The European Union’s (EU) Anti-Money Laundering Directive (AMLD) prevents the misuse of the financial system to keep fraud and terror financing at bay. As and when newer money laundering crimes and trends come about in the financial services industry, the directive is recalibrated to safeguard banks and financial firms from the evolving threats. Recognizing that the prime concern is the non-standard approach across member states in criminalizing the offenses (for instance, tax crimes are not unlawful in some member states), the EU introduced the sixth AML directive in November 2018, due to come into force in December 2020.
Let us examine the implications of the sixth directive for the financial institutions in member states.
As part of the sixth AML directive, the EU parliament has come up with a harmonized list of 22 predicate offences which all the member states are to adhere to, with no differences in the definition, scope, and sanctioning of these offences. This list includes tax crimes, environmental crimes, and cybercrimes over and above the recommendations of the Financial Action Task Force (FATF) and other international bodies. Further, aiding and abetting, inciting, and attempting an offence defined in the directive are now within the scope of punishable offenses.
The new directive will have several implications for the financial institutions in all of EU’s member states. They will have to review and assess their compliance programs to identify gaps in the current operations and work on the areas of improvement to meet the regulatory requirement. Already burdened with the rising cost of compliance, financial institutions will need to figure out a cost effective yet efficient way of identifying and fixing the gaps. To ensure the successful implementation of the new directive, financial institutions will need necessary support internally, as well as externally, through strategic partnerships. We have outlined the following key considerations for financial institutions:
Firstly, financial institutions will be required to enhance their compliance policies to cover the directive recommendations and accordingly implement those typologies in their AML platforms. In case of multi-geo operations, firms should standardize the policies and operating procedures across all geographies covered under the EU jurisdiction. They should use self-learning analytics solutions while deploying the new detection scenarios to minimize false positives.
Secondly, the deployment of new rules will result in a surge in alert volumes as well as remediation or backlog volumes. Financial institutions should therefore staff their compliance units adequately with appropriate and targeted training. Firms can also look at third-party operations support providers for the short term, to effectively manage the high alert volumes and backlog.
Thirdly, firms must also look at automating their AML operations through RPA solutions such as a mash-up tool to facilitate alert review by collation of data from various source systems, a web crawler tool to scrape negative information from public domain, and a narrative writer tool for the summation of review conclusion as per regulatory expectations.
In a nutshell, the implications of the sixth AML directive for financial institutions that fall in the EU’s jurisdiction will have to be addressed through well-thought out multi-pronged interventions including technology solutions (using a combination of artificial intelligence, machine learning, and advanced analytics solutions). This will help in modifying current typologies or rulesets to enhance or replace existing AML platforms and optimize the false positives in alert volume surge.