EU Banks' AML Systems Ineffective, Warns European Banking Authority

The European Banking Authority (EBA) has issued a warning stating that anti-money laundering (AML) systems and controls implemented by EU banks are often ineffective.

The EBA's fourth biennial Opinion on the risks of money laundering and terrorist financing (ML/TF) in the EU financial sector revealed significant challenges in transaction monitoring and the reporting of suspicious transactions.

The EBA highlighted that transaction monitoring and reporting were particularly weak, with 30% to 50% of competent authorities rating them as "poor" or "very poor." Payment institutions and e-money institutions were identified as the worst-performing sectors in this regard.

According to the EBA, the supervision of AML/CFT measures does not always align with perceived levels of money laundering risk or demonstrate overall effectiveness. The authority emphasized the emergence of new risks associated with the laundering of proceeds from environmental crimes and cybercrimes, along with the increased risks linked to financial innovation and market growth.

EBA Chair Jose Manuel Campa stated, "The large-scale displacement of vulnerable persons from Ukraine has led to a surge in human trafficking and given rise to an urgent need to provide access to financial services to refugees from Ukraine." He also highlighted the presence of ongoing terrorist financing risks, including an increase in right-wing extremism and terrorism.

The EBA identified several cross-sectorial risks that are either new or emerging. These include inconsistent national approaches to enforcing compliance with restrictive measures, non-compliance leading to operational and legal risks for financial institutions, inadequate efforts to tackle human trafficking through financial inclusion, deficiencies in identifying ultimate beneficial owners (UBOs), and the continued importance of identifying politically exposed persons (PEPs) to combat corruption.

The EBA acknowledged that AML/CFT supervision has shown overall improvement, with more supervisors conducting formal risk assessments as per the EBA's guidelines. It noted that increased supervisory engagement has had a tangible impact on inherent and residual risk levels.

The EBA has encouraged supervisors to enhance cooperation with other authorities, including tax authorities, to combat tax-related crimes. It also provided recommendations for competent authorities and EU co-legislators to mitigate the identified ML/TF risks.

The opinion was issued against the backdrop of a changing risk landscape, influenced by geopolitical events such as Russia's invasion of Ukraine and legislative developments, including the publication of a comprehensive AML Package and the Markets in Crypto-Assets Regulation (MiCAR). Emerging risks like corruption and the laundering of proceeds from environmental crime and cybercrime were also highlighted.

While certain ML/TF risks associated with crypto assets, innovative financial services, beneficial owner identification, and terrorist financing were previously identified, other risks such as those related to Covid-19 and de-risking are now starting to decrease.

Awareness of ML/TF risks is growing across all sectors under the EBA's AML/CFT purview, with credit institutions and investment firms showing small but noticeable improvements.

The EBA's findings underscore the urgent need for EU banks and competent authorities to strengthen their AML systems and controls to effectively combat money laundering and terrorist financing risks.

By fLEXI tEAM