The European Parliament (EP) is currently in the process of adopting new measures against money laundering and terrorist financing as they proudly announced at the end of March. Great you would think as Money Laundering/Terrorist Financing (ML/TF) is seen as one of the greatest threats to public society. Yet, if you take a better look, it isn’t good at all, as the baby is being thrown out with the bathwater.
The politicians seem to be taking the easy way out, pinning the problem on banks without giving them real possibilities to solve the issue. Unfortunately, the EP is unable to see that the path they have chosen impacts common citizens and increasingly hits them hard. In five to ten years, will the politicians wonder how it was possible that their measures lacked effect and had such bad outcomes? When looking for the causes, will they understand that their decision contributed?
Citizens Already Feel the Impact of Existing AML Measures
There are many signals that the current AML legislation is already overshooting its mark. In the last month, bank customers in Germany noticed their accounts being blocked, without notice and without explanation. Some are lucky and can use their account again after a few weeks or months, but for other customers, the relationship is terminated by the bank.
The cause? A new stricter AML law.
In a cash intensive society like Germany, where it is completely normal to sell your car for cash, depositing that cash can nowadays lead to suspicion of money laundering which is enough to get your account blocked. Imagine what it means if you suddenly can’t access your paycheck or pay your bills. Or if the bank terminates the relationship, you might have to sell your house. This is actually happening, and sadly, it is not limited to Germany. Similar signals are coming from the Nordics and other EU countries.
For the treasurer of a club or society, you might have noticed that the costs for holding the club’s account have gone up from naught, or just a few euros per month, to €10 or €20 per month. For a small club, the costs might become 20-25% of your yearly budget. If you think you can use a private account for the club to save costs, think again. You might be violating the terms and conditions which is a reason to have your relationship cancelled by the bank. The best option is to do everything in cash. But wait, wasn’t the idea of the AML legislation to ban all cash where possible?
As the treasurer, you also might have noticed that it is quite difficult to even open an account. Several banks are so busy (re)doing all the Know Your Customer (KYC) procedures that it can take a long time, or you are just refused.
Uncovering the Root Cause
The root cause is that the financial industry has made a 180 degree turn in the last few decades. Once it was as easy to open a bank account as it was to buy a loaf of bread from your local baker. You could walk into a bank office with an ID and five minutes later you would have an active account with a working card. Banks were completely focused on delivering service. This also made it very easy for money launderers, and they happily seized these opportunities.
Seeing the dark side of money laundering, politicians have taken action. Compelled by the resulting laws, rules, and regulations, and forced by prosecution and fines, the banks made a reversal and now do everything in their power to prevent and detect money laundering. So far, so good.
Originally, the idea was to fight money laundering with a risk-based approach. The Financial Action Taskforce (FATF) setting the standards still recommends this as it is the best use of resources. Yet, in Europe this not an option anymore. Banks have gone to extremes, as they risk being prosecuted and fined heavily, even by missing a single transaction.
Further influenced by the threat of personal prosecution of their CEOs and MLROs, each bank now employs thousands of staff to perform KYC. They scrutinise every onboarding customer, trying to find every money laundering transaction, investigating possible suspicious transactions, meticulously documenting and reporting the suspicious ones. The number of reported transactions has risen sharply over the last few years, and the vast majority did not involve money laundering, as anything with the slightest suspicion now gets reported.
This is very costly, and the costs are passed on to the customers. And to limit costs and risks, banks terminate the relationship with customers that behave as if it might possibly be money laundering. Better safe than sorry. As it concerns money laundering, banks are often legally prohibited from disclosing information. All this leads to the issues described above.
New Measures Will Make Things Worse
The measures announced by the EP will strengthen the fight against money laundering, yet they fail to consider the collateral damage. On the contrary, the measures stand to exacerbate the problems described before.
The legislation package consists of the following:
- A new authority is added, the Anti Money Laundering Authority (AMLA), with new supervisory and investigative powers to ensure compliance with AML/CFT requirements. Unfortunately, there is no proposal to improve existing structure and organisations. An additional organisation will just add more complexity. Its supervisory and investigative powers can only mean one thing: increased pressure on the banks.
- The 6th Anti-Money Laundering Directive (6AMLD) contains an extended list of predicate offenses already proposed in 2021. This is good to fight those crimes as it becomes more difficult to enjoy the proceeds. As the bar is lowered further, it means that there will be more money laundering. It also means more money laundering for the banks to find. Again: increased pressure on the banks.
- A single rulebook. Standardisation is always good as it removes the loopholes used by the money launderers. Yet, a combined set of rules will typically mean the maximum strictness of all existing rules, with some additional ones. Especially given the current mood of “more, more, more.” More and stricter rules again means more pressure on the banks.
Weren’t AMLA and 6AMLD already announced?
Yes, in July 2021, the European Commission (EC) announced a proposal, containing the AMLA, 6AMLD, a EU-wide limit of €10,000 for cash payments, and more. The proposal, for instance, contained the extended list with predicate offenses. You could say that it is great marketing from the EP, announcing essentially the same again. There are some minor changes such as the limit on cash payments is lowered to €7,000.
These proposals create the same outcome: more pressure on the banks. This will further impact consumers as the banks will do whatever needed to prevent huge fines.
Are all the proposed measures bad? Well, there are some positive things, such as the beneficial ownership information that is to be kept in national central registers. The complete ban of golden passports and visas is also good.
Is this an EU specific problem?
Not at all. In the UK, there is currently a debate about the right to access a bank account because of some upcoming laws. Banks would not be allowed to refuse a new customer just because they are a PEP, which of course would lead to no MP having a bank account anymore. And banks should not be allowed to cancel accounts on short notice, but the customer should be given several months to find another bank. Money launderers will love this. In the UK, too, the symptoms are fought and not the cause.
Wiebe Fokma is the Director Advisory (EMEA) at BioCatch and has over 20 years of experience working in banking