European anti-money-laundering reform

An in-depth conversation with Stephen Rae

Europe has just centralized its fight against financial crime with the launch of the Anti-Money Laundering Authority (AMLA), giving Brussels direct oversight of major banks and crypto-asset providers. At the same time, the U.S. is easing some reporting requirements even as crypto-based laundering grows, raising fresh questions about cross-border cooperation. As AMLA sets its rulebook, Europe’s data-sharing debates may well shape the next era of global anti-money-laundering strategy.

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Introduction to Stephen Rae

Peter Kinahan

Hello everybody and welcome, and today I’m with Stephen Rae, and Stephen is co-founder and publisher of AML Intelligence, one of the world’s foremost publications on the subject of anti-money laundering and CFT, combating the finance of terrorism. Stephen, welcome. How are you today?

Stephen Rae

I’m great, and thank you for having me. Thanks, Peter.

Peter Kinahan

Stephen had a pretty distinguished career in journalism here in Ireland, where he was group editor of Ireland’s largest newspaper group. Stephen, how did you come to alight on AML Intelligence and the subject of AML as a commercial venture and as something that the world needed to know more about?

Stephen Rae

I guess in 2018, when I stepped down from editor-in-chief of, as you said, Independent News and Media, I’d set up an innovation hub in INM, which had sprang out a couple of startups. So I guess I got the startup bug. So I was looking to establish some startups.

And, you know, when you’re in that area, you’re meeting people and finding out what’s going on and where there are gaps in the market. And even in that early stage in 2018, 2019, we knew Europe was about to set up its own anti-money laundering agency, and new European anti-money laundering laws were in the pipeline. So myself and my co-founder, James Tracy, did a little bit of research, and we found that most of the literature, most of the journals, were coming out of the United Kingdom and the United States.

And Europe really didn’t have its own lens on anti-financial crime, fraud, and money laundering. So we thought this might be a good area to get into. And soon, you know, wouldn’t have been familiar with AML and KYC and CCD back then, but very familiar with it now.

And it’s a really, really interesting area. It’s kind of the confluence of law enforcement, regulators, banking, fintech, crypto, organized crime. It’s where they all come together.

So it’s a really, really interesting area.

What is the AML relationship like between the US and Europe?

Peter Kinahan

One thing, and it’s not just AML, we’re seeing a major divergence, potentially, what’s starting to happen already between Europe and the United States. How is this playing out now, even at this early days in the new administration of the States? What are you seeing and how is this going to affect the global AML landscape Because AML, by definition, is a global subject. It’s got to be tackled globally, I would have thought.

Stephen Rae

So what we’re seeing right now is significant seismic shockwaves in the whole anti-financial crime sphere. So for years, from 1970 and the Bank Secrecy Act, the United States has been the leader in this space. So you’ve seen it from, as I said, the BSA, Patriot Act after 9-11, and right up until very recently with the United States imposing sanctions on Russia and other malign players.

And Europe has very much been kind of a laggard, a follower. And even when you look at all the major fines that have been imposed in this space, they’ve been fines imposed by the United States Treasury, and OFAC, and FinCEN, the regulators in the United States. And I remember when we were researching what to do with AML intelligence, what paths we should be pursuing, I met a senior European banking leader. And he says, who is Europe’s regulator? And I gave him an answer. And he says, no, Europe’s regulator is the United States.

So it’s been like that since 1970, effectively, and particularly after 9-11, when, as you said, combating financial terrorism became part of the whole AML package. And Europe, as I said, has been following or been in slow pursuit. But back in 2000 or 2006 and beyond, Europe realized it needed to get its act in order.

That really only started taking place in 2021. Huge pressure from the European Parliament to get the European Commission to do something about it and enact laws that would give Europe some resilient and robust anti-financial crime measures. And finally, that came to pass two years ago when the European Parliament passed the new AML regulation and directive, which allowed the setting up of the new European Anti-Money Laundering Authority.

So AMLA has finally been established. It’s found its headquarters in Frankfurt. It’s appointed a chair, Bruna Szego, who’s an Italian head of, she’s the woman in charge the AML CF team in the Banca d’Italia, the Italian Central Bank. By all means, a really strong leader, very effective leader. So she’s taking control of AMLA. She’s going to be joined by a five-member executive board from Ireland, Italy, Germany, Lithuania and Denmark.

So that’s a really strong executive board. They will be in place by Easter of this year or slightly afterwards. So then we’ll start seeing the whole thing start moving quite quickly.

You’ll see direct supervision of 40 banks in Europe, as well as crypto asset providers, BASPs or CASPs, maybe even a football club, maybe even a gaming, some gambling institution. So they’ll be the 40 institutions directly supervised by AMLA. But then AMLA also has a supervisory role, ensuring that the so-called single rulebook is applied throughout Europe.

And the need for the single rulebook was that there had been an a la carte approach to enforcing money laundering regulations in Europe. Now, AMLA will ensure that it’s kind of a single rulebook that’s applied systematically. And AMLA also, of course, will have a role in supervising the financial intelligence units.

And these are the economic crime or financial crime units that are usually based in police departments. In Germany, it’s slightly different, they’re based in customs. These are the guys that are monitoring what’s going on in the banks. These are the guys who receive the red flags, the SARs or the STRs. And so AMLA will also have a role in coordinating the work of the FIUs right through Europe.

Are banks over-regulated when it comes to AML?

Peter Kinahan

OK, OK. But at the same time, you know, the trend from the States is about deregulation. And I think there are already some moves there to lower thresholds and that kind of stuff.

So are you seeing more potential as Europe ironically catches up with the States on the regulatory side, that in fact we’re now in a deregulatory trend in the States? You know, is there room for conflict there? That’s my first question.

And my second question is, is there too much regulation of banks? You know, is there any truth in the idea that AML is an extremely onerous regime, AML and CFT?

Stephen Rae

So it’s definitely a divergence, right? So one of President Trump’s first acts was to say that, you know, no American will ever again be found guilty of foreign corrupt practices. So, you know, that was one of the first shockwaves.

Yeah. Yeah. And then and then clearly the signals from U.S. banks is they want that threshold that you report every transaction over $10,000 to the federal agency FinCEN. They want that gone as well, maybe raised to $75,000 or $100,000. So again, that’s a sign that these guys are deregulating, deregulating fast.

Now, what I would caution is this is probably likely temporary. So, you know, when a new president comes in, what will happen? And will banks be held to account for the actions they’ve taken now in four years time?

So you’ve got to be very conscious of that because banks have a responsibility to monitor transactions. And if they’ve been seen to be asleep at the wheel over the next four years, that could end. That could lead to trouble in four years time.

The other thing. So, yeah, you’re going to see divergence with Europe because Europe is finally on this journey in a serious way. So this is a huge opportunity for Europe as well to show it’s deadly serious.

A recent report showed that 750 billion euros a year of dirty money flows through Europe and its financial system. So it’s a deadly serious problem. And when we talk about financial crime, what we’re talking about is human trafficking, drug trafficking, modern slavery, child exploitation, child sexual exploitation, forced labor.

So these are really serious problems with a serious human toll. And it’s so these are things that we need to take seriously. So it’s really important that Europe has a robust anti money laundering and CFT policy and enforces it.

Now, to your second question, does it cost too much? Yeah. And I’m sure every banker would say, yes, it does.

In some cases, up to 40 percent of bank employees come from compliance, the compliance side. So it’s a lot of money. And I suppose over the last 50 years, a lot of policing has been privatized.

As in, you know, banks have been given the responsibility of policing their own customers with KYC, CBD. And it’s quite expensive. So, yeah, policing has been privatized.

There’s clearly better ways of doing it. You know, I think, you know, if regulators took a far more serious risk based approach, maybe not flag everything, but the seriously risky transactions that could help. Also, why should you have to file hundreds of thousands of SARs and hundreds of STRs maybe weekly?

And so the FIU is actually under a swamp with SARs. You know, it’s not able to find the real criminals because it’s swamped with too much data and too much information. So there are ways of maybe being more targeted.

So, yeah, costs could come down, but you can still do a good job. Another thing, of course, is data sharing. Banks should be able to share data with each other.

And they should be able to share data with police more effectively. GDPR is a huge problem. It’s, you know, so privacy seems to trump crime prevention in the hierarchy of rights in Europe.

And that needs to change because crime prevention should trump data privacy, in my view. And that’s something that the new EU Justice Commissioner Michael McGrath might look at. Because he’s talked about maybe slimming down GDPR.

Certainly an area to be slimmed down is in data sharing between banks and between banks and law enforcement.

How are financial centres, crypto and AI reshaping AML risk?

Peter Kinahan

So let me just put out a few, you know, topical things, you know, for general discussion.

I mean, financial centers. How has that, how have things evolved there? I mean, places like Switzerland have changed remarkably over the years.

And the whole business of bank secrecy, that kind of stuff. Are they being monitored very closely? You know, reputation, that kind of stuff.

Crypto. I’m sure we could have a whole conversation about that. AI. You know, I guess these are the things that will be, you know, very much on your agenda.

Stephen Rae

Just recently, only last week, Transparency International warned Switzerland not to water down its beneficial ownership regulations or rules. Because as we saw with the Panama Papers, it’s shell companies that are being used to launder so much money. So really, law enforcement needs to know who the ultimate beneficial owners of companies are to find, you know, where the dirty money flows.

And we saw in the United States, another rule that Donald Trump’s administration has watered down is the new FinCEN rule about requiring companies in the United States to provide the ultimate beneficial ownership of companies to FinCEN. And now the Trump administration says, oh, we don’t need to know who owns American companies. We just need to know who owns foreign companies. That doesn’t quite work right.

And what else is happening? Crypto.

Yeah. So clearly, the criminals are laundering a lot of money through crypto. And yeah, blockchain is really important. So every transaction is locked in or logged. But because dirty money flows transnationally across borders, even though you might know every transaction, the money ultimately ends up in countries where you won’t be able to get at it.

So that’s why crypto is used. And we talk about instant payments. Crypto is instant and it’s gone.

And once it’s gone to a jurisdiction where you can’t get at it, it’s, you know, it’s gone forever. So crypto is used for criminals because of that, the anonymity in many cases. And plus, because it’s international and transnational, it takes a huge amount of police resources to actually get at the money once it leaves a country.

So I think, yeah, what else? Of course, we will be talking about AMLA, we’ll be talking about the United States, definitely talking about crypto, public-private partnerships. Clearly, that’s the best way forward. Because as you say, a lot of money is being spent by banks, but could it be spent better? So let’s say you put police officers in with the bank or take the people out of the bank and put them in with the police. Then you’re talking about maybe a matrix of really good skills.

Let’s say your crypto skill, blockchain skill, an asset tracing skill, an asset seizure skill, and a police investigative skill. So let’s say you have a cross-functional team working together on the really big cases. Then you could see results and lock that in maybe with Europol or Interpol or some federal agencies in other countries.

And then maybe, let’s say, instead of only ever recovering 1% of illicit assets ever, maybe you could double it to 2% or even go for 4%. And then can you imagine if all that money, all that dirty money was put back into good causes, then we’d be seeing some really tangible results.

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