The European Commission this week took rare and drastic steps to increase legal pressure on Luxembourg and Malta for not adequately implementing bloc-wide financial crime compliance regulations, while pulling back similar actions against Spain after a range of recent improvements.

The move comes as several EU member states – including Denmark, Estonia, Latvia, the Netherlands and others – have become mired in money laundering scandals to the tune of hundreds of billions of dollars and individual banks in some countries have paid in some cases record penalties in the hundreds of millions of dollars for extensive and longstanding anti-money laundering program (AML) failures.

In short, the commission levied a range of censures against the three countries. Authorities chastised Malta’s financial intelligence unit for having lax supervision of the banking sector with ostensibly the worst punishment handed down to Luxembourg, which was faces a lump sum penalty and daily fines until examiners deem it inline with Europe’s Fourth AML Directive.

To read the full commission report on Malta, click here.

To read the full commission report on Luxembourg, click here.

To read the full commission report on Spain, click here.

Spain faced similar punitive measures as Luxembourg, but this week got a reprieve from authorities for updating several AML measures in recent months and pledging to address outstanding criticisms before year’s end.

“We have stringent anti-money laundering rules at EU level, but we need all Member States to implement these rules on the ground,” said Věra Jourová, Commissioner for Justice, Consumers and Gender Equality, in a statement.

“We don’t want any weak point in the EU that criminals could exploit,” she said, cognizant of the gaps that have allowed institutions including Copenhagen-based Danske Bank move some $234 billion – the largest laundering debacle in the bloc’s history. “The recent scandals have shown that Member States should treat this as a matter of urgency.”

The Commission has opened, so far, infringement procedures for non-communication of transposition measures on the 4th Anti-Money Laundering Directive against 21 Member States: three are currently at the stage of court referrals (Romania, Ireland and Luxembourg), with one on hold  (Greece), nine at the stage of Reasoned Opinions, and eight at the stage of Letters of Formal Notice. 

Malta regulator in the hot seat

At issue with Malta and the Financial Intelligence Analysis Unit (FIAU) has been what European authorities believe is a disconnect between what examiners concluded on the ground and what was actually going on behind the scenes at financial institutions in the region.

This is exemplified by what happened at Pilatus bank, which the European Central Bank (ECB) shuttered this week due to widespread fraud and money laundering allegations, culminating in the indictment of the institution’s chairman on related charges.

Prior to this, the Maltese FIAU has given Pilatus overall positive reviews for AML program functions.

That all changed in March when U.S. prosecutors arrested Pilatus Chairman Ali Sadr Hashemi Nejad.

The Iranian allegedly orchestrated a scheme to evade U.S. economic sanctions and secret more than $115 million paid under a Venezuelan construction deal through the U.S. financial system – a dynamic layering risks on top of risks, something a regulator should have realized required significantly more scrutiny.

Pilatus also faced allegations of processing graft-gilt payments for senior Azeri and Maltese figures by investigative journalist Daphne Caruana Galizia, later killed by a car bomb attack, according to media reports.

The European Banking Authority (EBA) investigated and concluded that Malta’s FIAU “was breaching Union law” and issued recommendations to improve the situation in July, which have not been implemented to the watchdog’s satisfaction. “It considered that Malta failed to correctly supervise financial institutions and ensure their compliance with anti-money laundering rules.”

More concretely, the European Commission calls upon FIAU to take a number of measures to improve AML oversight, including:

  • Improving its methodology to assess money laundering and terrorist financing risks;
  • Enhancing its monitoring and supervisory strategy by aligning resources with the risk of money laundering posed by certain institutions;
  • Ensuring that the authority is able to react in an appropriate time when a weakness is identified, including by revising its sanctioning procedures;
  • Ensuring that its decision-making is properly reasoned and documented;
  • Adopting systematic and detailed record-keeping processes for offsite inspections.

Luxembourg needs to get on board

As for historical tax and secrecy haven Luxembourg, a country trying to shed that image, it faces more draconian and potentially far more expensive measures than Malta, with the commission formally suing, calling on the EU Court of Justice to levy a hefty fine and start tabulating daily penalties that will accrue and swell until the jurisdiction is judged to have made the necessary improvements.

Member States had to transpose the Directive into national law by June 2018. The 4th Anti-Money Laundering Directive reinforces the previously existing rules by:

  • strengthening the risk assessment obligation for banks, lawyers, and accountants;
  • setting clear transparency requirements about beneficial ownership for companies and trusts;
  • facilitating cooperation and exchange of information between Financial Intelligence Units from different Member States to identify and follow suspicious transfers of money to prevent and detect money laundering or terrorist financing;
  • establishing a coherent policy towards non-EU countries that have deficient anti-money laundering and counter-terrorist financing rules;
  • reinforcing the sanctioning powers of competent authorities.

“We have stringent anti-money laundering rules at EU level, but we need all Member States to implement these rules on the ground,” Jourová said.  “We don’t want any weak point in the EU that criminals could exploit. The recent scandals have shown that Member States should treat this as a matter of urgency.”

Spain given second chance

In the case of Spain, it nearly found itself in the same situation as Luxembourg, but the commission this week decided to put the decision “on hold” for failure to “to fully implement EU rules on prudential supervision of credit institutions and investment firms, in light of the recent developments in the case,” after a referral to the Court of Justice in July.

As part of its risk management and compliance improvements, Spain submitted updated draft measures to strengthen key areas related AML in August and September with another expected this month, according to the commission. Further, another Royal Decree related to the solvency of credit institutions and the stock market will be coming next month.

As part of broader initiatives to better unify AML supervision and improve the communication and coordination of various EU member state financial crime regulators, the commission recently put forth a proposal to give the EBA more powers to review and sanction banks and related oversight bodies.

“We need to ensure that money laundering and terrorist financing risks in the financial sector are properly assessed and mitigated by our supervisory authorities,” Commission Vice-President Valdis Dombrovskis, responsible for Financial Stability, Financial Services and Capital Markets Union, said in a statement.

“The European Banking Authority contributes to a harmonized application of anti-money laundering supervisory rules,” the official stated, adding that the September proposal to strengthen the EBA will equip it with the “additional instruments and resources needed to ensure effective cooperation and convergence of supervisory standards. I count on the European Parliament and Council’s cooperation to turn this proposal into legislation rapidly.”