The past year remained a challenging one for Europe and the world due to the persisting COVID-19 pandemic, its negative effects on society, the economy, and the continued turbulence in the financial system.
It was also marked by one of the largest global money laundering scandals in recent history – the “Pandora Papers.”
This demonstrated the growing scale of the money laundering threat and the persistence of launderers to abuse the international financial system to hide their illicit proceeds.
We are facing a combination of older money laundering methods and newer trends – both requiring coordinated action from governments in Europe and around the world.
On one hand, traditional money laundering uses offshore jurisdictions, and complex corporate structures, while concealing the true ownership of assets behind several layers of so-called “shell” companies.
Specialised “gatekeepers,” such as lawyers, accountants and other service providers often help launderers set up such companies, as well as trusts and other corporate structures.
The “Pandora Papers”, just like the “Panama Papers” five years ago, showed that “gatekeepers” can be complicit in large-scale transnational money laundering schemes involving corrupt politicians, as well as high-net worth individuals seeking to evade taxes.
A newer money laundering trend is related to the emerging virtual assets sector, the increasing global use of cryptocurrencies and other components of the rapidly evolving ecosystem of so-called ‘decentralised finance (DeFi)’
This is the reason MONEYVAL has been focusing on these professions – and working with the FATF to enhance their regulatory regime. In 2021 we achieved an important change to the international FATF Standard to regulate the transnational operations of “gatekeepers” and improve their global compliance.
This change will oblige the professions to establish group-wide anti-money laundering programmes and pave the way for tighter supervisory cooperation among governments to carry out their oversight.
These measures will be challenging to implement, since supervisory cooperation in this area did not exist before. However, governments must mobilise their efforts, in order to finally curb the money laundering abuses we have seen in recent years.
A newer money laundering trend is related to the emerging virtual assets sector, the increasing global use of cryptocurrencies, and other components of the rapidly evolving ecosystem of so-called “decentralised finance” (DeFi).
This alternative system removes the traditional forms of control that banks and institutions have on financial flows and services, creating new forms of financial products accessible through the internet from any point on the globe. In most cases, the components of one single crypto-business are spread across multiple countries.
Supervisory cooperation on virtual assets is at its very nascent stages and is not yet keeping pace with the rapid evolution of technology.
It creates enforcement and supervisory challenges for governments, due to rapidly evolving tech infrastructure, cross-border nature of financial services, and difficulties to determine the responsible national jurisdiction for their oversight. Supervisory cooperation in this field is at its very nascent stages and is not yet keeping pace with the rapid evolution of technology.
The COVID pandemic has further complicated the operations of anti-money laundering authorities. Following initial trend analysis research carried out in 2020, MONEYVAL continued in 2021 with a further systemic effort to assist financial sector supervisory authorities to adjust their working methods to the “new normal”. The Committee completed a comprehensive typologies study “AML/CFT supervision in times of crisis and challenging external factors”.
The study highlighted the importance of effectively managing the business continuity risks of public and private sectors in their anti-money laundering tasks during the COVID pandemic and extrapolated the lessons learned to other challenging external factors, such as the supervision of remote territories.
The focus on supervisory authorities was made due to their broad public responsibilities for safeguarding and maintaining public confidence in the financial system in the event of a major operational disruption.
As the mandates of supervisory authorities vary (e.g. some prudential supervisors are responsible for systemic issues while others, such as AML/CFT supervisors, are not), it was concluded that the approach to business continuity management must be tailored according to the circumstances, and a one-size-fits-all approach may not be always efficient.
Business Continuity Plans (BCP) proved to be a useful tool in helping financial supervisory authorities swiftly overcome crisis situations. Among other things, the BCPs set out a risk assessment methodology, detailed governance arrangements, a division of responsibilities and specific actions to be undertaken in relation to the crisis in order to ensure the continuity of business operations. When the AML/CFT supervision is distributed amongst several supervisors, setting up a coordination committee showed positive results.
The COVID pandemic proved that in crisis situations where employees are unable to return to the office, technology is key to continuing effective on-going financial sector supervision. Moreover, this can be used in case of other challenging circumstances, such as the supervision of entities having only limited or no physical presence in a given jurisdiction (e.g. for offshore territories).
Shifting to remote or hybrid inspections to replace traditional on-site visits was the main solution to continue AML/CFT supervision during the crisis
Our study found that supervisors sought additional sources of data to allow the monitoring of ML/TF risks in reporting entities. Shifting to remote or hybrid inspections to replace traditional on-site visits was the main solution to continue AML/CFT supervision during the crisis.
Supervisory focus has also been diverted to thematic (horizontal) supervision to enable an assessment of the vulnerabilities of internal systems and controls across a broad range of financial sector entities.
Guidelines and/or regulations were developed to permit the use of digital ID systems by reporting entities. A partial relaxation of customer identification requirements for low-risk scenarios was allowed, in order to enable reporting entities to on-board clients and facilitate the delivery of government benefits in response to the pandemic.
Importantly, our study recommended to adjust existing cross-border operational agreements between supervisors to include specific provisions on assistance in times of crisis and in case of force majeure.
In the absence of a specific provision, the general memorandum of understanding rules should allow and/or encourage communication and cooperation using electronic means, when available, to exchange supervisory data.
As we emerge from the pandemic, Europe will continue to face significant money laundering challenges. MONEYVAL member states and jurisdictions currently demonstrate a moderate level of effectiveness in their AML/CFT efforts.
Thus, the median level of compliance is below the satisfactory threshold. MONEYVAL members show the best results in the areas of risk assessment, international co-operation and use of financial intelligence.
Effectiveness remains particularly weak in financial sector supervision, private sector compliance, transparency of legal persons, money laundering convictions and confiscations, and financial sanctions for terrorism and proliferation of weapons of mass destruction.
In almost 90% of assessed countries, analysis highlights the absence of in-depth assessment of specific risks, such as terrorism financing and offshore money laundering
Risk understanding is the central pillar of a robust AML/CFT system.
An inadequate understanding of country risks is likely to lead to inappropriate policies. In almost 90% of the assessed countries, our analysis highlights the absence of in-depth assessment of certain specific risks, such as terrorism financing and offshore money laundering, where relevant to the jurisdiction.
Moreover, when the assessment of risks is not thorough, the responses cannot be adequate. Indeed, the analysis points to the difficulty of some countries to successfully apply a risk-based approach to non-profit organisations (NPOs) potentially vulnerable to misuse for terrorism financing purposes.
Given the nature of money laundering and financing of terrorism, solid international co-operation is key to effective implementation of AML/CFT. The FATF Standards call for mutual legal assistance (MLA) and other forms of international co-operation to the greatest extent possible and an established system for expeditious actions to be taken in response to requests made by foreign countries.
International co-operation and information exchange are the strongest point of MONEYVAL members. Most of the jurisdictions assessed by MONEYVAL proactively pursue international co-operation, and only a few face difficulties in sending and receiving MLA requests, lack prioritisation mechanisms or cannot guarantee the provision of information in a timely manner.
Efficient supervision of the private sector lies at the basis of an effective AML/CFT regime. However, no country was awarded a high effectiveness rating so far, and supervision is one of the areas where countries are less effective.
The analysis underlines the significant differences in the global risk understanding among the supervisors, in particular for the designated non-financial sectors (lawyers, notaries, accountants, casinos, trust and company service providers, real estate agents, dealers in precious metals and stones).
Our analysis demonstrates that, in many cases, sanctions are either not proportionate, dissuasive, and effective enough, and in many cases they are not applied by, or not even available to, the competent authorities
In all countries, having a sole supervisor for the different non-financial sectors passably enhances effectiveness, if and only if the supervisor benefits from adequate powers and resources; yet insufficient resources have been noted for the majority of the assessed jurisdictions.
Urgent improvement is required regarding overall sanctioning, that is when supervising the private sector, legal persons and arrangements, such as trusts. Our analysis demonstrates that, in many cases, sanctions are either not proportionate, dissuasive, and effective enough, and in many cases they are not applied by, or not even available to, the competent authorities.
Furthermore, successful confiscations of ill-gotten funds as a criminal measure are rather rare in comparison with the estimates of the proceeds of crime. Lack of adequate human resources and expertise of the competent authorities is another cross-cutting issue in the majority of our countries.
The key to resolving these challenges lies in enhanced cooperation and engagement between our law enforcement, supervisory authorities, financial intelligence units and the private sector. Effective internal and cross-border cooperation will give us additional capacity to tackle existing and new threats.
As MONEYVAL, we are constantly looking at ways to improve our performance and motivate our members to enhance their effectiveness. Even though the groundwork is now in place, there is still a long road ahead to achieving a good level of effectiveness in tackling money laundering and terrorism financing.
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