European Union Advances in Centralized Anti-Money Laundering Oversight;Are Your Procedures Prepared?
The European Union is set to enforce a new anti-money laundering (AML) regulation, scheduled to go into effect in two years. This landmark regulation aims to replace the current patchwork of national approaches with a harmonized, pan-European framework.
The European Anti-Money Laundering Authority (AMLA) has officially taken its seats, marking a significant step towards unified supervision and real accountability in the EU. The new regulation is designed to combat money laundering more effectively, addressing the evolving nature of financial crime and the tactics used by criminals.
One such tactic is smurfing, where large illicit transfers are broken up into smaller amounts and spread across accounts at different times and time zones, making them harder to detect in legacy systems. To counter this, the new regulation will require real-time monitoring of high-risk payments, particularly in emerging sectors like crypto and instant payments.
The regulation also calls for a shift from threshold-based alerts to monitoring behavioral anomalies. This approach will enable compliance teams to spot suspicious behaviors beyond just threshold violations, such as multiple cash deposits just below thresholds, sudden changes in behavior, involvement of unnecessary middlemen, high-risk jurisdictions, and more.
Financial institutions, including banks, should expect to implement uniform and stricter AML rules by 2027. These rules will expand the scopes covering financial sanctions, enhance transparency, and comply with new supervisory authorities established at the EU level. Banks must prepare for expanded obligations, including new topics and sectors now subject to AML rules, requiring significant adjustments to their compliance systems.
Moreover, the regulation emphasizes the need for a cultural change within institutions. Investigators are encouraged to ask uncomfortable questions and are incentivized to find risk in all its forms. This shift aims to move away from a mindset that focuses on form over substance, which is often reinforced by legacy systems.
The fight against financial crime requires cross-functional collaboration between data scientists, compliance, operations, and legal departments. Banks need to develop robust compliance programs that adapt to constantly evolving criminal tactics. Clear explainability of automated decisions with greater human oversight and increased accountability for senior management will be expected under the new regulation.
KYC (Know Your Customer) should no longer be limited to onboarding. The "clean" client might not remain clean over time, necessitating continuous updates to KYC processes. Banks should also expect stricter due diligence on occasional transactions and high-net-worth individuals.
The new regulation signals a move towards continuous, behavior-based monitoring rather than procedural compliance. AMLA now requires "meaningful human intervention" in onboarding decisions, necessitating a move from black-box AI to explainable tools. This shift will help ensure that decisions are transparent and accountable.
In summary, the new EU AML regulation represents a significant step forward in the fight against financial crime. It requires banks to adapt their compliance systems, collaborate across departments, and embrace a culture that prioritizes risk detection over formality. The regulation's focus on real-time responsiveness, behavior-based monitoring, and continuous KYC updates reflects the evolving nature of financial crime and the need for financial institutions to stay vigilant and adaptable.
