Europe Strikes Back: A Critical Look to the New Arsenal in the Fight Against Dirty Money

Money laundering, a standalone crime closely tied to serious and organized crime, has evolved beyond traditional criminal organizations. A new class of professionals now specializes in laundering services as their primary business. The UNODC estimates that 2-5% of global GDP (€715 billion to €1.87 trillion) is laundered annually. This aligns with Eurojust's statistics, showing money laundering cases accounting for nearly 15% of all cases registered between 2016 and 2021.

Recognizing this threat, the EU has prioritized combating financial crimes in its EMPACT 2022-2025 initiative. In June 2024, the EU unleashed a powerful weapon in its arsenal against money laundering and terrorist financing: a comprehensive package of new rules designed to close loopholes, enhance transparency, and strengthen enforcement.

The adoption of the sixth EU AML package raises questions about the effectiveness of previous measures and whether this new framework can effectively address the root causes of money laundering.

The new AML package marks the end of an extensive legislative process within EU institutions. However, this conclusion merely heralds the commencement of a more crucial phase: implementation.

Key pillars of the package

Among other instruments the new package includes:

The Sixth Anti-Money Laundering Directive (AMLD6), which strengthens the powers and obligations of national supervisory bodies and Financial Intelligence Units (FIUs), setting clear standards for information sharing, risk assessment, and customer due diligence.

The new Anti-Money Laundering Regulation (AMLR) that establishes detailed and directly applicable rules for a wide range of "obliged entities," including banks, financial institutions, lawyers, real estate agents, and—for the first time—crypto asset service providers.

The European Union Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA), a newly established authority, headquartered in Frankfurt, will directly supervise the riskiest financial institutions operating across multiple member states, coordinate national supervisors, and support cooperation among FIUs.

Transparency vs. Compliance Burden

One of the most significant aspects of the new package is its emphasis on transparency, particularly in the area of beneficial ownership. The rules aim to pierce the veil of secrecy surrounding shell companies, trusts, and other complex structures often used to conceal the true owners of assets. This is a laudable goal, but it comes at a cost.

The AMLR lowers the ownership threshold for identifying beneficial owners to 25%, requiring obliged entities to identify individuals who own or control a significant stake in a company, even through intermediate layers.

Also, the new legislation clarifies the notion of "control," ensuring that individuals who exercise significant influence over a company, even without direct ownership, are also considered beneficial owners. Companies in high-risk sectors, such as extractive industries, may face lower ownership thresholds than 25%, potentially set by future Commission delegated acts. The AMLR strengthens due diligence requirements for customers from high-risk third countries.

These enhanced due diligence requirements will undoubtedly increase the compliance burden on financial institutions. Estimates suggest that the cost of AML compliance for European banks already runs into billions of euros annually.  Will the benefits of increased transparency outweigh these costs?

Another remarkable element of the new package concerns public access to beneficial ownership information for legitimate interest. While the European Court of Justice (ECJ) invalidated public access to beneficial ownership registers in November 2022 (Judgment of the Court in Joined Cases C-37/20), the new rules ensure access for journalists, civil society organizations, academics, and others with a legitimate interest in combating financial crime. This is a positive step, but it remains to be seen how effective it will be in practice.

Crypto, Luxury Goods, and Real Estate

Importantly, the new package extends AML obligations to cover emerging sectors and high-value assets increasingly vulnerable to money laundering. The AMLR brings the entire crypto sector under its scope, requiring crypto asset service providers to conduct customer due diligence, report suspicious transactions, and comply with anti-money laundering measures. Anonymous crypto asset wallets are also prohibited.

Moreover, traders of luxury goods, such as high-end cars, yachts, and aircraft, are now subject to AML obligations, requiring them to report transactions above a certain threshold. Similarly, the AMLD6 strengthens requirements for real estate registers, mandating that member states establish single digital access points for authorities to access information on real estate ownership.

These measures are certainly welcome, but they raise further questions about the effectiveness of a purely regulatory approach.

AMLA: A Game Changer or Another Layer of Bureaucracy?

A crucial objective of the new AML legislation is to fortify enforcement mechanisms. The new package bolsters enforcement capabilities by creating AMLA and enhancing cooperation among national authorities.

More specifically, the new authority, which will have its seat in Frankfurt, will directly supervise the 40 riskiest financial institutions, which are operational in at least six member states.

These measures collectively represent a significant step towards creating a more robust and unified approach to combating financial crime across the EU.

Harnessing the Power of Technology

In light of the complexity of the new measures and the associated increase in compliance costs, a pivotal aspect for the success of these initiatives is the potential role of technology in enhancing AML effectiveness.

For example, AMLA could leverage data analytics, artificial intelligence, and machine learning to improve risk assessment, transaction monitoring, and cross-border cooperation.

The same holds true with a wide range of "obliged entities," especially banks and financial institutions. These technologies could help to identify suspicious patterns, automate due diligence processes, and reduce the burden on financial institutions.

The challenges of implementation

In conclusion, the new EU AML package represents a bold and ambitious step towards a more transparent and secure financial system. However, it is essential to approach this new framework with a healthy dose of realism. Past efforts have fallen short, and the costs of compliance are significant.

The true test of this new framework lies in its implementation of national regulations and secondary legislation, which will ultimately determine the effectiveness of the new rules.

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.

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