue of manpower comes to the fore. As the endeavour of stamping out AML and CFT ever-growing with the development of technology, the number of capable people required to execute that task grows greater still.
This is the key challenge highlighted by Rory Doyle, head of Financial Crime Policy at Fenergo, who states: “One of the most significant challenges facing financial institutions in AML compliance is addressing the growing skills gap and shortage of qualified financial crime professionals needed for effective client due diligence.”
One approach to bridging that burden comes in the form of outsourcing. Jonathan Perkins, global director of AML at Carne Group, believes that as the AML regulation becomes increasingly complex and difficult to understand, firms will have to rely on external legal expertise.
He argues that “compliance with this regulation is a challenge and non-compliance can lead to fines which can bring not only financial damages, but reputational damages too.”
Perkins adds that this has meant that, “we’re increasingly seeing financial services turn to AML specialists to help them navigate this landscape. Ensuring that financial institutions are requesting the same level and standard of AML/KYC documents for customers across all EU member states in line with AMLA expectations.”.
The other approach suggested is to remove the man from the issue of manpower.
Tech tactics
“As EU regulators increasingly look for more quantitative information and reporting from the entities they supervise, the industry needs to ensure that they have the required tools to easily obtain and assess large volumes of customer data in a quick and flexible fashion, whilst still adhering to GDPR requirements.” Perkins explains, before instructing: “the use of AI will be key to adapting to these developing requirements.”
AI is identified across the industry as one of the best defences against financial crime. Yet, while the new watchdog will be able to use the latest, cutting-edge technology, so will the criminals.
Dechert’s Bedford comments: “The financial services industry continues to grapple with the challenges and opportunities posed by AI. There will inevitably be an increase in criminals using AI tools in money laundering schemes but there will also be opportunities for banks and financial institutions to use AI to improve their AML compliance programmes.”
Fenergo’s Doyle considers AI as key to overcoming the issues faced with man power and sees automation as integral to bringing money laundering under the industry’s thumb. He states: “To tackle the challenges of growing workloads and fewer skilled professionals, using technologies like machine learning and artificial intelligence in a cloud-based AML ecosystem which automates processes for compliance and onboarding is essential.”
The importance of technology is reinforced by FinScan’s Marshall who suggests that, “technology will continue to differentiate how organisations detect, prevent, and report on AML and CFT crimes”.
Marshall accepts AI will be important but is hesitant to throw unequivocal support behind the use of the technology for AML. He explains: “While AI is often touted as a solution, only AI that clearly illustrates its screening logic will be acceptable to the regulators. Beneficial ownership and financial instrument sanctions detection will gain focus, especially with ongoing Russian sanctions. Stricter enforcement, greater scrutiny, and higher penalties are expected.”
Yet, he concludes that should the watchdog bring “increased collaboration among regulators, financial institutions, and other stakeholders will enhance efforts to combat money laundering”, AI could be a powerful tool to combat money laundering and financing of terrorism.
The watchdog is aiming to start the majority of its oversight activities by mid-2025 and, as the industry players have suggested, represents an opportunity to truly tackle one of the industry’s greatest challenges.
