Analysing the effectiveness of the European Union's legislative framework in addressing the challenges of money laundering and financing of terrorism in a digitalised world

Abstract

In today’s technology-dependent world, digitalisation is a reality affecting most of the global population, mainly individuals and companies residing in developed countries. One of the key areas being highly impacted by this global phenomenon is that of financial services. Despite the benefits of digital finance, such innovative tools also tend to be used by financial criminals to launder money and finance terrorism in an easier and discreet manner. Although digital financial commodities have been around for several years, the recent sudden leap forward in their availability together with cross-border regulatory struggles for consistency have created a very dangerous threat of money laundering and financing of terrorism. Harmonisation could be deemed as one of the main remedies against cross-border financial criminality. It has always been a core pillar of the European Single Market, based on reducing discrepancies between legal frameworks of countries as a step towards economic integration and a liberalised market. In order to promote harmonious development, it is very important to develop and pursue actions leading to the strengthening of economic cohesion, with the objective of reducing disparities between various European regions. Globalisation represents an ulterior motive for European legislators to remove barriers between national legislative frameworks to facilitate regulatory cooperation and enforceability. Moreover, centralising of regulatory powers would be helpful to erode discrepancies within supervisory architectures for stronger Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT). The Fifth Anti-Money Laundering Directive is currently the main the European Union (EU) law in relation to this context. It represents an improved version of the preceding laws but fails to address certain aspects such as the anonymity of virtual financial tools and several other legal loopholes. Its nature as a Directive results in issues related to its transposition into the laws of Member States. Hence, there are aspects where harmonisation could be key for a stronger legislative framework. The present context also involves the implemented FinTech Action Plan which also included elements in relation to money laundering and financing of terrorism using technological tools. However, an Action Plan entirely dedicated to AML/CFT is required in line with evolving challenges. When it comes to the supervisory network in relation to AML/CFT, evident fragmentation within the European regulatory architecture is resulting in significant difficulties in consistently enforcing the laws on a cross-border basis. New proposals in relation to the European AML/CFT framework are indicating that the EU is moving towards a more harmonised approach of regulating this area. Despite some improved amendments proposed by the Sixth Anti-Money Laundering Directive, there are still certain limitations vis-à-vis cross-border criminality. The formulation of a single European rulebook for AML/CFT in the form of a Regulation should be proposed with the scope of having uniform application of relevant law across all EU Member States. Amongst the several initiatives which fall under the newly proposed AML/CFT Action Plan, there is the idea involving centralisation of supervisory powers to the EU-level. This could either be done by further strengthening the leading role of the European Banking Authority in AML/CFT, or by creating a new European Supervisory Authority specialised in this area of regulation. However, some fragmentations could still be present at the local level in the interactions between the National Competent Authorities and respective Financial Intelligence Units. Although harmonisation might eventually be effective in this context, there are factors which must be taken into consideration. Apart from striking a right balance between harmonisation and autonomy of Member States, EU legislators must aim at avoiding over-regulation, reaping the benefits of technology, and enhancing governance. Hence, balanced harmonisation and centralisation coupled with strong cooperation between all the authorities would significantly improve the abilities of the EU in strengthening AML/CFT in today’s digitalised world.