EU proposals give banks greater enforcement role, expert says

New proposals released by the European Commission to reinforce anti-money laundering (AML) regulation will give banks a greater enforcement role, a senior consultant says.

The proposals, released on February 5, complement previous AML rules. Key elements of the new directive include the expansion of provisions dealing with politically exposed persons (PEPs), increased coverage of the gambling sector, and a decrease in the current cash payment reporting threshold to €7,500.

Particularly significant is the suggestion to include an explicit reference to tax crimes, observers say.

“These changes will shift the balance in the relationship between customer and bank from trusted confidential service provider towards the bank becoming a part of the enforcement world,” says Colin Pickard, director of the financial services regulatory advisory team at Ernst & Young.

“In the UK, this is likely to be dealt with under the risk-based approach, but firms will have to take due care to ensure their systems are able to pick up potential criminal activity.”

Banks have become more involved in tax enforcement of late, amid increased attention from US prosecutors regarding tax evasion. Swiss bank Wegelin, for instance, recently pleaded guilty to charges of conspiracy to evade US taxes following an investigation by the US Department of Justice (DoJ). In 2009, the DoJ’s investigation into UBS for tax evasion ended with a $780 million payout and an agreement to hand over the details of 4,000 offshore accounts.

The implementation of US Foreign Account Tax Compliance Act (Fatca) regulations are a further incentive for banks to take on a greater enforcement role, as they will be forced to report details of US account holders.

Pickard, meanwhile, believes the European Union (EU) proposals on tax crimes would have a positive impact on Fatca. “There will have to be efforts made to converge and harmonise requirements and this should lead to greater overall transparency.”

In the current EU AML legislation, tax evasion is already recognised as a predicate offence for money laundering. (The Financial Action Task Force – an intergovernmental body aimed at stopping money laundering and the financing of terrorism – recommended adding tax crimes to the list of predicate offences for money laundering in February 2012.) Pickard warns, however, that the explicit references in the new proposals place further requirements on financial institutions to actively manage their AML obligations.

“This means an overall expansion of remit for AML compliance,” he says. “There will be consequential changes in a number of areas. For example, firms will need to revisit the scenarios currently used in transaction monitoring, and tighten practices around payment of interest gross.”

However, financial institutions will not be expected to monitor all of their clients’ taxes, according to Malcolm Taylor, global head of corporate development at data and software provider BankersAccuity: “It’s not practical to suggest that a large bank with several million retail customers can look at each and every individual account and satisfy itself that those individuals are meeting their tax obligations, but that’s not what the regulator is trying to achieve. What it is trying to do is make sure the higher-risk entities are being given the proper level of due diligence by the financial institutions.”

Other key components of the proposals include an expansion of the provisions dealing with PEPs so they include domestic in addition to foreign PEPs.

The proposals also suggest an expanded coverage of the gambling sector, with the former directive only covering casinos. In addition, they recommend bringing within the AML legislation’s scope all persons dealing in goods or providing services for cash payments of €7,500 or more. This is a change from the current threshold of €15,000.

Pickard warns such continued regulatory changes are causing a concern to financial institutions, despite their commitment to improving the identification of potential criminal activity.

“There is an increasing sense of regulatory fatigue and a desire for stability, especially in light of the expensive operational change that often results from regulatory change,” he adds.


This article was first published on Risk

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