EBA Opinion signals a shift to greater consistency on assessment of AML and CFT in banking

The European Banking Authority (‘EBA’) published (4 Nov 2020) an Opinion on the assessment of money laundering/terrorist financing risks in the context of Supervisory Review and Evaluation Process (‘SREP’).

SREP is the process, focused on banks, under which the supervisory authorities are required to review and evaluate the risks to which banks are or might be exposed; the risks that an institution poses to the financial system; and the risks revealed by stress testing taking into account the nature, scale and complexity of an institution’s activities.

The EBA has been tasked with building a common EU-wide supervisory culture and consistent supervisory practices around anti-money laundering (‘AML’) and counter-terrorist financing (‘CFT’).

Technological advances have allowed for the development of systems and processes that we all rely on to make payments, transfer funds and conduct business. But these processes also make it easier for bad actors to hide and transfer illegally obtained funds.

In this Opinion, the EBA are putting the spotlight firmly on AML/CFT risks within the banking system and are emphasising the importance of those risks to prudential supervisors across the EU. In doing so, the EBA is calling for greater attention to be given to those risks that are indicative of broader deficiencies in the internal governance or internal controls framework, such as ICT-related weaknesses, that can be exploited by criminals.

According to the EBA, this renewed focus on AML/CTF will serve to protect the financial soundness and viability of individual institutions, and will also protect the stability and integrity of the wider financial system. The EBA reminds national supervisors that ML/TF risks are not necessarily linked to an institution’s size or financial soundness and that smaller institutions can nevertheless present significant risks in these areas.

When assessing banks under the SREP, national supervisory authorities are requested to consider money laundering and terrorism financing risks as part of their assessments. In the Opinion, the EBA makes it clear that it expects prudential supervisors to:

• develop sufficient understanding of ML/TF risks so as to be able to identify those risks as well as any prudential concerns; and
• cooperate in a timely manner with AML/CFT supervisors to alert them to ML/TF risks and draw on their expertise as necessary.

More specifically, the EBA has called on prudential supervisors to take into account ML/TF risks in the context of SREP by adopting the following measures:

a) Monitoring of key indicators;

b) Business model analysis;

c) Assessment of internal governance and institution-wide controls;

d) Assessment of risks to capital; and

e) Assessment of risks to liquidity and funding.

With regards to the monitoring of key indicators, the EBA noted that some prudential supervisors have developed a set of indicators based on information that they have acquired from prudential reporting that may point to ML/TF. The EBA consider the use of such indicators to be good practice and has invited prudential supervisors to share the outcome of the monitoring of such indicators.

In respect of the conduct of business model analysis, the EBA expects prudential supervisors to alert AML/CFT supervisors where they observe indications that the business model or changes to the model could give rise to increased ML/TF risk.

In relation to the assessment of internal governance and institution-wide controls, the EBA expects prudential supervisors to consider, in the context of the institution’s internal governance framework, the arrangements that have been put in place to comply with applicable AML/CFT requirements.

Regarding the assessment of risks to capital, the EBA advises prudential supervisors to consider ML/TF risks that could result in reputational or operational risk.

Lastly, in respect of the assessment of risks to liquidity and funding, the EBA advises that prudential supervisors remain alert to indications that could signal ML/TF risks when assessing the liquidity and funding profile of an institution.

Whilst the Opinion issued by the EBA provides high level advice for supervisory authorities, it is expected that the EBA will publish guidance on the cooperation between prudential and AML/CFT supervisors in 2021.

Interestingly, at around the same time as the publication of the EBA Opinion, it was announced that EU Finance Ministers had agreed to the development of a single EU rulebook for anti-money laundering and that they had also agreed to establish an EU body that would have direct supervision powers over EU anti-money laundering rules across all sectors, not just banking. The European Commission is expected to publish legislative proposals in the first quarter of 2021 that will seek to advance these matters.

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The EBA’s Opinion may be found here.

For the general criteria and methodologies used by the CBI in the Supervisory Review and Evaluation Process, see: https://www.centralbank.ie/docs/default-source/regulation/how-we-regulate/supervision/supervisory-review-process/gns-4-1-2-2-2-srep.pdf?sfvrsn=12