EU crackdown on dirty money

Accountants in the EU are facing the launch of a more intrusive and proactive regime to fight money-laundering and terrorist finance, stemming the flow of dirty money across borders.

These flows are huge. They are impossible to count accurately, but the UN Office on Drugs and Crime (UNODC) has estimated that between US$800m and US$2 trillion (2%–5% of world GDP) is laundered annually worldwide from all types of crime, from tax evasion to sanctions busting, from drug trafficking to white-collar fraud.

With the US passing its strongest AML/CFT (anti-money laundering/combating the financing of terrorism) legislation in 20 years in January 2021, and reforms under way in Australia and Singapore as well as other countries, the EU is also now doing its part.

In July 2021, the European Commission proposed three comprehensive reforms designed to shake up an EU AML system that was set up in 1990. Since then, the EU has relied on directives to mandate action by member states against money laundering and terrorist finance, which give national governments leeway in how to implement this legislation.

But growing concerns that some member states are failing to run AML policies effectively, and have inconsistently implemented past EU AML directives, have prompted action from the Commission. It has proposed that when implementing AML actions, member states should follow a new regulation – an EU legal instrument that must be followed to the letter.

Stricter regime

The regulation would include a range of actions affecting accountants: customer due diligence rules, special checks on politically exposed persons, the issue of suspicious transaction reports, the filing of beneficial ownership declarations, and the banning of anonymous accounts. While these requirements were formally put in place under the 2018 fifth EU AML directive, implementation will be more rigorous across the 27 member states if the proposed regulation is passed.

The proposed regulation would also establish a grey list of non-EU jurisdictions with weak AML controls and a blacklist of non-cooperative governments.

The reform package would create a new EU-level Anti-Money Laundering Authority (AMLA), with powers to take over the supervision of financial industries and professions when national supervisors fail to fight money laundering properly. While that would not include accounting supervisory bodies, the legislation gives AMLA the authority to coordinate the AML work of professional organisations.

Coordination

Assuming the package is approved by the European parliament and the EU Council of Ministers – and the debates about it may stretch into 2023 – a great deal of change is clearly in the pipeline.

Accountancy Europe’s head of advocacy Eleni Kanelli says that her organisation welcomes the creation of AMLA on the grounds that it will ‘facilitate cooperation among member states’. The AML coordination of national accounting supervisors is seen as a particularly positive step.

How this will work in practice, she says, should become clearer as AMLA proposes second-level detailed rules. As long as there are ‘no overlapping conflicts’ in supervision at the EU and national level, ‘we believe it can only bring improvements,’ Kanelli says. She hopes that AMLA will also offer practical AML guidance tailored to the accountancy profession, reflecting differences not only between the AML roles of financial and non-financial sectors, but also between the roles of lawyers and notaries.

These upcoming details will shape how the regulation will operate and impact accountants. ‘How are you exchanging information? How much access do we have to the beneficial ownership public registries? What kind of information do we have from the clients? What do we know about the beneficial owner?’ asks Kanelli.

A key position of Accountancy Europe is that the ‘risk-based approach’ should underpin the regulation, which encourages proportionality – more monitoring of potentially suspicious clients and less of the obviously honest. ‘We don’t want the end of the legislative exercise to end up with ticking boxes,’ Kanelli says. ‘We need to enable accountants to use their judgment, assessing the level of risk, asking for the right level of information and the right level of detail.’

Accountancy Europe, for example, is asking for the easing of a proposed requirement that accountants update ultimate beneficial ownership registers within 14 days of receiving new client information – a process which it says requires more flexibility.

Harmonisation

The new system will also harmonise technical details of how beneficial ownership filings, which will help crossborder accounting networks and companies check and log such data. This is necessary, says Kanelli, as previous directives were not implemented effectively in all member states. But the harmonised measures should be applied with proportionality. ‘We mustn’t end up with additional complications that put us in a legal straitjacket that takes us away from using our best judgment and flagging suspicions,’ she warns.

As for accounting firms, Bram van Sunder, an EY partner in the Netherlands and a member of the firm’s EU AML taskforce, says the network backed the reforms. ‘They will bring about much needed enhancement to the existing regime, and the harmonisation of the AML rules into regulation will be a positive step to closing AML implementation gaps that currently exist across EU member states.’

Van Sunder also welcomes the likely focus of AMLA on standardising how suspicious activity reports are made by practices, and developing unified templates, training and guidance on working with financial intelligence units that receive and analyse such information. ‘This has the potential to bring much needed clarity and will give firms an opportunity to standardise their own internal operations,’ he says.

Another area of future action now being considered by the Commission is guidance on how public-private partnerships (PPPs) might work in EU AML. The EU executive is already consulting on how to proceed here.

Kanelli says accounting sector PPPs might better focus on money laundering methods and the use of red flags to aid the interpretation of data, aiding accountants’ statutory duty to report suspicious transactions.

Compliance

One concern raised by EY has been the proposed requirement for practices to appoint an AML compliance manager and AML compliance officer, with both roles being assigned specific tasks and duties within the firm, including implementation and oversight of AML controls. Van Sunder warns: ‘Smaller accounting/audit practices may struggle with the requirement for designation of these roles. The cost of compliance may be prohibitive to some firms.’

But overall, EY thinks accountants should play their part in detecting and preventing dirty money transactions. ‘We believe that accountants should continue to take their duties for implementing robust and effective AML/CFT control environments seriously. This will prevent and deter criminality and enable firms to identify, mitigate, manage and report money laundering to law enforcement,’ says van Sunder.

Ultimately, says Kanelli, the private sector will not replace the police, but should certainly cooperate with police forces when necessary. ‘Professional accountants have a different purpose, but still we are part of the ecosystem that can prevent and stop money laundering, and we stand ready to contribute to this public interest mission.’