On 31 March 2023, the European Banking Authority (EBA) released two final reports on guidelines produced under Articles 17 and 18(4) of the Fourth Money Laundering Directive (2015/849) to clarify regulatory expectations and tackle unwarranted de-risking.
Dealing with Non-Profit Organisations
The first set of new guidelines relating to Money Laundering (ML) and Terrorist Financing (TF), intends to assist financial institutions (FIs) when assessing the risks commonly associated with Non-Profit Organisations (NPOs).
The EBA have noted that institutions are de-risking, (aka terminating or restricting relationships) NPOs due to the perceived complexities of their organisational structure, and the difficulties in obtaining sufficient customer due diligence information (CDD). To assist FIs in understanding NPOs, the EBA has created an annex to be used when evaluating NPOs. This annex sets out that firms should:
- obtain good understanding of business governance, how the NPO is funded and its operational activities;
- identify the trustees, governing body or other influential individuals;
- recognise what beneficiaries benefit from the work of the NPO;
- locate what jurisdictions the NPO conducts its operations; and
- investigate types of transactions the NPO is likely to request based on its objectives and activity profile.
The EBA hopes that this will enable a fully inclusive financial services market, that allows for anti-money laundering (AML) and counter- terrorist financing (CTF) controls.
Managing Money Laundering and Terrorist Financing risks
The second set of guidelines deal with the management of ML and TF risks for FIs when providing access to financial services. The guidance highlights the risks associated with a new business relationship or occasional transactions, adjustments needed to CDD measures to mitigate identified ML/TF risks and finally, the EBA has introduced higher expectations of AML/CTF supervision efforts by authorities when assessing the competency of risk assessments by FIs. The EBA intends to:
- strengthen the individual and business-wide risk assessments and CDD measures;
- introduce innovative solutions to identify customers identities;
- support better understanding of legal provisions on enhanced CDD related to high risk third world countries; and
- introduce sector specific guidelines for crowdfunding platforms, corporate finance, accounts information, payment initiation service providers, and firms providing currency exchange services.
What does this potentially mean for FIs?
- conduct sufficient risk assessments in the evaluation of each NPO and identify ML/TF risks with individual customers – this is likely to require increased investment;
- have dedicated points of contact for NPOs and ensure suitable training and development is implemented to support the understanding of other jurisdictional areas – which will ultimately result in additional costs for extra resourcing and training; and
- implement better record and documentation processes – again potentially requiring additional expenditure.
All of the above will ultimately result in additional fees being incurred by FIs in order to comply. As NPOs do not generally provide much financial gain to financial providers, the benefit to FIs (other than compliance with the guidelines) is likely to be increased reputational gain from servicing a sector that is in support of those in need.
What does this mean for Fintechs?
Compliance with the new guidelines requires a level of innovation by FIs to achieve a fully inclusive financial services market. Fintechs are key to achieving this. By utilising Fintechs, FIs can support their development by relying on advanced technologies.
As always, not only will Fintechs enable faster transactions and reduce costs, they will also likely be the driving force behind enabling FIs to meet the EBA’s expectations of a more diverse and equal financial services market.
What does this mean for UK entities?
Whilst, post Brexit, the EBA guidelines are not directly applicable in the UK, FIs and Fintechs operating in the EU should ensure they are compliant. Equally, firms operating outside of the EU, and in particular in the UK (where the AML regime closely mirrors that of the EU) should also take note – the guidelines are still instructive and set out best practice.
Equally, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), housed within the UK’s Financial Conduct Authority (FCA), recently published its supervisory progress in April 2023 and stated that it “will be engaging with the Treasury on its consultation to identify the most impactful opportunities for reform”, so it is safe to say that developments to the rules regarding ML and TF in the UK are on the horizon.