[DRAFT] Matching Enforcement to Market Reality: AMLA and the Regulated Industry

By Yasemin, Lanqin, Exuan and Shuhua

Figure: AMLA’s new headquarter will be in Frankfurt (Image: AMLA Official Website)

Money laundering is a global crime that undermines economies and causes corruption, crime and terrorism. The European Union (EU) has long implemented international standards and legislative frameworks to combat money laundering and terrorist financing within its territory. However, the scandals highlight that the legislative frameworks without the right enforcement cannot overcome the problem. This blog post shows why the enforcement model should align in terms of the anti-money laundering (AML) industry and whether the creation of the new Anti-Money Laundering Authority (AMLA) can better enhance this mission.

Spotlighted dilemma and its extended approach

Money laundering is the process of hiding funds from illegal activities because criminals want their money to look clean. This is generally divided into three steps. First, criminals put the illicit gains into the financial system. Then, they move money around to hide its origin. Finally, they bring the money back as if it had been earned legitimately. Money laundering is very threatening, which helps to support crimes such as terrorism, fraud, and corruption, and reduces people’s trust in banks and financial systems.

Over the past decade, many money laundering scandals have occurred in the EU. In 2018, Denmark’s largest bank- Danske Bank, was involved in a huge money laundering case in which $236 billion was laundered through its Estonian branch. Lately, Rabobank is about to face prosecution because it failed to prevent money laundering. From the Danske Bank scandal to the recent Rabobank case, there are not isolated failures but symptoms of weaknesses in the EU’s decentralized AML enforcement structure.

Now, the EU has decided to fight back with a new EU agency- AMLA (the proposal was tabled in 2021, and the regulation was adopted in 2024). Through EU-level supervision, AMLA will support national supervisors and financial intelligence units (FIUs), and enhance cooperation and coordination among member states. But there is another question: Does this new EU agency fit the industry it supervises?

National enforcement wasn’t enough

The current AML mechanism is based on national authorities, with European Banking Authority (EBA) advice and policy-setting. Financial intelligence units (FIU) collect unusual transactions from entities with an obligation to report, analyse them and share them with law enforcement and security agencies as necessary, and exchange information with FIUs worldwide. The concern is that the ‘insufficient detection of suspicious transactions and activities by FIUs, particularly in cross-border cases, limits their capacity to suspend transactions and to disseminate relevant information to competent authorities’. Due to a lack of coordination and information sharing among FIUs, cross-border suspicious transactions are often not identified and responded to in a timely manner’.

For instance, in the Netherlands, Dutch banks are required to report unusual transactions to the FIU-Nederland. DNB supervises the effective fulfilment of the banks’ compliance obligations under the Anti-Money Laundering and Counter-Terrorist Financing Act (Wwft) and the enforcement of sanctions. In 2024, the recent Dutch AML cases, including Volksbank and Rabobank, indicate weaknesses in national enforcement, like a dysfunctional system that generates alerts about customers and their transactions and inadequate action following an alert.

Besides, ‘the application of AML/CFT rules across EU is both ineffective and insufficient’ is hard to ignore according to the impact assessment. There are differences in the formulation and enforcement of AML regulations among member states, leading to unclear rules and inconsistent standards, which affects the uniformity and effectiveness of the entire framework. Besides, the inconsistency of regulatory resources and methods across countries has left some industries and subjects in the regulatory blind spot for a long time, especially in the non-financial sector.

Europe’s new watchdog: AMLA

As one manifestation of the AML’s enforcement model transferring from prominently relying on member states’ authorities to the institution at the EU level, AMLA is further empowered to deal with challenges such as the lack of effectiveness and insufficiencies of the contemporary AML framework.

As an integrated system composed of itself and national authorities, AMLA is entrusted with more direct and indirect supervision powers compared to the more advisory or policy-making role assumed by EBA. For instance, in terms of governing selected obliged entities in the financial sector, national supervisors participate in selecting, listing, and reviewing the entities by the joint supervisory teams in charge of AMLA. Meanwhile, AMLA can exercise direct supervision, such as by adopting binding decisions and especially pecuniary administrative sanctions. In terms of governing non-selected obliged entities, while AMLA enforcement power relies on member states, in which national supervisors retain full responsibility and accountability for direct supervision, AMLA actively coordinates national authorities to help them increase their enforcement effectiveness. With these powers entrusted, AMLA is expected to enhance AML enforcement through the centralization of certain tasks, responsibilities and powers within such a central authority. Nevertheless, diversity and disparity in AML enforcement among member states still have chances to occur.

Figure: Evolving AML supervision in the EU (Image: AI-generated)

The Industry Matters: AMLA ensures the security of the industry and consumers

Money laundering is not just a local issue; it is international. The threat of money laundering and financial crime is cross-border and involves high risk. Because of these characteristics of money laundering, prevention needs to be a priority before non-compliance occurs. If it is detected, authorities need to move faster and take effective action.

However, there has to be the right enforcement mechanism to prevent it. Because good laws can only be better implemented with the right hands. If the regulated industry is highly concentrated and international, as previously pointed out with the recent scandals, national authorities may fail to implement such successful rules. Unmatching the enforcement model with the regulated industry can create problems not just for the market actors but also for the safety and trust of EU citizens.

To illustrate this challenge, consider the analogy of housing design. Imagine living in a detached house with a concrete exterior and buying quality paint perfect for your walls. It might be the ideal solution for your home alone, but what if it is part of a larger complex? Suddenly, it might not fit in with everything else. The best results will not come from acting alone but from a shared decision to harmonize the whole complex. It is the same with anti-money laundering enforcement; it cannot be expected to work effectively if each Member State paints its own house, because the regulated AML industry is not a house but an integrated complex. AMLA is a new EU agency that ensures that Member States are on the same page when it comes to supervising money laundering. Its centralized powers and EU-wide reach aim to sustain a better and risk-free industry in the future.

Figure: AMLA as an EU agency fits the regulated industry’s characteristics (Image: AI-generated)

The EU is moving AML enforcement to Brussels by establishing a centralized enforcement model: AMLA. With AMLA stepping into the role of Europe’s central watchdog, the EU is aligning its enforcement with the regulated industry characteristics. The next challenge will be ensuring AMLA’s effectiveness and adaptability in a fast-evolving risk landscape.