Viktor Fischer and
Pino-Sun Becker (ACOLIN Group): National AML requirements and cross-border distribution
ACOLIN Group executive board member Viktor Fischer and group head of compliance and risk Pino-Sun Becker say differences in application of AML law within the EU has burdened IFMs with translucent regulatory requirements, shifting the focus away from investor protection and fighting to prevent money laundering to the formalistic fulfilment of regulatory requirements.
What challenges face the fund industry as a result of the EU’s AML directives and national supervisory requirements?
Announcing its action plan for a comprehensive EU policy for the prevention of money laundering and the financing of terrorism, the European Commission said in May 2020 what most of us have known since at least 2017: “The current approach of EU legislation has resulted in diverging implementation of the [EU AML] framework across member states.”  As a fully MiFID-licensed fund distribution service provider, we have been faced with great reluctance on the part of many of our regulated counterparties (especially, beyond the scope of the EU in countries such as Switzerland) to accept the stringent requirements imposed by national and supra-national regulators. That’s because of their frustration with the ineffective formalistic KYD process between regulated entities, especially, since they have to answer to home and host regulators, internal and external auditors, all following different approaches resulting from different understanding of the same rules.
“We have seen member states take the initiative to go above and beyond the requirements of the EU directives.”
What is the best approach to establishing a fund distributor as a cross-border player with products from different domiciles?
We have seen member states take the initiative to go above and beyond the requirements of the EU directives, implementing their own reporting requirements, creating intra-European equivalency evaluations, and ultimately giving the impression that the regulators’ approach must be taken into account even if it does not apply to the relationship at hand. Meanwhile regulators are doubling down and closely monitoring the entities they supervise to ensure they follow the national interpretation of the AML directives. The EU’s function-follows-form approach to AML requirements has led to uncertainty and inefficiency. A good example is Germany’s Financial Intelligence Unit, which was moved to the customs authority in June 2017 following implementation of the fourth EU AML directive. The unit, which is primarily responsible for the handling of suspicious activity or transaction reports with regard to money laundering, has quickly gained a reputation for being hopelessly overburdened. The fault is not just down to purely organisational shortcomings but insecurity among reporting entities that have opened the floodgates, drowning the FIU in reports, on the ground of “better safe than sorry”. In its 2019 report, the FIU noted an increase of almost 50% in reported transactions, of which 98% were from the financial sector, even though the FIU itself identified a prominent money laundering risk not only in the financial sector but also especially in real estate. This begs the question of whether the focus is on the wrong place to fulfil political goals rather than to tackle the issue at hand.
We currently see a demand for standardisation, with many market players trying to establish themselves and their systems as the go-to approach for professional KYD. On one hand industry associations are promoting standardised questionnaires, the Wolfsberg Questionnaire being a prime example. However, although the questionnaire itself is established as a vital tool, the information provided is sometimes not of a standard that meets the expectations of its designers. On the other, service providers are competing to become the industry platform to share professional due diligence information. This approach only goes halfway to fulfilling legal due diligence obligations, since the risk assessment must take into account the individual conditions of each case.
What impact do you expect in the future from the CSSF’s proactive approach and the EU’s AML action plan?
In less than 24 months, the proactive approach taken by the CSSF had to be amended to allow a simplified KYD/KYC process for face-to-face business since August this year – something many other regulators were aware of for many years. However, for non-face to face business relationships the CSSF remains adamant in its position requiring the application of enhanced due diligence requirements even if they are no longer required by the 2004 law, due to the perceived higher risk. If well executed, the EU’s approach to centralisation of FIUs and co-operation could be a welcome and necessary next step toward the introduction of a harmonised European AML rulebook that would prevent national regulators gold-plating the rules.
[4 ]P. 24 ibid.