I. Anti-Money Laundering Regulation (AMLR):
The AMLR, effective from July 2027, serves as a single rulebook to harmonize AML practices across EU Member States. Unlike directives, regulations are directly applicable and do not require national transposition[1].
- Obliged Entities: The regulation expands the list of entities that must observe the AML obligations to include financial institutions, real estate agents, and some high-value goods traders[2].
- Internal Policies and Procedures: Obliged entities must devise internal controls, policies, and procedures designed to prevent money laundering and the financing of terrorism.
- Customer Due Diligence (CDD): Enhancements to CDD measures are mandated specifically for high-risk customers and transactions.
- Beneficial Ownership Transparency: The benchmark established for determining beneficial ownership in corporate entities is 25%. This will mean that member states may fix lower thresholds for higher-risk entities but not below 15%.
- Reporting Obligations: Stricter reporting requirements are incorporated, such as making reports on suspicious transactions immediately.
- Record Retention: The requirement is imposed upon entities to retain records of transactions and that of customer information for at least some duration such that it facilitates effective monitoring and investigation.
- Risk Mitigation: Introduced to address the risks associated with anonymous instruments, notably prepaid cards and virtual currencies.
II. Anti-Money Laundering Authority Regulation (AMLA):
AMLR creates ANTI-MONEY LAUNDERING AUTHORITY, or AMLA, at the EU level, with its headquarters located in Frankfurt am Main, Germany. It should be directly accountable to the European Parliament and the Council to implement AMLR.[3]
An AMLA, which will enter into force in July 2025, will be a new EU agency that will supervise and coordinate national efforts to avoid and combat money laundering. It will exercise both direct and indirect supervisory power on high-risk entities under supervision in the financial sector. [4]
Supervisory Powers: AMLA may impose sanctions and penalties against a non-compliant entity.
Supervisory Role: From 2028, AMLA will directly supervise at least 40 chosen obliged entities and indirect supervisory for other obliged entities, maintaining some consistency of applying AML rules across the Member States.[5]
Coordination Role: The authority will facilitate cooperation and coordination among national Financial Intelligence Units (FIUs) and other competent authorities to promote information-sharing and effectiveness of operations.
III. Sixth Anti-Money Laundering Directive (AMLD 6):
AMLD 6 must be transposed into Member States’ national legislation by 10 July 2027. This directive introduces enhanced rules regarding beneficial ownership information and its recording in central registers.[6]
A. Implications for Financial Institutions: While the AMLR will apply from July 2027 and AMLD 6 still requires transposition, financial institutions should assess the impact of this legislative package on their operations and begin preparations accordingly.[7]
B. The rising cost of financial crime compliance :
- Increase in Operating Costs: Research by LexisNexis Risk Solutions found that 98% of EMEA financial institutions showed growing compliance costs by 2023, worth, altogether, more than US$85 billion annually.
- Technology-Related Costs Unrelentingly Grew: Compliance and Know-Your-Customer (KYC) software costs grew for 70% of EMEA organizations and 67% of European institutions.
- Emerging Risks: Twenty-nine percent of the financial institutions Thus cite digital currencies, digital payments, and AI technology as increasing compliance costs, alongside increased regulation (38%) and demands for automation (32%).
- Staffing Costs: 72% of organizations reported increases in annualized pay for full-time and part-time employees in the past year.
C. The Commission de Surveillance du Secteur Financier (CSSF) has enhanced its regulatory inspections to focus on specific areas within financial institutions:
- Environmental, Social, and Governance (ESG) Reporting: In 2023, the CSSF doubled its ESG inspections compared to 2022, emphasizing the importance of sustainability and responsible investment practices.
- Information and Communications Technology (ICT) Outsourcing: With the financial sector’s increased reliance on technology and third-party services, the CSSF has intensified scrutiny of ICT outsourcing arrangements.
- Markets in Financial Instruments Directive (MiFID) Compliance: The CSSF is examining adherence to MiFID regulations to ensure investor protection and market transparency.
- Branch Inspections: The number of branch inspections has tripled since the previous year, reflecting the CSSF’s proactive approach to overseeing financial institutions’ operations, especially as Management Companies (ManCos) expand their European presence.
- Costs and Charges: The CSSF is focusing on the transparency and fairness of financial institutions’ fee structures.
[2] Conseil de l’Union européenne