European financial regulators warned Tuesday that the financial sector is exposed to money laundering and terrorist financing risks, amid concerns that firms are not properly assessing, or managing, their exposure.
The European Securities and Markets Authorities (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA issued a joint opinion, which warns that the sector is vulnerable to abuse by financial criminals due to weaknesses in firms’ controls, regulatory arbitrage, a lack of access to intelligence on terrorist suspects and the risk of transactions being driven underground.
“Over the course of the last two years, terrorist attacks have been committed in several EU member states. There is evidence to suggest that in at least some cases, terrorists abused legitimate payment channels to facilitate their actions,” the joint opinion says.
Among other things, the joint opinion notes that local regulators have found problems with firms’ overall levels of AML compliance, and that no sector is perceived as having ‘good’ or ‘very good’ compliance levels by all local authorities.
In particular, almost all local regulators have concerns about the quality of firms’ ML/TF risk assessments, the joint opinion says, and two thirds or local regulators found that the implementation of firms’ internal AML policies to be deficient.
The joint opinion also identifies several underlying reasons for firms’ weak controls, including: a lack of senior management attention; an unwillingness to challenge unusual behaviour by long-standing, or particularly profitable, customers; and remuneration structures that reward turnover and profit rather than compliance. Firms deliberately lower their defenses due to increased competition, the opinion adds.
The joint opinion also highlights concerns about differences between local regulators in overseeing these risks; and, a lack of timely access to intelligence that might help firms identify and prevent terrorist financing. If these issues are not addressed, the opinion warns, Europe’s defences against financial criminals and terrorists will be diminished, and it calls for action to help bolster these efforts.
Several initiatives are under way that will address some of these issues, the joint opinion notes, but it also calls for other initiatives by local regulators including: looking for ways to work more closely with firms; raising awareness of supervisory expectations; and collecting supervisory data in a more consistent way.