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The Governance of Money Laundering:

Challenges in the European Union’s Anti-Money Laundering

Framework

__________________________

Master Thesis Political Science

Political Economy

Presented to

The Faculty of Social and Behavioural Sciences

University of Amsterdam

Prof. Dr. Jonathan Zeitlin

Dr. Julian Gruin

__________________________

by

Iris van Dijk

12295825

June, 2020

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Abbreviations

AML Anti-Money Laundering

AML/CFT Anti Money Laundering and Counter Financing of Terrorism AMLD Anti-Money Laundering Directive

CA Competent Authority

CCM Classic Community Method CDD Customer Due Diligence

CFATF Caribbean Financial Action Task Force CFT Combating the Financing of Terrorism CJEU Court of Justice of the European Union COSUN Co-operating and Supporting Nation CRD V Capital Requirements Directive DDP Directly Deliberative Polyarchy

Danish FSA Danish Financial Supervisory Authority DNB Dutch Central Bank

EBA European Banking Authority

EC European Commission

EDD Enhanced Due Diligence EEA European Economic Area

EFSA Estonian Financial Supervisory Authority / Finantsinspektsioon EIOPA European Insurance and Occupational Pensions Authority ESA European Supervisory Authority

ESMA European Securities and Markets Authority

EU European Union

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2 FEC the Financial Expertise Centre

FIAU Financial Intelligence Analysis Unit FinCen Financial Crimes Enforcement Network FIOD Fiscal Intelligence and Investigation Service FSRB FATF-Style Regional Body

FUI Financial Intelligence Unit

IEEPA International Emergency Economic Powers Act ICRG International Cooperation Review Group IMF International Monetary Fund

KSA Netherlands Gambling Authority

KYC Know Your Customer

LLP Limited Liability Partnership Company LSI Less Significant Institution

MER Mutual Evaluations Report MFSA Malta Financial Services Authority

ML/FT money laundering and terrorist financing risks MLRO Money Laundering Reporting Officer

MONEVAL Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism

NCA National Competent Authority

NCCT Non-Cooperative Countries and Territories NOVA Netherlands Bar

PEP Politically Exposed Person PFTs Plausible Folk Theories

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3 RBA risk-based approach

SI Significant Institution

SNRA Supranational Risk Assessments SSM Single Supervisory Mechanism STR Suspicious Transaction Report SW The Dutch Sanctions Act 1977 TBML Trade-Based Money Laundering

UN United Nations

WTT Supervision of Trust Offices Act

WWFT The Dutch Anti-Money Laundering and Anti-Terrorist Financing Act

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Table of Contents

Abbreviations ... 1 1. Introduction ... 6 2. Literature review ... 9 3. Theoretical Framework ... 13 3.1 Hierarchical governance ... 13 3.2 Network governance ... 15 3.3 Experimentalist governance ... 16 3.4 Conclusion ... 18 4. Research design ... 19

4.1 Methodology: data collection and data analysis... 19

4.2 Ethics ... 20

4.3 Limitations ... 21

5. The institutional AML framework in governance-theoretic terms ... 23

5.1 Financial Action Task Force ... 23

5.1.2 The FATF 2012 Recommendations ... 24

5.1.3 FATF’s monitoring and enforcement ... 25

5.2 MONEYVAL ... 27

5.3 Institutional AML framework of the European Union ... 28

5.3.1 The current legal AML framework in the European Union ... 28

5.3.2 Relevant actors for the supervision of AML in the European Union ... 30

5.3.3 The prosecution of money laundering in the European Union ... 32

5.3.4 European Expert Groups ... 32

5.3.5 Recent development: The New Action Plan ... 33

5.4 A national example: The Netherlands ... 33

5.4.1 The current legal AML framework in the Netherlands ... 33

5.4.2 Relevant actors for the supervision of AML in the Netherlands ... 34

5.4.3 Networks in the Netherlands ... 36

5.5 Banks’ obligations towards AML ... 36

5.6 The AML institutional framework in governance-theoretic terms ... 39

5.6.1 Features of hierarchical governance in the institutional AML framework ... 39

5.6.2 Features of network governance in the institutional AML framework ... 40

5.6.3 Features of experimentalist governance in the institutional AML framework ... 41

5.7 Conclusions ... 42

6. Case Studies ... 44

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6.1.1 Investigations into ING NL and their findings ... 44

6.1.2 Prosecution of the case ... 46

6.2 Estonia ... 46

6.2.1 Course of events at Danske Bank before 2014 ... 47

6.2.1 Investigations into Danske Bank’s Estonian branch since 2014 and their findings ... 48

6.2.3 Criticism on the relevant NCAs and the EBA’s response ... 52

6.2.4 Recent developments in the Danske Bank case ... 53

6.3 Malta ... 53

6.3.1 Investigations into Pilatus Bank and their findings ... 53

6.3.2 Investigations into the FIAU and their findings ... 57

6.3.3 Recent developments in the case ... 58

6.4 Conclusions ... 58

7. A Synthesis of Empirical Findings and Documentary Research ... 60

7.1 The fragmentation of the regulatory AML regime ... 60

7.2 Cooperation ... 61

7.2.1 Cross-border cooperation ... 61

7.2.1 Cooperation among FIUs ... 61

7.2.2 Cooperation between prudential and AML supervisors ... 62

7.3 Weaknesses in internal controls ... 63

7.4 Skewed incentives for banks ... 64

7.5 AML statistics. ... 66

7.6 Other common challenges ... 66

7.7 Conclusion ... 67

8. The policy debate ... 68

8.1 Converting towards a mix of hierarchical and experimentalist modes of governance ... 68

9. Conclusion and recommendations ... 71

Bibliography ... 72

Appendices ... 79

I. An overview of the members of the FATF, MONEYVAL, and European Union ... 79

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1. Introduction

In recent years, Anti-Money Laundering (AML) regulation and governance has gained prominence in academic literature and in global governance. The increased attention to AML is not without reason: multiple money laundering scandals have made headlines and well-known ‘leaks’ such as the Panama Papers and Paradise Papers revealed the shortcomings of global and regional AML governance. The terrorist attacks of 11 September 2001 in the United States have also acted as an impetus for change. Since then, it has been recognised that money laundering is also tied to crimes other than drug trafficking, on which it was formerly focussed. As a result, the scope of AML governance was broadened and efforts aimed at Combating the Financing of Terrorism (CFT) have typically been paired with AML policies ever since (Kirschenbaum & Véron, 2018, pp. 1, 13).

In response to the increased attention focussed on AML and CFT, significant changes have been made in global and regional frameworks for their governance. For example, the Financial Action Task Force (FATF), an inter-governmental body that sets global AML standards, added a set of 8 recommendations addressing CFT to its original 40 AML recomme8ndations in 2001. Finally, a ninth recommendation was added in 2004 aimed at fostering international cooperation, ultimately forming the FATF’s widely-used “40+9 Recommendations” (FATF, n.d.-c). The US adopted a more aggressive approach towards AML by amending its Bank Secrecy Act in 2001 which mandates the US Financial Crimes Enforcement Network (FinCen) to actively “condition, restrict or cut off” foreign financial institutions that it considers are “of primary money laundering concern”. The US is now considered to be a competent, well-resourced AML enforcer which imposes large fines on non-compliant financial institutions (Kirschenbaum & Véron, 2018, pp. 13-14). The European Union (EU) has improved its AML framework by adopting new AML Directives from 1990 to present, in line with international developments (Mitsilegas & Gilmore, 2007, pp. 119-120). For example, in response to the Panama Papers that were revealed in 2016, the EU adopted the 5th Anti-Money Laundering Directive (AMLD) to further increase

the transparency of national beneficial ownership registers that EU Member States were required to implement with the transposition of the 4th AMLD by June 2017 (European Commission, 2019, pp.

1-2).

Despite these global and regional initiatives, the fight against money laundering and terrorist financing does not appear to be very effective. Pol (2020, p. 88) estimates that authorities intercept approximately $3 billion of an estimated $3 trillion in illicit funds generated annually, which indicates that current AML policies have a success rate of only 0.1 percent worldwide. The performance of the EU is similarly disappointing. Covering data ranging from 2014 to 2016, Europol (2017, pp. 4-5) estimates that “barely 1 percent of criminal proceeds in the European Union are ultimately confiscated

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7 by relevant authorities”, although between 0.7 and 1.28 percent of annual EU Gross Domestic Product is estimated to be involved in illicit financial activity.

With a success rate of barely one percent, it is a relevant and critical time to analyse the European AML regime by reflecting on the challenges it faces and by exploring opportunities for change. This research aims to provide an answer to the research question:

“What are the main challenges for European banks and public authorities in the implementation of the European Union’s Anti-Money Laundering legislation and how can the EU’s AML framework be improved?”

To answer this research question, the following sub-questions will be answered:

1) What is the current institutional framework for Anti-Money Laundering in the European Union? 2) How can the European Union’s institutional Anti-Money Laundering framework be understood

in governance-theoretic terms?

3) What are the main challenges for European banks and public authorities in the implementation of Anti-Money Laundering Directives?

4) How can the European Union’s Anti-Money Laundering framework be improved?

The objective of this study is to provide an insight into the challenges that hinder the effectiveness of the European AML framework and to ultimately provide policy recommendations based on the findings of this research. The scope of this research are European banks and public authorities precisely because they are the front-line actors in AML policy making, enforcement and implementation. Their successful performance is thus critical to an effective AML approach, but remains understudied (Helgesson & Mörth, 2018, p. 243). This study will synthesise different findings and views collected from documentary research, interviews and an empirical analysis of a number of recent AML scandals in order to identify these actors’ main challenges in the implementation of the European Union’s Anti-Money Laundering Directives.

The social importance of addressing money laundering is inherent to its very purpose: making illegally-gained proceeds appear legal in the financial system and successfully investing, using or withdrawing the laundered money (Kirschenbaum & Véron, 2018, p. 3). The ability to launder money thus makes corruption and other crimes profitable, such as the drugs- and arms trade, human trafficking, and other types of organised crime. Money laundering also jeopardises the integrity and stability of the financial system, hurts the development of economies of all sizes, and has negatively affected goals of financial inclusion (Tsingou, 2010, p. 627; Nance, 2018, p. 19).

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8 The following chapters will systematically answer the research question for this study. First, this research is further positioned in relation to relevant theoretical contributions and the current knowledge of this subject in the literature review. In the theoretical framework, the main characteristics and scope conditions of three contrasting governance modes are outlined which provide the basis for the empirical analysis of this research. Then, the research design is presented, followed by an analysis of three extreme cases of money laundering in the EU and an analysis of secondary data that will demonstrate the main challenges that European banks and public authorities face in the implementation of the EU’s AML legislation. The findings of this research and the theoretical framework are then used to discuss possible policy reforms for the EU’s AML framework. Lastly, a conclusion and recommendations for further research are provided.

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2. Literature review

The fight against money laundering and the financing of terrorism in the European Union has a rich history. Starting with the United Nations 1988 Convention on drug trafficking and the Council of Europe 1990 money laundering Convention, the European Community was engaged in the first developments of an international and regional AML regime. The creation of the FATF in 1989 and the presentation of its first 40 recommendations a year later mark a significant milestone in global AML standard setting. All European Community Member States (the 15 pre-2004 EU Member States) adopted these standards as members of the FATF and integrated them in the first AMLD in 1991. This directive became the first regional instrument in the European Community adopting an AML framework. Since then, the European Union has continued to revise its AMLDs and improve its AML regime in parallel with international developments (Mitsilegas & Gilmore, 2007, pp. 119-120).

Nevertheless, the European AML regime does not appear to be very effective with a success rate of barely 1 percent, and a series of money laundering scandals in the EU have put the spotlight on the structure of its AML regime (Europol, 2017, p. 4; Kirschenbaum & Véron, 2018, p. 1). Hence, the most prominent AML literature is dedicated to explanations for the ineffectiveness of the AML regime. Some scholars attribute the ineffectiveness of the AML regime to the nature of AML itself. For example, Tsingou (2010, pp. 627, 633) refers to the AML regime as being symbolic due to the inherent contradiction between global financial integration and an ‘effective’ AML regime. She argues that, for three decades at the time of writing, regulators had been promoting the view that the inclusion of “some dirty money” in the global financial system “may be an acceptable price to pay for efficient and adaptable financial markets”. Thus, the aim and practice of AML has been more political than financial in the sense that it focussed primarily on tackling crimes that lead to money laundering, such as drug trade, human trafficking and other organised crime. Little attention has been given to questions of financial governance, such as how to understand the concept of capital mobility and the free movement of money in relation to money laundering. Therefore, the aim of an AML regime could never resemble a zero-tolerance regime, and its effectiveness will remain “at best fuzzy”.

Another prominent academic critic of the nature of AML regulation is Halliday (2018, pp. 936, 948), who regards the justificatory rhetorics of AML efforts as “Plausible Folk Theories” (PFTs). He finds that neither the diagnosis, nor the solutions for AML are grounded in empirical evidence despite living in the “age of expertise”. Like Tsingou (2010), Halliday addresses the discourse behind the concept of ‘dirty money’ which implies that this money “is not good and … should be cleaned up”. However, such an understanding ignores questions about what ‘dirty’ could mean in different contexts, it narrows the scope for resources that could “ensure cleanliness”, and the fact that “one person’s dirt might be another person’s fertile soil”. As a result, the understanding of ‘dirty money’, which he refers to as the

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10 diagnosis, and the understanding of a solution that the AML regime could facilitate are where “global governance … settles for ignorance”. Thus, according to Halliday, the current AML regime cannot be more effective than a PFT that is based on ignorance, resulting in costly policies that lead to no results. The effectiveness of AML regimes has also been linked to the nature of policies and research about policy failure. For example, Rose and Copus (2020, p. 392-393), found that value-based regulations promote ethical behaviour in actors more sustainably, although compliance-based regulations might still be more effective to ensure ethical behaviour in policy areas where there is a low level of trust in the regulated to persistently behave ethically. In practice, regulations are often a mix of both approaches and the evaluation method usually depends on which approach the emphasis has been put. The nature of the regulation and its evaluation methods can thus have great effects on the ethical behaviour of actors. Especially in policy areas such as financial crimes, the ethical behaviour of operational actors can be decisive for policy failures or successes. Therefore, the type of regulation and evaluation is of vital importance to ensure integrity in the system.

According to Levi et al. (2018) and Pol (2020), AML policy making and implementation lacks the input of quantitative data that can be used to assess the effectiveness of AML interventions. Quantitative data does not have a very prominent role in current AML policy making, in part because there is not much reliable hard data available. Nevertheless, the inability to quantitatively measure the effectiveness of AML policies jeopardises the perceived legitimacy of the AML regime, and may hinder the acknowledgement of policy failure.

Doig and Levi (2020, p. 347) point to a gap between the rhetoric of current policies and strategies and the reality that implementers experience “on the ground”. Therefore, it is argued that the nature of the relationship between policy makers and implementers should become more interactive and continuous.

More specifically, Kirschenbaum and Véron (2018, p. 15) refer to the divergence in the implementation of AML legislation in EU Member States as the cause for the ineffectiveness of the European AML regime. From their perspective, the EU is trapped in an “AML vicious circle”, as the extreme divergence between Member States’ national implementation of EU AMLDs conflicts with the freedoms of the European Single Market. The weak or unsuccessful implementation of AML legislation in one Member State grants money launderers access to the entire European Single Market, effectively eroding the integrity of the whole financial system.

The findings from Levi and Doig (2019, p. 18) complement this statement. The authors argue that especially in situations of multi-level governance it is challenging to appropriately implement policies, which they conclude requires “serious management … time and cultural awareness”.

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11 Another prominent debate in the AML literature concerns the role and effectiveness of private actors in the implementation and execution of AML policies. A later study by Tsingou (2017) found that AML compliance officers have become more influential in shaping the input and output of AML governance. Compliance is a core element of AML regulations, and it is the compliance officers’ responsibility to correctly interpret AML regulations in line with the regulator’s intentions when implementing AML regulations or monitoring financial institutions. However, the fact that AML provisions leave room for interpretations allow compliance officers to engage in regulatory creep and enables them to govern the input and output of AML regulations.

Contributing to the debate about the role of banks in AML, Favarel-Garrigues et al (2011, p. 192) found that banks have assumed more responsibility in the AML regime since 2001. A new interdependence between banks and law enforcement can be observed which consists of new complex interactions that stem from the aggregation of diverse motivations and logics within the AML regime. For example, regulators and organisations can be motivated to preserve the international financial system or to combat terrorism. Private actors on the other hand, are, at the very least, motivated to comply with AML policies in order to avoid being sanctioned. But despite being forced to comply with governmental requirements which potentially conflicts with profit-driven incentives, banks are now involved in “intelligence-led policing missions” and contribute to anticipating money laundering risks and influence decisionmakers.

However, from Yeoh’s (2019, p. 1) work it can be inferred that it might be unwise to place such responsibilities on private actors such as banks. He finds that the bank’s role as a profit-driven institution and simultaneously as gatekeeper of the financial system creates diverging incentives that hinder the pursuit of both objectives. The study found that “competitive pressures, shareholders returns imperative, and lucrative misaligned incentives for management” hinder banks’ compliance with, AML legislation.

Adding to these conclusions, Helgesson and Mörth (2018) highlight the underlying assumptions about the nature of anti-money laundering and the risk-based approach that private actors ought to take in anticipation of money laundering risks. By framing crime as a risk, it is implied that these risks are knowable to private actors and passes on the responsibility of assessing what is ‘risky’ and ‘reportable’ to these actors, although faulty risk-management is also blamed on them. To conclude, it is argued private actors may be reluctant to comply with AML regulations as it may conflict with other interests and obligations which represent a tension between compliance and commerce, which Favarel-Garrigues et al (2011) and Yeoh (2019) have also pointed out.

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12 The recently increased attention upon these debates has provided a growing number of unique insights into the effectiveness of the European AML regime, the nature of AML and the effectiveness of its policies. However, none of these studies address the weaknesses of the European AML regime in relation to both public and private actors, or a stock-take of the governance modes that can be identified from the current EU institutional AML framework. This study aims to fill this gap in the literature and contribute to the debate about the effectiveness of the European AML regime by providing an insight into the governance modes that are currently used in the European institutional AML framework, the main challenges that public authorities and banks face in the implementation of AML legislations, and, drawing on these findings, discussing possible policy reforms that improve the European AML framework.

In the next chapter, the main characteristics and scope conditions for three contrasting modes of governance are outlined, which will provide the basis to analyse the current institutional AML framework of the European Union in governance-theoretic terms. To identify the main challenges public authorities and banks face in the implementation of AML legislation in the EU, three extreme cases of money laundering in the EU are analysed and complemented by interviews and an analysis of secondary data. The findings of this research are then used to discuss possible policy reforms for the EU’s AML framework.

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3. Theoretical Framework

The theoretical framework of this research consists of three contrasting governance modes that will serve as an analytical framework for this study. Each of these governance modes are characterised by different assumptions about hierarchy, the nature of policies, and enforcement. In this chapter, the main characteristics and scope conditions for each governance mode are explained as well as the debates that are inherent to each of these governance modes. Identifying the scope conditions for these three types of governance will provide useful indicators that will assist in analysing the current institutional AML framework from the FATF to local bank’s policies.

3.1 Hierarchical governance

For the past decades, there has been an ongoing debate concerning the evolution of new modes of governance. Craig and de Búrca (2015, p. 163) describe the evolution that is discussed in this debate as “a move away from hierarchical governing towards more flexible forms of governance”, or what Kohler-Koch and Rittberger (2006, p. 27) have dubbed the “governance turn”, referring to the same evolution of differing governance modes and their corresponding processes, instruments, and actors. The development of this debate has contributed significantly to the understanding of ‘governance’ in general and in relation to specific regions or policy issues, and to the relative operational importance of certain governance modes and characteristics in practice. As Craig and de Búrca (2015, p. 163) remark additionally, the growing size and complexity of this debate could “mean that there has been recognition of the inadequacy of past practice, and [that] even a change in rhetoric can lead to substantive change”.

In context of the shift in EU governance “from hierarchical governing towards more flexible forms of governance” (Craig and de Búrca, 2015, p. 163-4), hierarchical governance can be seen as a more traditional mode of governance in comparison to the recently observed “new” or “alternative” modes of governance that have surged in and beyond the EU. The main characteristics of hierarchical governance are that policies are established “top-down”, thus coming from “above” or the centre, policies are quite prescriptive and therefore allow little room for interpretation, and are usually binding for “those to whom they apply”. Referring to the control and stringency imposed on ‘the regulated’, these hierarchical types of regulation are commonly referred to as “command-and-control-type regulation”.

Each of these characteristics generate advantages and disadvantages, inherently limiting the effectiveness of hierarchical governance. To explore the limits of hierarchical governance, Héritier and Lehmkuhl (2008, p. 5-6) use principal-agent theory based on the assumption of bounded rationality, meaning that actors are not all-knowing and could therefore make decisions that are ‘not perfect’ and may conflict with the actors’ self-interest.

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14 In the EU, the effectiveness of hierarchical governance is limited as the principal (the EU) has multiple agents to instruct and control (the national administrative authorities). Firstly, between principals and agents there exists the tendency to both serve their self-interest to the greatest extent possible. Although under “command-and-control-type” of regulations, agents will seek to pursue their self-interests which can result in little divergences from the principal’s presumed plan. The principal will seek to minimise this “agency drift”, in order to maintain its legitimacy as regulator (Sabel & Zeitlin, 2008, p. 304). Consequently, the principal needs to have an adequate oversight of the policy area, the issue at hand, and how to effectively address it in order to anticipate agency drift. Usually, the principal can incentivise its agents to follow its instructions and minimise agency drift by fixing efficient rewards. However, this entails that the principal needs to know how to incentivise its agents (ibid., p. 304). Secondly, referring to the principals’ bounded rationality, the principal “is presumed to have only a vague or provisional idea of its own goals” (Sabel & Zeitlin, 2008, p. 304). It is therefore possible that the agent, in pursuing its self-interest under the principals regulation, reveals possibilities that the principal had not anticipated. As Sabel and Zeitlin (2008, p. 304) put it, “the principal can sometimes learn from the agents”.

This presents the first scope condition that is necessary to effectively use hierarchical governance: strategic certainty. If strategic certainty is present, “actors are convinced that they know how to pursue their ends” (Rangoni, 2019, p. 68), and principals would have the necessary information to effectively instruct their agents. Conversely, strategic uncertainty entails that principals will have less control over their agents. Such situations may occur, for example, in policy areas with high technological complexity, or if there are multiple principals that each pursue different interests, imposing contradicting goals on the agent (Héritier & Lehmkuhl, 2008, p. 6).

The second scope condition for hierarchical governance is the “monopoly of central institutional actors” (Craig & de Búrca, 2015, p. 166). In terms of the principal-agent theory, this means that the principal is dominant and has the capacity to “impose outcomes rather than pursue them cooperatively with others” (Sabel & Zeitlin, 2012b, p. 412, as cited in Rangoni, 2019, p. 69). This scope condition also concerns the principal’s capacity to enforce the implementation of its decisions. Craig and de Búrca (2015, p. 164) refer to the “Classic Community Method” (CCM) of law-making in the EU as an example: before the Lisbon Treaty, the European Commission had the “almost exclusive right of initiative, leading to the adoption of legislation by the Council and Parliament, resulting in a binding uniform rule that is subject to the jurisdiction of the CJEU [Court of Justice of the European Union]”. In this example, the monopoly of central institutional actors can be recognised, imposing uniform rule top-down, with the ability to enforce these rules by means of the CJEU.

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3.2 Network governance

At the end of the cold war, Kohler-Koch and Rittberger (2006, p. 31) found that hierarchical modes of governance were “gradually abandoned in favour of concepts that are open to more co-operative forms of governing”. One of these new forms of governance is network governance.

Network governance is characterised by the horizontal distribution of power amongst actors, which entails the growing importance of private actors, and the construction of issue-specific constituencies as a result of a more problem-solving orientation instead of utility-maximisation. Networks in transnational or regional contexts are also characterised by its multi-level nature of governance, although this is not necessarily the case for networks within the nation-state (ibid., pp. 30, 34-5). Part of the governance turn was the changing principle that politics were no longer used to serve certain interests, but for the public good (Kohler-Koch & Rittberger, 2006, pp. 30, 34-35). This new problem-solving focus led to the creation of issue-specific constituencies that involved “bringing together the relevant state and societal actors”. Through the cooperation of actors on different levels, thereby sharing the “control over many activities that take place in their respective territories”, a greater interdependency between actors had materialised which, in turn, reinforces incentives for cooperation. The state, or central institutional actors, became the “activator” in network governance rather than imposing ‘command-and-control regulation’ on society.

As with hierarchical governance, network governance can only function properly if certain scope conditions are met. The first scope condition is “mutual dependence” (Torfing, 2012, p. 3). Although actors might have diverging interests, and participation in networks is voluntary, mutual dependence serves as an incentive for actors to cooperate if they recognise that other actors have a certain power over them as a result of the interdependence stated above. This cooperation can take the form of sharing “information, knowledge, and ideas; coordinate their actions in order to enhance efficiency; or collaborate in order to find joint solutions to problems and challenges that are deemed relevant and important” (ibid., p. 3).

The second scope condition for network governance is that the network has to “contribute to the production of public regulation in the broad sense of common values, standards, scenarios, plans, regulation, and concrete decisions” (Torfing, 2012, p. 4). Although each of the actors may be involved in the network for different interests, as a governance network they should pursue a broad consensus of goals and shared values and be involved in governance.

Another important scope condition to note is the even distribution of power within the network. The actors involved in the network may have “different resources and different structural positions in the network that create asymmetrical power relations”. However, contrasting to hierarchical governance

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16 where power is distributed vertically, in network governance power is distributed horizontally so that “that no one actor has the power and authority to resolve, single-handedly, the disputes that emerge in the network” (Torfing, 2012, p. 3).

However, there are important nuances to note about network governance and the observed shift from hierarchical governance to new modes of governance. Network governance can be performed in or

with networks. For example, decision-making in the EU is still executed by central institutional actors

following hierarchical modes of governance. Networks are often involved in implementing the policies and agenda-setting in the EU. Thus, the EU does not govern in networks but it governs with networks (Kohler-Koch & Rittberger, 2006, p. 36). It should also be noted that the ‘governance turn’ does not imply the disappearance of hierarchical governance and a complete conversion to new modes of governance. Instead, the shift implies that the characteristics of governance have shifted more towards those from other forms of governance, which should be analysed in terms of degrees instead of absolute terms. Overall, it could then be argued that a shift has occurred in the generally preferred mode of governance (Craig & de Búrca, 2015, p. 165).

3.3 Experimentalist governance

Sabel and Zeitlin (2012a, p. 169) observed the emergence of experimentalist governance as a result of “far-reaching transformations in the nature of contemporary governance … within and beyond the nation-state”. They define experimentalist governance as “a recursive process of provisional goal-setting and revision based on learning from the comparison of alternative approaches to advancing them in different contexts”.

The main elements of this recursive process are to set provisional “broad framework goals” and metrics that should be used to measure if these goals are achieved. Important to note is that these broad framework goals are not prescriptive. Instead, those to whom the framework goals apply, or what Sabel and Zeitlin (2012a, p. 170) refer to as “local units”, are given the discretion to achieve these goals in the way they prefer. Local units are typically private actors or territorial authorities such as EU Member States. In order to monitor the progress of these actors, they have to “report regularly on their performance and participate in a peer review in which their results are compared with those of others employing different means to the same ends”. If it appears that their efforts are less successful towards achieving the goals than anticipated, the actors are expected to take corrective measures, taking into consideration the experience of their peers. Finally, “the goals, metrics, and decision-making procedures themselves are periodically revised by a widening circle of actors in response to the problems and possibilities revealed by the review process, and the cycle repeats”.

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17 One of the underlying transformations in the nature of governance that Sabel and Zeitlin (2012a, pp. 169-170) referred to is a philosophical change. This mode of governance is receptive to self-criticism, even to the extent as to question its basic assumptions and practices, which is incorporated in the recursive process. This philosophy distinguishes experimentalist governance from hierarchical and network governance: if the assumptions and practices on which regulators or networks based their policies would be subject to scrutiny, their legitimacy as principal or problem-solving entity would be undermined.

The other is that experimentalist governance can be considered as a “directly deliberative polyarchy” (DDP). It is ‘deliberative’ because settled practices such as group, institutional, and national interests are subject to reconsideration by use of argument. It is ‘directly deliberative’ because concrete experiences of different actors are compared to each other in order to generate new possibilities to the same problem. It is polyarchic due to the absence of a central, final authority and thus different actors are involved in the process of learning, disciplining, and goal-setting for one another (Sabel & Zeitlin, 2012a, p. 170).

Three scope conditions can be identified that make experimentalist governance possible. Most presentations of experimentalist governance include at least strategic uncertainty and a multi-polar or polyarchic distribution of power as scope conditions, which can be considered as opposites to the scope conditions that are necessary for hierarchical governance. It is important to note, as Rangoni (2019, pp. 68-69) states, that these scope conditions are “jointly necessary but not sufficient … for the emergence of experimentalist governance”. Finally, de Búrca et al (2013, p. 726) add a third scope condition, namely complex interdependence.

Strategic uncertainty refers to the situation where “neither the official decision-maker nor primary actors know what their precise goals should be and how to achieve them” (Rangoni, 2019, p. 68). In a situation of strategic uncertainty, experimentalist governance offers the opportunity for regulators and primary actors to jointly find a solution, adjusting the recursive process to the policy issue and the relevant actors involved. In practice, strategic uncertainty can best be measured by “the specificity of key actors’ preferences about how to achieve policy goals” as empirical cases are not likely to demonstrate either complete strategic certainty or uncertainty.

The multi-polar or polyarchic distribution of power is a situation “in which no single actor has the capacity to impose her own preferred solution without taking into account the views of the others” (Sabel & Zeitlin, 2008, p. 280). Experimentalist governance is a cooperative mode of governance which process was designed to learn from diversity (Sabel & Zeitlin, 2012a, p. 175). In such collaborations, it is important to ensure that the preferences of all actors are represented to sustain legitimacy.

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18 Complex interdependence is marked by a situation where state and non-state actors are vulnerable to the actions of others. However, in complex interdependence, which distinguishes this scope condition from that of mutual dependence in network governance, is that the mutual dependence may be asymmetrical. As de Búrca et al (2013, p. 726) state:

“There are multiple state and non-state actors, linked by multiple channels of contact. Direct force is not a usable instrument of power. There is no overarching international constitutional framework with institutionalized hierarchical relations between governance units or courts. There are areas of agreed authority, but on many issues authority is overlapping, contested and fluid; and there is no necessary teleological movement toward greater integration or formal constitutionalisation”

Experimentalist governance provides an outcome in situations of complex interdependence where continued discord is costly to all participants (de Búrca, et al., 2013, p. 726).

3.4 Conclusion

In this chapter, the main characteristics and the scope conditions of three governance modes are outlined and conceptualised. The descriptions of each mode of governance will assist in identifying what modes of governance are currently used in the institutional AML framework. Later in the thesis, the main challenges of banks and public authorities in implementing EU AML legislation are identified which will provide a basis to indicate which of the above-mentioned scope conditions are present in the current AML regime of the EU. Table 1 presents an overview of the scope conditions per governance mode.

Table 1 The scope conditions of hierarchical governance, network governance and experimentalist governance Scope

conditions

Hierarchical governance Network governance Experimentalist governance

Strategic certainty Mutual dependence Strategic uncertainty Monopoly of

institutional actors Even distribution of power within the network Polyarchic distribution of power A broad consensus of goals and

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19

4. Research design

In order to provide an answer to the research question, “what are the main challenges for European banks and public authorities in the implementation of the European Union’s Anti-Money Laundering legislation and how can the EU’s AML framework be improved?”, several methods were used. In this chapter, the methodology, ethical considerations and the limitations of this research are presented. This research has both a descriptive and explorative character. The descriptive character of the research aims to accurately and systematically identify the characteristics of the current institutional AML framework of the EU in governance-theoretic terms. The explorative character of this research presents itself by seeking to identify what the main challenges of banks and public authorities are in the implementation of EU AML legislation. This research is based on qualitative methods, using primary and secondary data.

4.1 Methodology: data collection and data analysis

Prior to the empirical analysis, desk research was conducted in order to gain an understanding of governance theories and anti-money laundering, as well as to take stock of the current knowledge around this subject. The knowledge obtained from this preliminary research formed the basis for the literature review and the theoretical framework. The sources used in this preliminary research were mainly academic articles.

To describe the current institutional AML framework from the FATF to local bank’s policies, and to outline the three cases that were used in the empirical analysis, secondary data obtained from documentary research was used. Documentary research also provided valuable insights into the main challenges of banks and public authorities in the implementation of EU AML legislation, which complemented the case study analysis. The documents involved in the research consisted mainly of official publications by various relevant governmental and organisational actors, as well as media publications.

Then, a case study analysis was conducted. The analysis was case-oriented, meaning it “aims at rich descriptions of a few instances of a certain phenomenon” (Della Porta, 2008, p. 198). Three extreme cases were selected for this analysis on the basis that they were recent accounts of money laundering in the EU where large amounts of laundered money were involved. According to Flyvbjerg (2011, p. 306), extreme cases “often reveal more information because they activate more actors and more basic mechanisms in the situation studied”, which was considered useful in this descriptive and explorative research. The selected cases all have gotten substantive attention in the media which improved access to information. The findings of this analysis indicated the challenges that banks and public authorities

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20 had faced to comply with EU AML legislation. To provide a more complete overview of these challenges, the findings were complemented with the documentary research mentioned in the paragraph above. Finally, three semi-structured expert interviews were conducted. These interviews were aimed at identifying the main challenges of banks and public authorities in the implementation of EU AML legislation. Expert interviews were considered to be suitable for this research as such interviews provide “specific information from individuals with specialized knowledge or expertise on a particular issue” (Halperin & Heath, 2017, p. 275). Semi-structuring the interviews allowed the interviewer to prepare questions that serve as an interview guide, as well as to follow up on leads from the interviewee. Each interview was recorded to ensure that any useful information could be interpreted accurately and lasted approximately 1 to 1.5 hour.

The interviewees were experts from three different institutions: a Policy Expert from the European Banking Authority (EBA), the Head of Department of Financial Crimes at the Dutch Central Bank (DNB), and a Compliance Expert with more than 20 years of working experience at different financial institutions in the EU, including one of the Netherland’s biggest banks. They were selected with purposive sampling which is a method where “investigators using their own ‘expert’ judgement to select respondents whom they consider to be typical or representative of the population of interest” (Halperin & Heath, 2017, p. 246). In this case, the interviewees were selected based on an expectation of their knowledge.

It was attempted to arrange more interviews, for example with Commission officials and multiple other banks. However, due to the sensitivity of the topic and the global outbreak of COVID-19, it was not possible to realise more interviews.

4.2 Ethics

To ensure voluntary participation, informed consent, and the privacy of the interviewees in this research, the respondents were notified in advance that the interview would be recorded. With all three interviews, it was agreed that the recordings would not be shared with thirds and would be deleted after the research was concluded. To accommodate the preferences of the interviewees with regard to anonymity, nothing more than their job title and relevant institution is mentioned.

Another important factor to consider was that the information disclosed during the interviews may be of sensitive nature. Therefore, in accordance with the respondents’ preferences, member checks were conducted. The essence of member checks is further explained in the paragraph below. Moreover, high priorities were assigned to building rapport with the interviewees to make them feel comfortable throughout the whole interview. Rapport was attained, amongst others, by ensuring their privacy and

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21 informed consent to mitigate the risks of potential harm to the participants and by developing mutual trust: the research and interview objectives were clear to each interviewee as to not deceive them.

4.3 Limitations

To evaluate the limitations of this research, the widely known “trustworthiness criteria” for interpretive research from Guba and Lincoln (1989) are used. In the paragraphs below, the credibility, dependability, transferability, and confirmability of this research are discussed and, where applicable, what measures have been taken to improve the research.

Credibility addresses the isomorphism “between the constructed realities of respondents … and those realities as represented by the evaluator and attributed to various stakeholders” (Guba & Lincoln, 1989, p. 237). Thus, in this research it is important that the information obtained through interviews is interpreted in accordance with respondent’s intention by providing that information. To ensure that the interviews were represented credibly in this research, member checks were performed where the respondent confirms if the researcher has correctly extracted the meaning of any piece of information from the interview (pp. 237-239). However, only one of the three respondents preferred to engage in member checks which substantively decreases the credible potential of this research.

Triangulation has also been used as a method in this research to increase credibility. It is important to note that triangulation and member checks differ from each other. Triangulation means that information can be cross-checked with other sources to confirm factual information, making it a suitable method for positivist research as well. Member checks are meant to verify the constructions, or perceived realities of respondents. Nevertheless, much information provided in the interviews was factual and could therefore be triangulated with secondary data, and vice versa.

The transferability of this research, which is the parallel criteria to external validity or generalisation in positivist research, is not very high. Since this research has a descriptive and explorative nature, the conditions of this research are not very detailed. The contents and analytical research area of this study will thus remain more factual and holistic.

Dependability concerns “the stability of the data over time” (Guba & Lincoln, 1989, p. 242). Several methodological changes were made to this research over the course of half a year. For example, due to the outbreak of COVID-19 and the resulting social lock-down in many areas of the world, a lower response rate to interviews was to be anticipated. As a result, the collection of data relied more on documentary research, subsequently adjusting the methodology to fewer input of primary data. Finally, it was decided to complement the primary data collected through interviews and the findings of the case study analysis with a documentary research in order to provide an answer to the question “What

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22 are the main challenges for European banks and public authorities in the implementation of Anti-Money Laundering Directives?”

Confirmability is the assurance “that data, interpretations, and outcomes of inquiries are rooted in contexts and persons … and are not simply figments of the evaluator’s imagination” (Guba & Lincoln, 1989, p. 243). By using scope conditions and main characteristics that were derived from governance theories, this research attempted to assure that the analysis of the current institutional AML framework of the EU remained confirmable. The triangulation of information has also contributed to the confirmability of this study.

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5. The institutional AML framework in governance-theoretic terms

In this chapter, the institutional AML framework is analysed from the global to the local level. First, the institutional framework of the Financial Action Task Force (FATF) and the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) are described. The FATF is an intergovernmental body that sets global AML standards, to which MONEYVAL acts as an associate organisation. These frameworks have formed the basis for the European Union’s institutional framework for AML and are therefore described before the institutional AML framework of the EU is presented. Then, the institutional AML framework of the Netherlands is outlined to illustrate how an EU Member State may implement the EU’s AMLDs into their national law. Subsequently, it will be detailed what banks’ obligations are with respect to AML in the European Union. Finally, it will be identified which governance modes can be recognised in the institutional AML framework.

5.1 Financial Action Task Force

The FATF is an intergovernmental body that was created during the G7 Summit in Paris in 1989 and is mandated “to set standards and to promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and the financing of proliferation, and other related threats to the integrity of the international financial system” (FATF, 2019a, p. 6). Shortly after its creation, the FATF introduced 40 recommendations on to combat money laundering. Initially, the scope of the FATF was to combat money laundering that was linked to illegal drugs trade. Over the years, the scope and recommendations of the FATF have evolved and now comprise of 49 recommendations that span far beyond the scope of drug money. The recommendations set by the FATF (2019a, p.6) address multiple goals, namely to:

“identify the risks, and develop policies and domestic coordination; pursue money laundering, terrorist financing and the financing of proliferation; apply preventive measures for the financial sector and other designated sectors; establish powers and responsibilities for the competent authorities (e.g., investigative, law enforcement and supervisory authorities) and other institutional measures; enhance the transparency and availability of beneficial ownership information of legal persons and arrangements; and facilitate international cooperation”

To date, the FATF has 35 member countries of which 14 are EU member states (FATF, n.d.-a). The other 13 EU Member States are members of MONEYVAL (Council of Europe, n.d.-b). The International Monetary Fund (IMF), the World Bank and the United Nations are amongst others to act as observer organisations to the FATF (FATF, 2019b, p. 6). Although membership at the FATF is voluntary, and its recommendations are not legally binding, the FATF has installed mechanisms to monitor and enforce

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24 the compliance of its members. The Plenary is the decision-making body of the FATF, consisting of representatives from FATF’s and FATF-Style Regional Bodies’ (FSRBs) member countries. The plenary meetings are held three times a year, in February, June and October, to discuss the evaluations, to update policies, guidance and best practices, and to review new and evolving threats to the financial system (FATF, 2019a, p. 25). In the paragraphs below, the recommendations, monitoring and enforcement is explained.

5.1.2 The FATF 2012 Recommendations

The FATF 2012 Recommendations, commonly referred to as the “40+9 Recommendations” or the “revised FATF Recommendations”, provide guidelines for the establishment of national AML supervisors, Financial Intelligence Units (FIUs), and guidelines for law enforcement and investigative authorities (FATF, 2019a, p. 6). This set of recommendations is a revision of the recommendations that the FATF had established from 1990 to 2004, aggregating them into one coherent entity (FATF, n.d.-c). In Recommendation 26 it is stipulated that countries have to ensure that financial institutions are subject to adequate AML regulations and that the FATF Recommendations are implemented correctly. National AML supervisors are expected to supervise and monitor if financial institutions comply with AML regulations. AML supervisors should also have the authority to conduct inspections, require any information from a financial institution necessary to assess compliance, and to impose sanctions on the financial institution if it fails to comply. In accordance with Recommendation 35, the range of sanctions should be “effective, proportionate and dissuasive sanctions, whether criminal, civil or administrative” (FATF, 2019a, p. 24) and can be put on the financial institution itself, or their directors and senior management (ibid., pp. 21-4).

Recommendation 29 specifies that each country should establish a FIU that serves to collect, analyse and disseminate the unusual transactions reports that are submitted by financial institutions. Conforming with Recommendation 20, national law should require financial institutions to report suspicions to the FIU if it is believed that funds originate from criminal activity or the financing of terrorism. The FIU should be able to “obtain additional information from reporting entities” and have access “on a timely basis to the financial, administrative and law enforcement information” that is necessary to function properly (FATF, 2019a, pp. 17, 22). Each FIU is part of the Egmont Group, which is a global body dedicated to supporting the activities of AML supervisors and law enforcement agencies. Within this group, financial intelligence is shared amongst FIUs either proactively or upon request (Kirschenbaum & Véron, 2018, p. 5).

Similar to FIUs, law enforcement and investigative authorities should be able to obtain “all necessary documents and information for use in … investigations, and in prosecutions and related actions” (FATF,

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25 2019a, p. 23). Recommendation 31 also states that such authorities should have the power to “use compulsory measures” to obtain necessary records held by financial institutions and other natural or legal persons, to search persons and premises, to take witness statements and to seize and obtain evidence. Countries should provide law enforcement and investigative authorities with investigative techniques that include “undercover operations, intercepting communications, accessing computer systems and controlled delivery” (FATF, 2019a, p. 23).

Finally, the FATF also creates a “black list” and a “grey list” of countries that are “high-risk jurisdictions” or “jurisdictions under increased monitoring”, respectively. Countries on the black list demonstrate significant deficiencies in their AML regimes to counter money laundering, terrorist financing and the financing of proliferation. Therefore, the FATF urges all its (affiliate) members to conduct Enhanced Due Diligence (EDD), which is a more elaborate client research than Customer Due Diligence (CDD), or to apply counter-measures to protect the financial system from risks emanating from the listed country. Countries on the grey list are actively working on the deficiencies in their AML regime, and FATF and FSRBs continue to work with the listed jurisdictions. EDD does not have to be applied, but countries are encouraged to take the listing into consideration in their risk analysis (FATF, 2020a; FATF, 2020b).

5.1.3 FATF’s monitoring and enforcement

The first monitoring mechanism the FATF established was a self-assessment process that was introduced a year after its first recommendations were created. During the self-assessment, member countries evaluated their implementation of the recommendations, reporting on the “laws and regulations it had adopted, and the operational structures it had put in place, such as the creation of a financial intelligence unit” (FATF, 2019a, p. 51). Although these assessments provided useful information on member countries’ implementation of recommendations, in 1991 a different method of assessment was introduced, namely, the mutual evaluation process. In this process, a team of experts from FATF member countries review another country’s implementation of FATF recommendations. These peer reviews were favoured as opposed to the self-assessments because they provide an independent and unbiased analysis. Additionally, the involvement of ‘peers’ in evaluation processes stimulated member countries’ correct implementation of FATF recommendations (ibid., p. 51).

By time of the third round of mutual evaluations in early 2000, the assessments indicated that most countries had successfully introduced FATF’s recommendations into their national laws. However, it also became apparent that many countries has taken a “tick-off-the-box” approach and failed to consider “whether their actions delivered the expected results” (FATF, 2019a, p. 52). To optimise the effectiveness of member countries’ AML framework, a new assessment methodology was published in 2013. The new methodology for mutual evaluations, while maintaining the peer reviews as a central

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26 feature in the assessment process, adopted a “two-pronged approach”: assessing technical compliance and effectiveness (ibid., p. 53).

The assessment of technical compliance relates to the legal framework of a country and requires laws, regulations and other legal instruments used to combat money laundering or the financing of terrorism to be in place. Effectiveness is measured during a country visit where the host country has to demonstrate that its AML measures are working effectively. Such measures have to correspond with the level of risk that the country is exposed to, which entails that the initial risk assessment of the country should also be adequate (FATF, n.d.-e). The effectiveness of AML policies is measured against a benchmark that FATF established, the 11 Immediate Outcomes (see Appendix 2). The findings of the assessments, as well as feedback for the evaluated country on how to move forward, are published in a Mutual Evaluations Report (MER) (FATF, 2019a, p. 53).

After completion of the mutual evaluation, which takes up to 14 months, a robust follow-up process starts where the evaluated country has to report regularly on its progress and will be expected to have addressed most, if not all, technical compliance deficiencies that are identified in the MER. After five years, a follow-up assessment is conducted by the FATF to examine how the country has improved (FATF, n.d.-e). The results of each mutual evaluation are also discussed in the Plenary. Since the creation of the common methodology in 2013, “mutual evaluations are now generally conducted by regional FATF groupings, the International Financial Institutions, or some other international organization” (Nance, 2018, p. 9). The FATF is now in its fourth round of evaluations (FATF, 2019c). Besides mutual evaluations, the FATF also organises typology exercises where money laundering experts “exchange information on any on-going cases and operations; … identify and describe current trends in money laundering … [and] any effective countermeasures, as well as any failed attempts” (Nance, 2018, p. 9).

Finally, to enforce compliance, the FATF used to manage a blacklist of non-cooperative jurisdictions known as the Non-Cooperative Countries and Territories (NCCT) process. The FATF would call on all other member countries to take countermeasures against the listed countries so that the risks emanating from these jurisdictions would be mitigated. Although it was noticed that listed countries would quickly change their laws in order to comply with the FATF, this coercive stance was soon replaced by a different process of enforcement (Nance & Cottrell, 2014, p. 291). The NCCT was replaced with the International Cooperation Review Group (ICRG) in 2007. With this new method, if the mutual evaluation of a member country proves that the country’s AML efforts are insufficient, the ICGR will review the report again. If officials choose to do so, the report sent to the ECGR will include comments from the evaluated country. Then, if the ICGR also condemns the country’s AML efforts as

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27 insufficient, the country will be monitored more closely by the FATF and is expected to develop a comprehensive reform plan with high-level political commitment in cooperation with other FATF members (Nance, 2018, p. 9).

As a result, the FATF now maintains a black list only for jurisdictions that are seriously deficient and demonstrate no progress towards reforms (Nance, 2018, p. 9), and a so-called “grey list” for countries that are under increased monitoring but are actively working on the deficiencies in their AML regime. With regard to blacklisted jurisdictions, the FATF also still urges its members, as well as the members of FSRBs and other affiliates, to take extra measures to protect the financial system from risks emanating from such countries. Extra measures are for example to conduct EDD, which is a more elaborate client research than CDD that financial institutions should undertake before engaging in a business relation. For greylisted jurisdictions, members are only encouraged to take the listing into consideration in their risk analysis (FATF, 2020a; FATF, 2020b).

5.2 MONEYVAL

MONEYVAL is one of eight FSRBs in the global network of AML/CFT assessment bodies. As an FSRB, MONEYVAL cooperates closely with the FATF and other FSRBs but is autonomous and independent from the FATF. MONEYVAL is the AML monitoring body of the Council of Europe and reports directly to the Committee of Ministers (Council of Europe, n.d.-c). The jurisdictions that MONEYVAL evaluates are the “Member States of the Council of Europe that are not members of the FATF … and Member States of the Council of Europe that become members of the FATF and request to continue to be evaluated by MONEYVAL”, amounting to 28 members of which 13 are EU Member States. In addition, four Non-member States of the Council of Europe are evaluated by MONEYVAL (Council of Europe, n.d.-b).

The task of MONEYVAL is to ensure that its members comply with FATF’s standards, and to assess the effectiveness of their implementation. MONEYVAL can also issue recommendations to national authorities with regard to their response to national AML risks, be it an on-going case or the implementation of policies (Council of Europe, n.d.-c; Council of Europe, n.d.-b). The evaluation procedures performed by MONEYVAL are based on the 2013 Methodology for Assessing Compliance

with the FATF Recommendations and the Effectiveness of AML/CFT Systems, which resembles FATF’s

evaluation process as described in the paragraphs above (Council of Europe, n.d.-e). Besides the global standards set by FATF, MONEYVAL also assesses compliance with regional AML standards and EU legislations on AML/CFT. MONEYVAL is now in its fifth round of evaluations, lasting from 2015 to 2021 (Council of Europe, n.d.-d).

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5.3 Institutional AML framework of the European Union

As stated in the literature review, the EU has been involved in the first developments of an international and regional AML regime. In 1991, the European Union integrated the FATF’s Recommendations into the first AMLD. This directive became the first regional instrument in the European Community adopting an AML framework. Since then, the European Union has continued to revise its Anti-Money Laundering Directives and improve its AML regime in parallel with FATF standards (Mitsilegas & Gilmore, 2007, pp. 119-120).

The policy makers of the EU’s AML framework are the European Commission (EC) that proposes new laws, and the Council and the European Parliament whom act as legislators that amend and pass laws for the EU. Today’s AML regulatory framework of the EU rests mainly upon the 4th and the 5th AMLD,

transposed by June 2017 and January 2020, respectively. These are the first Directives that were based on the revised FATF Recommendations published on 16 February 2012. Therefore, the most important elements of these Recommendations that have been detailed in the subchapter above, such as the RBA, CDD measures, and the inclusion of PEPs into AML procedures, are also included in the EU’s regulatory framework.

5.3.1 The current legal AML framework in the European Union

The 4th and the 5th AML Directive have brought about several significant changes. The 4th AMLD has

brought new focus to risk assessments and introduced the collection of beneficial ownership information. The 5th AMLD updates and improves the 4th AMLD, for example by including crypto

currencies to the scope of AML policies.

Article 6 of the 4th AMLD addresses risk assessments, and stipulates that the Commission should

conduct SNRAs every two years to identify potential AML/CFT risks in the European Single Market. Article 7 states that Member States should also conduct risk assessments to “identify, assess, understand and mitigate the risks of money laundering and terrorist financing” (European Parliament and Council Directive (EU) 2015/849, 2015, p. 17). In addition, each Member State should assign a National Competent Authority (NCA) that coordinates the national response to money laundering and terrorist financing risks and an FIU as required by FATF’s recommendations (ibid., p. 17, 26). Lastly, article 8 requires financial institutions to conduct risk assessments which includes:

“the development of internal policies, controls and procedures, including model risk management practices, customer due diligence, reporting, record-keeping, internal control, compliance management including, where appropriate with regard to the size and nature of the business, the appointment of a compliance officer at management level, and employee screening” (European Parliament and Council Directive (EU) 2015/849, 2015, p. 18)

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29 Articles 10 to 14 address provisions with regard to CDD. Financial institutions must conduct CDD before establishing a business relationship, when carrying out an occasional transaction of 15.000 euro or more, when a person trading goods receives a payment of 10.000 euro or more, or when a fund transfer exceed 1.000 euro, when there are suspicions of money laundering or terrorist financing and when there are doubts about the veracity or adequacy of previously obtained customer identification data. CDD measures must consist of: identifying the customer and the beneficial owner and verifying the person’s identity until the financial institution is confident that it knows the customer or beneficial owner; assessing the intended nature of the business relationship; and conducting ongoing transaction monitoring to ensure that the customer’s transaction behaviour is consistent with its (previously assessed) risk profile (European Parliament and Council Directive (EU) 2015/849, 2015, pp. 2, 19-20). The 4th AMLD has also established ‘simplified’ customer due diligence and ‘enhanced’ customer due

diligence. If the financial institution assesses a low degree of risk, the Member State may allow financial institutions to apply simplified CDD measures. Conversely, when a higher degree of risk is identified, financial institutions must conduct EDD measures. In this case, financial institutions should examine the background and purpose of the unusual transactions, patterns, or profiles and monitor the business relationship more closely and intensively to determine if the transactions are suspicious (European Parliament and Council Directive (EU) 2015/849, 2015, p. 22).

Furthermore, Member States have to “ensure that corporate and other legal entities incorporated within their territory are required to obtain and hold adequate, accurate and current information on their beneficial ownership, including the details of the beneficial interests held” (European Parliament and Council Directive (EU) 2015/849, 2015, p. 24). This information has to be accessible in a timely manner by competent authorities and FIUs, and should be held in a national central register. Exemptions to this rule are only granted if the beneficial owner would be exposed to the risk of “fraud, kidnapping, blackmail, violence or intimidation, or where the beneficial owner is a minor or otherwise incapable” (ibid., p. 25). This exemption does not apply to politically exposed persons. Any fees charged to obtain the beneficial owner information may not exceed the administrative costs (ibid., p. 25). Articles 58 to 62 detail what kind of sanctions may be imposed in case of a breach of national or Union law. Sanctions should be “effective, proportionate and dissuasive”, can be criminal or administrative sanctions, and can be applied to members of management or those responsible for the breach. More precisely, sanctions could be a public statement that identifies the nature of the breach and the legal person, an order to stop the legal person from conduct, a withdrawal or suspension of authorisation, temporarily banning the person responsible from exercising managerial functions in financial institutions, or impose an administrative sanction “of at least twice the amount of the benefit derived

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