Anti-money laundering regulations are in place to help protect financial institutions from being used in illegal schemes. Although many banks have individual policies in place, countries around the globe have stepped up their efforts to put universal laws in effect. How do these laws stack up around the world?
With the United Kingdom voted to leave the European Union, many were concerned about how this would impact financial institutions. In July 2018, the European Union adopted the Fifth Anti-Money Laundering Directive, otherwise known as MLD5. The United Kingdom indicated that they would abide by these regulations, just as other European countries would.
Alex Cobham of the Tax Justice Network told The Guardian that the UK accepting MLD5 was great news. He added, “at least in this area the UK will not pursue a post-Brexit race to the bottom on financial secrecy. This decision will help establish the fifth directive and its position on public registers as the international standard.”
In the United States, firms must comply with the Bank Secrecy Act and FINRA Rule 3310. Curious about how MLD5 and the Bank Secrecy Act compare? Below, we’ll compare AML regulations between the United States and the European Union.
The European Union’s MLD5 was officially adopted on July 9, 2018. Companies will have until January 10, 2020 to abide by all laws outlined in the regulation. MLD5 was not a new initiative. Instead, it grew on the previously-instituted MLD4. One of the most significant changes of MLD5 was the fact that it clarified and strengthened the due diligence measures in place when dealing with “high-risk third countries.”
Additionally, the regulations restricted the use of anonymous prepaid cards. The hope was that by doing so, financial institutions would not find themselves entering into business with terrorist financing efforts. The regulations also gave new powers to financial intelligence units. For instance, these units can now request and obtain information based on their own research and analysis. No longer does a prior suspicious activity report need to be in place.
MLD5 clarified that virtual currency service providers were subject to these regulations, something that was not in place previously. Lastly, MLD5 also called on member states to help strengthen rules. For example, EU member states must maintain a list of public functions in their jurisdiction who qualify as a politically exposed person. States must also establish a centralized database that is accessible to financial intelligence units.
Bank Secrecy Act
The Bank Secrecy Act requires companies to assist the United States in monitoring, detecting and reporting fraudulent activity. The regulations have been in place since 1970, although amendments have occurred along the way. One of the most notable changes was under Title III of the US PATRIOT Act. This amendment put much of the onus on AML detection onto companies, requiring them to establish anti-money-laundering programs by:
• Creating internal policies and controls
• Providing employee training
• Designating compliance officers
• Ensuring their programs’ success through independent audits
The Bank Secrecy Act requires financial institutions to submit reports to the US. The most straightforward statement is the currency transaction report, which requires financial institutions to report any financial transaction that exceeds $10,000 in a single business day. Institutions file this report with the Financial Crimes Enforcement Network, including relevant information such as bank account numbers and social security numbers. Other required reports include:
• Suspicious Activity Report
• Foreign Bank Account Report
• Monetary Instrument Log
• Report of International Transportation of Currency or Monetary Instruments
• Designation of Exempt Person
Trouble Between The US And The EU
One of the most significant problems with AML regulations is ensuring international compliance. Ideally, the United States and the European Union would be on the same page about how to proceed with anti-money laundering. However, the EU seems set on requiring states to provide necessary information to financial institutions, while the US wishes to have institutions report red flags to the government. Recent comments demonstrate fundamental differences.
The rift emerged because the European Commission added seven countries to its list of those blacklisted for weak AML efforts. Many of the countries or territories added to this list are under US control. However, on the other hand, the US’ Financial Action Tax Force feels that of the 23 countries on the EU list, only 12 are valid. The Financial Action Tax Force thinks that 11 of these countries or territories are on the list without reasonable support. Primary issues surround:
• American Samoa
• Puerto Rico
• US Virgin Islands
It will be interesting to see, moving forward, if the EU and the United States can get on the same page with their AML regulations. Universal AML regulations protect everyone involved, including both financial institutions and consumers. This is especially the case as businesses grow overseas. Having two separate sets of regulation could pose troublesome for those operating internationally. A global standard would best-suit financial institutions in the long run.