4Money-laundering: powers of the European Banking Authority
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Committee’s assessment |
Politically important |
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Not cleared from scrutiny; further information requested; drawn to the attention of the Home Affairs Committee and the Treasury Committees |
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Document details |
(a) Amended proposal for a Regulation of the European Parliament and of the Council amending Regulation 1093/2013 establishing the European Banking Authority and Directive 2015/849 on the prevention of the use of the financial system for the purposes of money-laundering or terrorist financing; (b) Communication from the Commission: Strengthening the Union framework for prudential and anti-money laundering supervision for financial institutions |
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Legal base |
(a) Article 114 TFEU; ordinary legislative procedure; QMV; (b) — |
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Department |
Treasury |
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Document Numbers |
(a) (40057), 12111/18, COM(2018) 646; (b) (40058), 12108/18, COM(2018) 645 |
Summary and Committee’s conclusions
4.1Following a number of money-laundering scandals involving EU-based banks, including notably the recent revelations about Danske Bank’s laundering of Russian money via its Estonian branch—the European Commission in September 2018 proposed to expand the responsibilities of the European Banking Authority (EBA) with respect to the proper implementation of the EU’s Anti-Money Laundering Directive (AMLD).
4.2The legislative proposal, accompanied by a policy paper on its broader approach to limiting the risks of money-laundering in the EU, would give the EBA a greater coordinating role, including by setting “common standards” for combating the risk of money laundering, and also, in certain circumstances, allow it to direct individual banks to take specific actions to ensure the AMLD is complied with.45 The draft legislation is part of the wider revision of the European System of Financial Supervision (ESFS),46 tabled in September 2017, which already foresaw a transfer of regulatory responsibility in the financial sector from the national to the European level. 47 We have set out the substance of the Commission proposal in more detail in ‘Background’ below.
4.3The ESFS proposals have been controversial among the Member States, given the implied loss of domestic regulatory power they entail. These latest additions in relation to money laundering are, in the words of the Economic Secretary to the Treasury (John Glen), “likely to add to the contentious nature”48 of the Council’s deliberations on the balance of responsibilities between national and European financial regulators. As such, formal adoption of the proposal to expand the remit of the European Banking Authority is unlikely to occur in the near future.
4.4The implications of the proposal to expand the remit of the European Banking Authority for the UK remain unclear. This is partially because the legislative text is still subject to change by the Member States in the Council and by the European Parliament, and partially because of the wider uncertainty about the nature of the UK’s economic relationship with the EU after 29 March 2019 (when the two-year EU exit period begun in March last year expires, and the UK becomes a ‘third country’ vis-à-vis the Union unless the Withdrawal Agreement is ratified).
4.5If the changes proposed by the Commission were to take effect while the UK is still bound by EU law—which it would until the end of the post-Brexit transitional period, currently due to end on 31 December 2020—the European Banking Authority would gain new powers to direct the activities of the Bank of England’s Prudential Regulation Authority. However, the UK—having ceased to be a formal Member State on 29 March 2019—would not be permanently represented within the EBA’s governance structures, and it would have no voting rights over any measures it wants to adopt to address money-laundering risks (or decisions related to other aspects of its legal mandate, such as prudential supervision).
4.6Without a ratified Withdrawal Agreement (and therefore without a post-Brexit transitional period), there would be an abrupt UK exit from the EU’s established structures to tackle money-laundering (and tax evasion). New legal mechanisms, including for the exchange of data and information, would then have to be negotiated afresh in what would likely be an acrimonious political atmosphere, adversely affecting UK-EU cooperation in this area. As the new Regulation would designate the European Banking Authority as the EU’s main interlocutor with ‘third countries’ on issues related to money-laundering, the proposed changes to its mandate would nevertheless remain relevant for the UK even in a ‘no deal’ scenario. There are also wider considerations about the possible impact of the UK becoming a ‘third country’ for the purposes of the AMLD on cross-Channel financial flows, which we discussed in our Report of 22 November 2017.49
4.7In light of these uncertainties, which we have assessed in more detail in the ‘Background’ section of this Report, we retain the amended proposal for the responsibilities of the European Banking Authority under scrutiny. We also draw these proposed new EU measures to tackle money laundering to the attention of the Home Affairs and Treasury Committees. We are content to clear the Commission’s accompanying policy paper from scrutiny.
4.8We ask the Minister to keep us informed of further developments in the legislative deliberations within the Council and the Parliament on the European System of Financial Supervision, including this latest proposal.
Full details of the documents:
(a) Amended proposal for a Regulation of the European Parliament and of the Council amending Regulation 1093/2013 establishing the European Banking Authority and Directive 2015/849 on the prevention of the use of the financial system for the purposes of money-laundering or terrorist financing: (40057), 12111/18, COM(18) 646; (b) Communication from the Commission: Strengthening the Union framework for prudential and anti-money laundering supervision for financial institutions: (40058), 12108/18, COM(18) 645.
Background
4.9The EU’s Anti-Money Laundering Directive50 (AMLD) requires banks and other businesses handling financial transactions (“obliged entities”) to apply due diligence to their customers, and report suspicious activity to the authorities.51
4.10In most EU countries, prudential supervision of banks—monitoring their financial health and stability—and the investigation of money-laundering are the responsibility of different agencies or regulators.52 Nevertheless, there is a direct link between money-laundering and the prudential health of a financial institution: laundering illicit money flows can affect the reputation and stability of individual banks and, by extension, the financial system as a whole. In May 2018, the Member States and the European Parliament therefore amended the AMLD to improve the exchange of information between anti-money laundering and prudential authorities.53 However, there is no “mandatory mechanism or detailed guidance” on structural cooperation between the two — especially between different Member States.
4.11In response to several scandals—including notably the revelations that Danish lender Danske Bank potentially laundered as much as €200 billion of criminal proceeds through its Estonian branch between 2007 and 2015,54 but also similar occurrences in Latvia and the Netherlands—the European Commission in September 2018 decided further action was necessary.55 Stating that “gaps remain in the Union’s supervisory framework”56 to prevent money-laundering.57 It therefore published a policy paper on the steps it wanted the EU to take to further address these risks.
4.12Its core recommendation is that national anti-money laundering authorities in the EU —called Financial Intelligence Units (FIUs) in the AMLD—and the prudential authorities responsible for ensuring the stability of banks and other financial institutions should work more closely together. Prudential authorities, who operate on the basis of the EU law like the Capital Requirements Directive (CRD), have more powers than FIUs to intervene in the operation of banks and investment firms within their jurisdiction, including—as a last resort—suspending or withdrawing their operating licence. The exchange of information with FIUs can provide these regulators with the input necessary to intervene where money-laundering risks could pose a risk to micro- or macro-prudential stability.
4.13In aid of this objective, the Commission uses its policy paper to express support for amendments to the Capital Requirements Directive58 recently put forward by the European Parliament, which seek to address confidentiality requirements that in practice prevent prudential regulators from cooperating with other enforcement authorities.59 The Committee will assess those proposed changes separately as part of its on-going scrutiny work on the Risk Reduction Measures package of banking reform proposals in due course.60
4.14The Commission has also produced a new legislative proposal to amend the Regulation that established the European Banking Authority (EBA).61 The objective of the proposal is to expand the remit of the Authority’s activities, explicitly incorporating “matters related to combating money-laundering and terrorist financing across the financial sector” into its legal mandate, as set out in more detail below.
Expanding the EBA’s powers in relation to money laundering
4.15The proposed changes to the EBA’s remit are not a stand-alone document: they take the form of an amended proposal for a Regulation, first presented in September 2017, to substantially amend the EU’s system of financial supervision (ESFS) more broadly. The Committee assessed that proposal in its Reports of 13 December 2017 and 21 February 2018, and retains it under scrutiny (given the potential implications of the proposals for the UK both during and after the post-Brexit transitional period). The remainder of this chapter is focussed only on the latest Commission proposal relating to the EBA’s powers in the area of money-laundering.62
4.16The aim of the Commission proposal is to enable the EBA to take action to ensure national banking regulators properly apply the AMLD as part of their supervisory work. The specific details of the proposed Regulation are as follows:
- The EBA would be empowered to set “common standards”63 for combating money laundering, collect information relating to steps taken by both “financial market operators” and national regulators within the EU to tackle money laundering, and undertake risk assessments in Member States about the strategies and resources being deployed. Ultimately, the Authority would act as a centralised “data hub”, including confidential information, which national regulators could use to address money-laundering risks;
- The Authority would also gain the power to request a national regulator “consider” taking action against a specific “financial sector operator”64 to ensure compliance with the Anti-Money Laundering Directive.65 If the EBA considers any follow-up action did not ‘comply’ with the request, the proposal would enable the Authority to initiate a ‘breach of Union law’ procedure,66 which could ultimately67 result in a binding decision requiring either a national regulator or a specific financial market operator to “take all necessary action to comply with its obligations under Union law, including the cessation of any conduct”;
- The initiation of such a “breach of Union law” procedure against a national regulator would ultimately have to be made by the EBA’s Board of Supervisors. Under the current legal framework, it is only the EU’s national regulators themselves who are voting members of the Board and as a result—the Commission argues—the procedure has never been invoked. Under the parallel review of the European System of Financial Supervision,68 the Commission has therefore proposed to transfer some of the powers of the EBA’s Board of Supervisors— including in relation to ‘breach of Union law’ procedures to a new four-person Executive Board composed of full-time independent members;69
- The proposal would establish a new Anti-Money Laundering Committee within the EBA for cooperation with and among the EU’s national financial regulators;70 and
- Finally, the Commission foresees a role for the European Banking Authority in leading the EU’s cooperation with ‘third country’ anti-money laundering supervisors (including, after Brexit, the UK’s National Crime Agency).
4.17The amended legislative proposal was not accompanied by an Impact Assessment, presumably because it was produced at speed in response to recent developments and with a view to giving it time for consideration before the 2019 European elections. It will now be considered by the Member States in the Council’s working party on financial services, and by the Economic & Monetary Affairs Committee of the European Parliament.
4.18The Commission has also asked the EBA to issue guidance on use of information on money laundering risks by the European Central Bank and national prudential regulators, to “specify how prudential supervisors should integrate anti-money laundering aspects” into their work. The Authority will also map the distribution of prudential and anti-money laundering supervision in the different Member States to help national authorities identify the relevant counterparts in other EU countries.71
Implications of the proposal for the UK
4.19The Economic Secretary to the Treasury submitted an Explanatory Memorandum on the EBA proposal on 2 October 2018, and a separate—but largely identical—Memorandum on the Commission’s related policy paper approximately a week later.72
4.20The Government’s Memoranda note that the proposed expansion of the EBA’s responsibilities would “represent a significant shift in responsibility and power for supervision within the financial services sector away” from national regulators to the European level. Placing the latest proposal in the context of the EU’s wider financial supervision review—through which the Commission had already suggested a significant transfer of power to the European Supervisory Authorities—the Minister adds that the proposed “increased mandate of the EBA” was “likely to add to the contentious nature” of the Council’s deliberations in this area.
4.21The exact implications of the proposed extension of the EBA’s remit for the UK are unclear. This is partially because the legal text of the Commission proposal is likely to be altered significantly by both the Member States and the European Parliament during the legislative process, and—in the context of Brexit—because of the continued uncertainty about the future of the UK’s economic and regulatory relationship with the EU after March 2019. It is in any event unclear what would be the practical impact of the EBA’s new powers to instruct national prudential authorities, given that the “breach of Union law” procedure has never yet been used. Our ability to take an informed position in this respect is hampered by the fact that the European Commission did not prepare a formal Impact Assessment, and the analysis provided by the Government’s Explanatory Memoranda is cursory.
4.22The substance of the proposal notwithstanding, there is also a wider issue of the Regulation’s (potential) applicability to the UK. If the amendments to the EBA Regulation were to take effect during the proposed post-Brexit transitional period, currently scheduled to last until the end of 2020,73 the Authority’s new powers would apply here. In such a scenario, the EBA would gain new powers to direct the activities of the Bank of England’s Prudential Regulation Authority in cases of suspected money laundering, even though the UK would not be represented within the EBA’s governing structures or have voting rights over potential “breach of Union law” procedures.
4.23However, the timing of the adoption of the proposal, and consequently its date of application, remains uncertain: as noted, it forms part of the wider review of the European System of Financial Supervision, which has proved to be contentious because it would lead to a significant shift of regulatory responsibilities from the Member States to the EU. Rapid adoption is therefore considered highly unlikely, meaning the new Regulation is likely to take effect in 2021 or later. The likelihood that the new EBA powers might apply to the UK would increase if the post-Brexit transitional period were extended beyond December 2020 for whatever reason.74
4.24Once the UK is outside the Single Market, the EBA Regulation would no longer have any direct effect domestically. However, under the Commission proposals the EBA would still be a key interlocutor for EU cooperation with the UK—and other third countries—on matters of money laundering. The breadth and depth of UK cooperation with the EBA and individual Member States on such matters will need to be established as part of any future negotiations on the detail of a new economic and security partnership.
4.25In light of the above, we have retained the proposed EBA Regulation under scrutiny in anticipation of further information from the Minister on developments in the legislative process.
Previous Committee Reports
None. For our last Report on the current Anti-Money Laundering Directive, see our Twelfth Report HC 301–xii (2017–19), chapter 14 (31 January 2018).
45 From a procedural perspective, the proposal to clarify the powers of the EBA is an amendment to a pending legislative proposal—the review of the European System of Financial Supervision—which dealt with the responsibilities of the EU’s financial supervisory authorities more generally. That draft legislation also remains under scrutiny, as we concluded in July 2018 that it could have an impact on the UK both during and after the post-Brexit transitional period.
46 The ESFS was established in the aftermath of the financial crisis and centred on the European Central Bank and three new EU-level ‘Supervisory Authorities’: the EBA (banking), EIOPA (insurance) and ESMA (markets and securities).
47 See for more information on the proposed changes to the ESFS our Report of 21 February 2018. The proposals remain under scrutiny.
48 Explanatory Memorandum submitted by HM Treasury (2 October 2018).
51 It also obliges Member States to maintain central registers of the beneficial ownership of both companies and trusts, although there is—at present—no obligation to make the latter accessible to the public.
52 For example, within the Eurozone’s Banking Union, prudential supervision of the largest banks is the responsibility of the European Central Bank. However, tackling money-laundering remains a largely national competence of each Member State under the Anti-Money Laundering Directive (AMLD), who must appoint a Financial Intelligence Unit for that purpose (the National Crime Agency in the UK).
53 See Subsection IIIA of the AMLD as amended, relating to “Cooperation between competent authorities supervising credit and financial institutions and other authorities”. The amendments to the AMLD adopted in 2018 also make a number of other changes, including more transparency of the beneficial ownership of trusts. See our Report of 31 January 2018 for more information.
54 BBC News, “Danske Bank boss quits over €200bn money-laundering scandal“ (19 September 2018).
55 The same sentiment was expressed by France and Germany in their Joint Declaration of 19 June 2018, by the European Parliament, and by the President of the Eurogroup, Mário Centeno.
56 Commission Communication COM(2018) 645, p. 2.
57 Other recent money laundering scandals involving EU banks took place in Latvia and the Netherlands.
59 The relevant amendments are contained in European Parliament Report A8 2018/243, in relation to a new article 4a of Article 117 (“Competent authorities [and] financial intelligence units […] supervising obliged entities listed in [the AMLD], shall cooperate closely with each other within their respective competences and shall provide one another with information relevant for this under […]”) and a change to Article 56 on exchange of information (“[The Capital Requirements Directive] shall not preclude the exchange of information between competent authorities within a Member State, between competent authorities in different Member States or between competent authorities and the [competent authorities referred to in Article 48 of the Directive (EU) 2015/849], in the discharge of their supervisory functions”.
60 The Risk Reduction Measures (RRM) are a package of proposed reforms to the EU’s legislation on banking supervision and, in the cause of bank failure, resolution. We last considered the proposals on 16 May 2018 and retain them under scrutiny in anticipation of further developments in the legislative process.
61 Regulation 1093/2013 establishing the European Banking Authority.
62 The Member States and the European Parliament are also still deliberating the wider ESFS proposals, but there is no firm timetable for their adoption given the contentiousness of what is being proposed.
63 The Committee is still clarifying what the (legal) nature of these “common standards” would be.
64 The Commission proposal defines ‘financial sector operators’ as “obliged entities” under the Anti-Money Laundering Directive which are also either a ‘financial institution’ as defined in the EBA or EIOPA Regulations, or as a ‘financial market participant’ under the ESMA Regulation.
65 The new article 9b of the EBA Regulation would empower the Authority to “request a [national] competent authority […] to investigate possible breaches of Union law” relating to money-laundering, and if considered necessary ask that authority to “consider adopting an individual decision addressed to that financial sector operator requiring it to undertake all necessary action to comply” with its legal obligations.
66 Currently, the EBA can only use the “breach of Union law” procedure for alleged breaches of EU regulations in the field of financial services (like the Capital Requirements Regulation), not the Anti-Money Laundering Directive.
67 Such binding decisions under a ‘breach of Union law’ procedure must be preceded by several steps, including a formal Commission Opinion a) concluding that a breach of the AMLD had occurred and b) stipulating the necessary measures to be taken to ensure compliance.
68 See ‘Background’ for more information on the review of the European System of Financial Supervision.
69 The same would also apply within EIOPA and ESMA.
70 The other Supervisory Authorities (ESMA and EIOPA), as well as the European Commission, the European Central Bank and the European Systemic Risk Board would be represented on the Committee as observers.
71 Commission Communication COM(2018) 645, p. 10–11.
72 Although this second Explanatory Memorandum was dated 1 October, it was not received by the Committee until 12 October 2018.
73 Under the draft Withdrawal Agreement, the UK would stay in the Single Market and the Customs Union until 31 December 2020.
Published: 30 October 2018