Public Conference The fight against Money Laundering and Terrorist Financing Brussels, 15 March 2013 14.30 15.45 Session 3 : Future challenges for the AML/CFT framework John Hogan, Head of Banking Directorate, Department of Finance, Ireland Operational challenges for financial regulators and police authorities Ladies and gentlemen, I would like to join with my colleagues in welcoming the Commission s publication of its proposals for a new Directive. I hope that the following remarks won t repeat too many of the very interesting points which we have just heard from my fellow panellists. As you will note, the theme of my speech is the future challenges for the AML/CFT framework. There will always be such challenges but the job of financial regulators and police forces will be to mitigate the dangers and to ensure compliance with the law. While there may be some duplication in the topics raised, I hope to try to focus on problems as seen from the point of view of financial regulators and law enforcement agencies. One of the clearest operational challenges facing both financial regulators and police authorities lies in the interaction between the requirements of the single market and those of effective anti-money laundering systems. Under the standard single market rules a provider of financial services in any Member State can provide those services in any other Member State without having a physical presence in the other Member State or by operating through a branch or agency which might not be a regulated entity in its own right in the host State. For large scale financial institutions this has not generally given rise to material issues in the money laundering area. However, the architects of the single market in financial services probably did not foresee the scale of the problem which could arise under the Payment Services Directive where 1 C:\Users\dalyj\AppData\Local\Microsoft\Windows\Temporary Internet
relatively small operators can act as agents for money transmitters. Some Member States have seen agencies established in their hundreds, if not thousands. Remittance services are not only provided from chains of post offices, banks, credit unions and motor service stations, but also from a very diverse range of independent, often tiny retailers such as groceries, tobacconists, hairdressers, phone shops and so on. The kind of operational challenges which this poses are fairly obvious. There is clearly an issue here both from a policing and regulatory viewpoint. The Payment Services Directive made provision for cooperation between home and host supervisors in the anti-money laundering area but without detailing how it would work in practice. I know that the Commission and financial supervisors have made substantial progress in formalising this cooperation. However, the challenge faced by financial regulators and police authorities lies, not so much in the regulatory framework, but in the sheer number and nature of the entities they have to deal with. Issues such as the application of a fit and proper test, training, customer due diligence, retention of records, and suspicious transaction reporting requirements pose a greater challenge where an agent is not already operating in a basic financial services framework and indeed, may be operating in a very basic way with limited resources. The Commission has acknowledged the type of difficulties that can arise in its proposed new Directive by requiring home and host supervisory authorities to cooperate in the effective implementation of anti-money laundering rules by a branch or a subsidiary established in another Member State. In the case of both e-money providers and payment services providers, the Commission is proposing to give Member States the power to require issuers established on their territory, and whose head office is situated in another Member State or outside the Union, to appoint a central contact point in their territory to oversee compliance with anti-money laundering and terrorist financing rules. In Ireland we are particularly conscious of these issues as we are both home supervisor and host supervisor to some major money transmitters. 2 C:\Users\dalyj\AppData\Local\Microsoft\Windows\Temporary Internet
The whole area of money transmission points to the basic challenge posed by new technologies. Much of the wording of the Directive and of the FATF Recommendations conveys the impression of old style banking relationships where a customer physically presents himself and can be identified by means of a passport, national identity card and so on. However, while the Directive and national laws may try to lay down rules for the identification of customers using electronic money or prepaid cards, the reality may fall short of any legal requirement. There may be some progress towards a solution of this problem in proposals published by the Commission on 4 June 2012 on e-identification. It was noted in a French report for a FATF meeting last year on new technologies that prepaid cards - designed to be used mainly to buy goods and services especially on the Internet - may be purchased for cash. Indeed some of them may be used to withdraw cash from global ATM networks. Although regulatory thresholds may attempt to limit ML/TF risks for cards issued in the European Union, large numbers of cards can still be purchased for cash below the identification thresholds to maintain anonymity. In addition, given the characteristics of electronic money distributors, identification and verification of the customer s identity can be uncertain, even over the two limits of 250 and 2,500. Moreover, there is minimal or no contact between electronic money operators on the Internet and their customers. In this environment, operators rarely know their customers and therefore find it hard to guarantee the integrity of the documents sent to prove the customer s identity. Therefore, it is possible to transfer funds anywhere in the world through this type of service without the involvement of the traditional banking system. Another specific risk arises from the use of cards issued in a non-eu country that authorises a high threshold without an identity check. This may provide a way of circumventing legislation in some Member States on the prohibition of cash payments above certain thresholds. 3 C:\Users\dalyj\AppData\Local\Microsoft\Windows\Temporary Internet
This French report also notes that the use of electronic money instruments is a hindrance to mutual legal assistance procedures because the persons concerned may have fictitious addresses or may have their computer servers hosted in countries subject to low levels of regulation. In view of the relatively small sums required to commit terrorist attacks and the anonymity of electronic money, these instruments represent a high risk in terms of terrorist financing. Both the Payment Services Directive and the Electronic Money Directive have the very laudable aims of improving competition by reducing barriers to entry. There can be little doubt that they have achieved considerable success in those objectives. However, Member States must ensure that the attendant money laundering and terrorist funding risks are adequately addressed. I have no doubt that the whole area of electronic money transmission will form a large part of the risk assessments which the new Directive will require the European supervisory authorities and Member States to carry out. A particularly welcome aspect of the new Directive is the increased emphasis which is being placed on cooperation between Financial Intelligence Units. It is hard not to be struck by the contrast between the high speed with which money launderers can transfer funds across borders and across the world and, the sometimes very cumbersome methods which different national FIUs have to use to trace them. Dealing with these challenges may require more than the Directives obligation to cooperate. Some countries have FIUs which are located within their police forces. In other cases, the FIU is an administrative unit and operates at one remove from the police. The sharing of information at any kind of reasonable speed between such differently constituted units can be a problem. Also, in some countries police may not be free to exchange information without the authority of a prosecutor. It is of course easy to call for greater speed and efficiency in the operation of 4 C:\Users\dalyj\AppData\Local\Microsoft\Windows\Temporary Internet
information exchange between FIUs much more difficult to achieve it, particularly given the often very difficult legal obstacles that may have to be overcome. Nonetheless, it is to be hoped that the Directive s emphasis on FIU cooperation will make a start in dealing with some of these difficulties. Another welcome aspect of the Directive is the formal declaration of tax crimes as a predicate offence for money laundering. Tax crimes have been treated as predicate offences for money laundering in Ireland for some time now so the change should not impose significant challenges in a direct way. However, Ireland would be anxious that with the new emphasis on tax crimes, that tax authorities that currently do not enjoy access to STR intelligence will do so in the future and that this access should be as direct as possible. The tax authorities in Ireland are probably in a unique situation in that they receive all suspicious transaction reports directly. While the prosecution of any criminal offence will always take priority, STRs have proved to be a valuable source of intelligence for our tax authorities. Direct access to suspicious transaction reports would enable the intelligence to be used actively in all countries in sourcing cases of tax and duty evasion as opposed to sitting passively in databases. Furthermore with a more direct access to the intelligence, tax administrations who receive financial intelligence from STRs that would be of interest to another country from a tax perspective would be better able to exchange the information under double taxation conventions. One of the clearest operational challenges to both police and tax authorities is the lack of transparency in some company and trust arrangements. Some jurisdictions and Ireland is one of these have placed a strong emphasis on easing the procedures for establishing new businesses. This approach carries risks and the facility it may give money launderers and other criminals can be open to criticism. The new Directive will require companies to 5 C:\Users\dalyj\AppData\Local\Microsoft\Windows\Temporary Internet
obtain and hold adequate, accurate and current information on their beneficial ownership and to make this available in a timely manner to financial institutions and others who are subject to anti-money laundering requirements. It will be important to ensure that this requirement is achieved without disproportionately increasing the financial or regulatory costs of establishing new businesses. I have no doubt that the expert working group discussions on this aspect of the Directive will be interesting. The Commission s 3 rd Money Laundering Directive application report of April 2012 raised the possibility of increasing the transparency of legal entities by using an existing legal instrument in the company law area. It would be interesting to know what consideration was given to this option. This is a brief outline of just some of the operational challenges faced by financial regulators, tax and police authorities. It will represent a major achievement if the new Directive can help to address them. Finally, ladies and gentlemen, the Irish Presidency will facilitate discussion on the upgraded Directive during the second half of its term. Already Member States have been asked for initial views on the Directive s content. Of course, much of the discussion may be familiar to those who have participated in Commission Committees where much of the groundwork for the review of the 3 rd Directive has taken place. The excellent work there will no doubt facilitate progress on the key issues within the Expert Working Groups. We will commence discussion on the Directive next month and continue the engagement through the remaining months of our Presidency. Thank you ladies and gentleman for your kind attention this afternoon. I am available to answer any questions from the floor. Thank you. 6 C:\Users\dalyj\AppData\Local\Microsoft\Windows\Temporary Internet