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Article by Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania for the Eurofi Magazine.

Massive technological innovation is rapidly changing the face of the financial sector. Cross-border payments these days can be made instantaneously any time of the day and week, with the number of payment providers and the overall complexity of the financial system growing. The Financial Action Task Force reports that multiple jurisdictions are facing increased vulnerabilities, particularly due to a rise in remote transactions. The COVID-19 pandemic accelerated the pace of change in customers’ financial patterns - more people work from home and conduct more online transactions than ever before.

With such a transformation taking place, sound, prudent and accurate AML/CFT procedures must be a top priority for financial market participants. Even though AML frameworks are improving, substantial amounts of money involved in suspect financial activity are still being detected. Europol assesses the annual cost of money-laundering to the European economy at well over 100 billion EUR. Therefore the EU Member-States must take action. Besides efforts to improve efficiency of the national AML/CFT frameworks, a further push is needed to implement more uniform AML supervision across the EU Member-States and to establish an effective EU AML Authority (AMLA).

Money-laundering and terrorism-financing activities are not contained within national borders. Accordingly, a truly effective framework for AML/CFT must be international. Completing the Single Market for services requires a well-functioning financial sector, and a well-functioning financial sector requires AML/CFT compliance at the very heart of financial companies, with uniform rules for compliance across the EU. To ensure this, we need a harmonized AML/CFT supervision framework.

Currently, AML/CFT regulatory and supervisory system is too country-centric and therefore application of the rules for compliance vary depending on the country. The recent proposal of the Commission introduces a Single Rulebook for preventing the financial system from being used for the purposes of money-laundering or financing terrorism. Such a Single Rulebook in place at the EU level will stop regulatory arbitrage and provide a basis for an effective supervisory practises. Furthermore, the Commission proposes to expand the rules against anti-money-laundering or terrorism financing regarding crypto-assets and related service providers – a crucial step, given the mounting evidence from research of illegal activities involving such assets.

At the center of such an EU-wide supervisory framework for AML and CFT should be a competent AMLA. A capable AMLA has the potential to improve the resilience of the European financial system, reduce the likelihood of systemic errors, and allow individual cases to be handled with greater efficiency. To this end, it must be ensured that AMLA has a broad mandate, covering a range of players in the financial sector, and its staff have thorough knowledge in all areas of financial services. In addition, there must be clear and objective criteria for determining which institutions fall under AMLA’s direct supervision, ensuring an appropriate balance between AMLA and national AML/CFT supervisors, in both the overall supervisory framework and the day-to-day operations. Last but not least, it is of utmost importance for AMLA to have a good overview and knowledge of the EU Member States‘ markets, as well as to promote the convergence of supervisory practices. Therefore, at least one entity per Member State should fall under direct AMLA supervision.

AMLA should work in close cooperation not only with national AML/CFT supervisors, but also with other institutions – ESAs, for example – to ensure the flow of all necessary information. Currently, we lack a well-defined common structure to support such cooperation at the EU level. This shortage of common tools and resources leads to situations where too few cross-border joint analyses by AML/CFT and non-AML/CFT supervisors are carried out, hindering the capacity to detect money-laundering and terrorism financing early on. Creating an EU-wide AML/CFT data hub, administered by AMLA, that integrates data from all sides is vital, as access to reliable, accurate, detailed and real-time data is crucial for an effective AMLA.

Building up an EU-wide AML/CFT framework with an AMLA at the center of it is not an easy feat. However, we are sure to succeed, as we start from vast experiences of AML/CFT coordination at the national level and recognize prevention of money-laundering and terrorism financing as our top priority.