New EU package to combat money laundering and terrorist financing

For a long time, the fight against money laundering and terrorist financing has been a high priority for the EU. This can be seen in the numerous directives adopted, updated and expanded over the past years such as the 5th EU Money Laundering Directive adopted in 2018 (Directive (EU) 2018/843). In addition to the money laundering directives, the EU adopted numerous other accompanying directives and regulations such as the directive on combating money laundering under criminal law (Directive (EU) 2018/1673). This ultimately also resulted in the consistent implementation of the so-called “all-crimes approach” in the German criminal code through the new definition of the criminal offense of money laundering offense in February of this year by deleting (without replacement) of the list of predicate offenses provided for in Section 261 of the German criminal code.

On July 20, 2021, the EU Commission now once again presented a package of several draft regulations to reaffirm the EU Commission’s commitment to protecting citizens as well as the EU financial system from money laundering and terrorist financing (see link). The aim is to uncover dubious transactions and to close loopholes that enabled criminals to channel incriminated funds into the financial systems of member states in the past.

Overview of the most important new provisions from the submitted legislative proposals:

Regulation establishing a new anti-money laundering and counter-terrorist financing supervisory authority within the EU: the Anti Money Laundering Agency (AMLA).
Regulation establishing EU-wide minimum standards in the fight against economic crime, with regard to customer due diligence, reporting requirements and the collection of information on beneficial owners.
Regulation amending the EU’s regulation on transfers of funds (Regulation 2015/847) and extending its scope to include the transfer of crypto-assets.
Introduce a general cap on cash payments of EUR 10,000 and prohibit the provision of anonymous crypto wallets.

Anti-money laundering agency to start operations on January 1, 2023

An EU Anti-Money Laundering and Counter-Terrorist Financing Agency (AMLA) shall be launched on January 1, 2023. The AMLA is established to form the core of an integrated anti-money laundering and counter-terrorist financing supervisory system within the EU by coordinating the work of national authorities. It is intended to strengthen the unambiguous and uniform application of EU rules as well as the cooperation of the national Financial Intelligence Units (FIUs). In addition, the AMLA aims to enhance the analytical capacity of FIUs and make them sources of information for law enforcement agencies.

In future, internationally active high-risk financial institutions will be directly supervised by the AMLA. Furthermore, the AMLA will have the power to impose sanctions in the event of violations of instructions issued.

The newly created authority will have 250 employees and a budget of EUR 45.6 million. The budget will be financed 75% by financial contributions from EU obligated parties in the financial sector and 25% by funds from the EU budget.

Regulation of EU-wide minimum standards to create “single EU rulebook

Furthermore, by introducing an “EU Single Rulebook” it is intended to eliminate the patchwork of differently designed regulations in the member states and to create a common legal framework of directly applicable regulations and requirements for obligated parties.

The proposed rulebook should, for example, set uniform standards for customer due diligence, reporting requirements and the collection of information on beneficial owners. In addition, the regulation is to contain detailed provisions on the powers and duties of supervisory authorities and FIUs. It also shall provide for the linking of national bank account registers to enable national FIUs and law enforcement authorities to access information on bank accounts more quickly.

In order to avoid regulatory patchwork in the future, the new rules – in contrast to the previous requirements, which were based on directives – now take immediate effect due to their design in the form of an EU regulation and are not required to be transposed into national law.

Virtual asset and cryptocurrency service providers now subject to EU regulations

Furthermore, the EU Commission proposes to fully extend EU anti-money laundering and counter-terrorist financing regulations to the crypto services sector. Thus, crypto asset service providers (CASPs) would also be obligated parties in the future and would have to submit to the EU’s know your customer (KYC) regime for establishing customer identities. In addition, the EU Credit Transfer Directive (Directive (EU) 2015/847) has been proposed to be redrafted to extend information requirements for credit transfers to include the transfer of crypto assets. This is to ensure that, analogous to transfers of fiat money, both the sender and the recipient of crypto assets can be identified. Also worth mentioning in this context is the proposed ban on providing anonymous crypto wallets – analogous to the ban on providing anonymous bank accounts.

Ceiling on cash payments between risk reduction and preservation of cash as legal tender

The proposed 6^th EU Money Laundering Directive also includes an EU-wide maximum threshold on cash transactions of EUR 10,000. It remains to be seen how the introduction of this threshold will impact the privileged treatment of merchants of goods (previously, a cap of EUR 10,000 for cash transactions also applied to them according to German AML laws) as well as private individuals. Member States can continue to set lower thresholds for cash transactions, such as Greece with a threshold of EUR 500.

With the introduction of maximum thresholds for cash transactions, the EU Commission wants to limit the possibilities of criminals to channel incriminated funds into the economic cycle. At the same time, it believes that the threshold of EUR 10,000 is high enough not to call the euro into question as a legal tender and to stigmatize the possession and use of cash.

Outlook

The package of draft legislation presented is already casting its shadow. If adopted in this form, the EU regulations will have immediate effect and do not need to be transposed into national law. First, however, the consultation process with the EU member states will begin for the draft laws presented, which may still lead to far-reaching changes to the drafts. We will report on any new developments.

First, however, the outcome of the Financial Action Task Force (FATF) review for Germany is still pending in the fall of 2021. Based at the OECD, the FATF is the most important international body for combating money laundering and terrorist financing. All member states and cooperating countries are evaluated at regular intervals. As a result of the last evaluation in 2010, 40 legislative changes were made in Germany. Should Germany again perform poorly in this round of evaluations, further amendments to anti-money laundering and counter-terrorist financing laws in Germany will probably have to be made.

At this point, we would also like to bring your attention to the German Transparency Register and Financial Information Act (TraFinG), which was passed by the Bundestag on June 10, 2021 and will come into force on August 1, 2021. By dropping the reporting fiction, the TraFinG now also requires listed companies (and their subsidiaries) to identify their beneficial owners and report them to the transparency register. In addition, the transparency register will change from a mere catch-all register to a full register and must always be kept up to date.

We are happy to advise and support you in the implementation of compliance measures in order to adequately integrate this further step in the fight against money laundering into your internal processes. Our consulting services also include reviewing or designing audit practices with regard to beneficial owners, internal processes for reporting to the transparency register, and other issues regarding any need for action (including requests for corrections, follow-up requests, requests for restriction of inspection, fine proceedings before the Federal Administrative Office, inspection processes, discrepancy reports, etc.).