22 November 2019

PIIE: A major step toward combating money laundering in Europe

The struggle to combat money laundering in Europe took a momentous step forward on November 8 when the finance ministers of France, Germany, Italy, Latvia, the Netherlands, and Spain put forward a joint position paper. Their proposal is likely to pave the way for strong EU legislation, buttressing the credibility of the new European Commission led by Ursula von der Leyen.

Adopting this proposal would create, for the first time, a centralized anti–money laundering (AML) supervisor with EU-wide authority in Europe. It is an apt response to a recent series of embarrassing revelations of AML failures.

The six countries’ joint paper came after an initial policy response that was quick by EU standards, but sadly underwhelming. In September 2018, the European Commission president Jean-Claude Juncker proposed strengthening the AML coordinating role of the European Banking Authority (EBA), an EU agency that brings together banking supervisors of all EU member states. The corresponding legislation was approved a few months later. But it left two major flaws uncorrected. First, the EBA is a “supervisor of supervisors” that only steps in (if at all) after national supervision failures become evident, too late to deter misbehaviour, and that offers national supervisors little incentive to cooperate. Second, the EBA’s intergovernmental governance is weak when it comes to remedial action.

The combined political heft of the EU’s largest countries, other than the United Kingdom, now adds to this momentum with the finance ministers' joint paper. Its main thrust is to call for a “supervisory mechanism,” akin to the Single Supervisory Mechanism (SSM) that exists for the prudential supervision of banks, and thus “featuring a European central supervisor cooperating with national supervisory authorities.” That European AML supervisor could be either a new EU agency, with Article 114 of the Treaty on the Functioning of the European Union (TFEU) its presumed legal basis, or the EBA. In the latter option, however, the joint paper makes it clear that a comprehensive overhaul of the EBA’s governance would be needed “to guarantee the required level of independence” as the paper delicately puts it—a task arguably as complex as a new institutional creation. The political issue underlying the choice between the two options, as with any EU agency, is location. The EBA would presumably remain in Paris, while a new agency could be in any member state.

On the latter point, the joint paper improves on the Dutch contribution in July, which called for “objective criteria” to characterize risk. Observable metrics should of course enter the assessment, but the decision on which entities to supervise should rest on the European supervisor’s judgment. The context is very different from the SSM’s, where smaller banks are generally left to national supervision. A proportionality-based approach that may be apt for prudential supervision cannot apply in AML supervision, because major AML violations often happen in smaller firms that have otherwise no systemic relevance. Prudential supervisors look at the haystack, but AML supervisors have to look for the needles.

The joint paper also suggests further harmonization of the AML regulatory framework in EU law. A directly applicable EU regulation would replace some legislation that currently requires transposition into national law. This step makes sense, but it should not be used to delay the establishment of the European central supervisor. Both tasks would be best addressed together.

Given the impetus from the joint paper, EU member states can and probably will formalize a strong European AML supervisory mechanism before year-end, and the European Commission could make a legislative proposal in the first half of 2020. Since AML supervision is as much a security challenge for the European Union as a regulatory one, it will buttress the von-der-Leyen-led European Commission’s credibility as a “geopolitical Commission.” It may also help create momentum for further shoring up the EU financial supervisory architecture, including the reform of ESMA to transform it into a truly independent supervisor and the completion of the banking union. The joint paper is bad news for money launderers and good news for Europe.

Full article on PIIE

© Peter G Peterson Institute for International Economics