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EU to create coordinated supervision for money laundering etc. risk management and compliance for some businesses.

This is a fascinating idea: if a financial services business operates in "more than three" EU member states, its regulators will create a "college" so as to make sure that it's not using regulatory arbitrage between member states.

Just one point: is this a recognition that the EU has failed to impose and enforce pan-European Regulation?

OK, there are lots more than one point.

A statement from the EU yesterday says "The three European Supervisory Authorities (EBA, EIOPA and ESMA - ESAs) published today Joint guidelines on cooperation and information exchange, establishing colleges of anti-money laundering and countering the financing of terrorism (AML/CFT) supervisors for the first time in the EU to ensure effective cooperation and information exchange between competent authorities. These measures are needed to strengthen the EU’s AML/CFT efforts."

Do you know that, in the 1980s, the EU used to use the correct term "counter-money laundering"? And, incidentally, a far more appropriate expression in relation to the financing of terrorism is "Anti-Terrorist Financing." It's a shame that they changed to the misleading "AML/CFT" terminology at a later date.

Anyway, picking through the gobbledook and stock phrases in the press release, there is the point: if a financial institution operates in "more than three" member states then the regulators in each of the appropriate states are to form "a college" of supervisors in relation to that business.

The statement announcing the Guidelines says "the Guidelines are broadly based on, and consistent with, the framework of colleges of prudential supervisors of banks, but the scope of these Guidelines is much wider and encompases (sic) all financial sectors in a proportionate manner."

That's not entirely correct, unless one restricts the term "financial sectors" to Banking, Insurance and Securities. It seems that the three European Supervisory Authorities (they like to call themselves ESAs) have defined their own areas of influence as marking the perimeter of the financial services industry. That is not, of course, what the EU's own Money Laundering Directives do.

The ESAs are:
EBA - The European Banking Authority
EIOPA -The European Insurance and Occupational Pensions Authority and
ESMA - The European Securities and Markets Authority.

There is no surprise that the three authorities have sought to increase their co-operation: a consultation was launched in November 2018. But the consultation used different language: it said that money laundering and terrorist financing risk management and compliance colleges should be set up "whenever three or more competent authorities from different Member States are responsible for the AML/CFT supervision of the same credit or financial institution and its establishments, and the frequency and intensity of each AML/CFT college should be determined on a risk-sensitive basis."

For the purposes of this review of the Guidelines, we can ignore the background and rationale but it's worth reading in your own time, so to speak. What matters here is what they intend to do and how they intend to do it.

Buzzword time: "mapping of firms." First, issue should be taken with the common practice to refer to financial services businesses as "firms." Traditionally, and for good reason, a "firm" was not the same as a "company." A company is incorporated; a firm is unincorporated. The use of the word "firm" to cover both diminishes clarity. It began in the 1990s so it's not new but even so it should be resisted and regulators should know better that to perpetuate a lack of clarity.

All they mean by the buzzword "mapping" is creating a combined list which shows a) all regulated businesses in each state and b) all their branches and subsidiaries in other "jurisdictions." This is to be compulsory for all supervisors. Note, in particular, that the list must include all branches and jurisdictions outside the EU.

The reason is this (verbatim, including grammatical errors) : "A firm that operates establishments in three or more jurisdictions is exposed to different ML/TF risks than a firm that operates in one jurisdiction only. It’s business model is also likely to be more complex." While international business generates different risks to domestic risk, that is the case for two-centre operations, too. So.... "Guideline 2 does not prevent the establishment of an AML/CFT college in situations where the conditions set out in Guideline 2 are not met."

Let us help them with their drafting to clarify it and make it less convoluted:

"Where a regulated entity is subject to supervision in more than one member state supervisors

a) where two supervisors are involved may; and
b) in cases where three or more supervisors are involved shall

create a College of Supervisors in relation to that regulated entity.

The College of Supervisors will be a permanent establishment which will exchange information and will co-operate in regulatory affairs to the intent that a unified approach is adopted with regard to that regulated entity.

The lead supervisor for the College shall be that of the regulated entity's home member state. Each College shall include, as an observer, the FIU from the lead supervisor's member state.

Third countries may be permitted to send observers if certain conditions are met, especially in relation to confidentiality."

A provision that is both interesting and raises many questions is " 21.In addition to the permanent members and observers, the lead supervisor may also invite other attendees to participate in specific AML/CFT college sessions as invited participants on an ad hoc basis where it considers that these attendees may add value to the college discussions. There are no limitations as to who can be an invited participant; however, in practice these are likely to be the firm, consultants who have engaged with the firm or FIUs from jurisdictions other than the lead supervisor’s Member State. However, their attendance at the AML/CFT college meeting should be justified by the lead supervisor and approved by the permanent members"

"consultants who have engaged with the firm "... That "firm" thing again but what is "consultants who have engaged with" supposed to mean? Does it mean those who have been "engaged by" it? Honestly, without guessing we cannot tell. It's flaccid, flowery English that does not carry an effective meaning. Regulators are moving towards an increasingly prescriptive regime yet they do so with increasingly imprecise language. It's a recipe for disaster.

Here's where, so to speak, the rubber hits the road. Leaving aside for one moment the highly complicated question of what constitutes a statement that may be used in evidence, or even what evidence is, in a non-judicial, multi-jurisdictional inquiry) that raises some important questions.

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