This article was reviewed by Emily Sachs, CAMS
On May 30, 2023, European authorities coordinated a mass arrest of 33 suspected money launderers in Italy and Spain. They are accused of running a global network to disguise millions of euros from proceeds of illicit sales on behalf of South American drug cartels. This was a win for the European authorities, but the millions seized in the arrests accounts for just a tiny fraction of global money laundering.
The United Nations Office on Drugs and Crime estimates that 2% to 5% of the global GDP (715 billion to 1.87 trillion euros) is laundered each year, though the exact value of all money laundering operations around the world is difficult to parse.
To combat this, the European Parliament has been steadily introducing due diligence laws called the EU anti-money laundering directives (EU AMLDs) for all financial institutions in its member states over the last three decades.
Directives are legislative acts that set goals for every EU member to achieve. These are considered mandatory, and it’s up to each member to devise their own laws on how to achieve these goals.
The EU AML Directives add new layers of complexity to due diligence processes, making compliance more onerous for companies as a result.
What is an Anti-Money Laundering Directive?
The European Union adopted the first AML Directive in 1990 to combat the growing misuse of financial systems across Europe for money laundering purposes, and to bridge the gaps between member states’ disparate legislation. Since then, five more directives have been added to account for the growing complexity of financial systems and the criminal enterprises that seek to abuse them.
Under these directives, any institution that handles financial transactions in EU member states (called “obliged entities”) is required to apply minimum due diligence checks, such as identity verification and transaction monitoring upon entering into new business relationships.
In the last decade, the EU has dramatically increased the pace of writing, passing, and adopting new AMLDs. This reflects how crowded the international financial landscape has become with new mechanisms for money to change hands, such as crypto exchanges, NFTs (non-fungible tokens), and growing terrorist networks.
How many EU AML Directives exist?
In total, the European Parliament has passed six AMLDs, each building off of and superseding the last. For multinational companies, these revisions can make it more difficult to navigate the compliance landscape in Europe.
First EU AML Directive
Adopted in 1990, the First EU AMLD required all member states to establish a national financial intelligence unit (FIU) and that financial institutions apply specific customer due diligence (CDD) requirements. This is the foundation on which all of the following AMLDs are built.
Second EU AML Directive
Adopted in 2001, the Second EU AMLD expanded the scope of the First to include regulations for additional financial entities, such as auditors, external accountants, tax advisors, and notaries. It also introduced enhanced due diligence measures, such as identifying and verifying the identity of beneficial owners.
Third EU AML Directive
Adopted in 2005, the Third EU AMLD strengthened the entire AML framework by introducing risk-based approaches to CDD, requiring the reporting of suspicious transactions to member states’ FIUs, and setting minimum penalties for non-compliance.
Fourth EU AML Directive
Adopted in 2015, the Fourth EU AMLD introduced new CDD measures, including the requirement to identify and verify the identity of beneficial owners and politically exposed persons (PEPs), as well as establishing central registers of beneficial ownership information. The directive also brought in new measures to combat terrorist financing, such as requiring member states to freeze terrorist assets.
Fifth EU AML Directive
Adopted in 2018, the Fifth EU AMLD improved the transparency of beneficial ownership information, imposed stricter CDD requirements for certain high-risk transactions and relationships, and established a central register of beneficial ownership information for EU companies and trusts.
Sixth EU AML Directive
Adopted in 2021, the Sixth EU AMLD is the most recent and relevant AMLD for compliance teams. Most notably, it expanded the scope of the AML framework by adding cybercrime, environmental crime, and “aiding and abetting” to the list of activities that are considered money laundering. It also increased the sentence for money laundering crimes to a minimum of four years’ imprisonment.
The full text of the Sixth EU AMLD can be read on the EU Parliamentary website.
New changes to EU AML Directives
In March 2023, lawmakers proposed further changes, including the establishment of a “single EU rulebook.” This aims to remove loopholes in the domestic legislation of member states, such as Bulgaria, whose money laundering laws are seen as being too lax. A more unified framework would include far more detailed and granular AML requirements, such as linking national bank registers so FIUs have quicker access to information during an investigation.
Another important change proposed in March is an expanded list of “obliged entities,” which includes NFT platforms, crypto-asset providers, high-level professional football clubs, and luxury traders.
What are the main takeaways from the Sixth EU AMLD?
For compliance officers, these directives can feel like an ever-moving target, with constant updates and new proposals to keep up with. Every new directive begets a compliance readjustment and subsequent refinement of policies and procedures.
The most important changes for compliance officers introduced in the Sixth EU AMLD are:
- Cybercrime and environmental crime have been added to the list of predicate offenses for money laundering.
- Companies can be found legally culpable of “aiding and abetting” money laundering activities.
- Companies can be criminally liable for the actions of employees who engage in criminal activities.
- Any criminal offense found in connection with money laundering will receive a minimum sentence of four years in prison (up from one year).
- The definitions of multiple offenses, such as smuggling, human trafficking, and insider trading, have been standardized across the EU.
With all of these changes introduced in the Sixth EU AMLD, compliance officers have more to think about with their CDD processes: in addition to their companies’ expanded liability, they must now weigh the impacts of additional business risks with the rising costs of keeping certain businesses as customers.
How can organizations comply with EU AMLDs?
Compliance with EU AMLDs is often viewed as an impediment to revenue-driving activities for financial institutions, including product sales, account openings, and customer onboarding. While these regulations aim to reduce serious criminal activity, they often deepen the complexity of verification tasks. It’s therefore critical that organizations strike a good balance between compliance and operations.
Here are five actionable procedures organizations can implement immediately to help ensure compliance with the EU AMLDs, regardless of which member states they operate in:
1. Run a risk assessment
Do you know where your company is at risk for money laundering activities as outlined in the EU AMLDs? Run a risk assessment to understand potential weaknesses and devise solutions.
2. Pinpoint the signs of money laundering
There are several common activities that could indicate money laundering. Identifying these early helps your compliance team catch loopholes in your AML processes. These include large volume transactions from high-risk countries, sudden upticks in transaction rates, and concerning user behavior such as repeated failed login attempts.
3. Set up an AML verification process
A robust AML compliance framework begins with screenings of both customers and employees who join your organization. This process should include multiple verification points, such as obtaining a person’s full name and date of birth and checking those details against their IDs and watchlists.
4. Monitor for changes in the EU AMLDs
An important part of any EU AML compliance monitoring strategy is remaining up to date on changing regulations. With the rise of so many new avenues for financial crimes, such as NFTs and crypto, the EU is ramping up its efforts to implement stronger checks and balances, including tougher penalties for non-compliance.
5. Invest in automated compliance tools
As the AML landscape evolves rapidly and global transaction volumes expand exponentially, the best support organizations can give to their compliance teams is automated AML tools.
AML automation vastly reduces the manual effort required to comply with the AMLDs by automating key tasks, such as data collection, identity verification, and watchlist screenings. This removes much of the spiraling complexity of due diligence that modern compliance teams grapple with on a daily basis.
With Persona, automation takes care of the most tedious parts of the KYC/AML compliance process, including new user screenings, continuous monitoring, maintaining an audit trail, and acting on new insights. Our unified identity platform allows you to build logic to determine what can be automatically approved or denied, as well as streamline manual reviews — all from one place.
Persona also reduces the gap between compliance and conversions by offering a high degree of design customization and flexibility. For example, you can adjust flows to match your organization’s needs, so there’s minimal friction between users and your CDD processes.
With wide-reaching directives regularly coming into effect, flexibility and adaptability are essential for a robust compliance strategy. If you’re ready to start building a compliance strategy that meets evolving EU AMLDs, get started for free or contact us to learn more.
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