Overview Of Key Regulation And CDD And KYC Requirements In EU: Fight Against Illicit Activities

Posted in Know Your Customer (KYC) on March 6, 2024
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The EU’s AML and CFT legal and regulatory model is divided into different parts. This article elaborates on ‘Overview Of Key Regulation And CDD And KYC Requirements In EU: Fight Against Illicit Activities’.

EU’s development of CDD and KYC

The EU Member States are developing efficient and robust means of Customer Due Diligence (CDD) and Know Your Customer (KYC) by opening up the mutualization opportunities and fostering a digital economy to contribute to strengthening the AML/KYC framework. The customers’ electronic identification and remote KYC processes are the subject domain for the EU Member States. The scope for portable CDD solutions is particularly the core area of consideration by the EU Member States for the banking sector. The targets for the EU Member States are to curtail money laundering, drug-trafficking-related proceeds, tax evasion, terrorist financing, human trafficking, and state-sponsored and corporate bribery.  

Reasons for development

The measures are taken to consider the key challenges building on the electronic ID interoperability framework with additional sets of attributes to enhance the CDD measures and KYC framework. It entails determining the necessary set of measures for CDD purposes in the banking sector, as well as the appropriate level of assurance required for the implementation of CDD procedures.

The following three broad topics are considered: 

  • How can CDD attributes be meaningfully related to the defined Levels of Assurance in general?
  • What are the benefits of KYC?
  • What may the CDD framework bring to the financial sector to achieve desired regulatory objectives?

It is acknowledged that the multi-dimensional impact of KYC processes in the digital age has been aimed at the KYC solutions to bring enhanced process improvements and facilitate KYC-related services within the EU as well as financial inclusion. 

The establishment of law enforcements in EU against money laundering

Money laundering has been criminalized in Europe, and the predicate offenses have widened from drug trafficking to the proceeds of all crimes. Europol has established itself internationally in anti-money laundering (AML) practices. The Egmont Group has grown into a large international organization consisting of various financial intelligence units, representing the operational arm of AML/CFT to complement the strategic arm of the FATF. 15 EU Member States are direct FATF members, and the remaining thirteen are members of Moneyval, the European regional version of FATF. 

ML/TF adjustment into digital/remote interaction

Strengthening the existing ML/TF framework and adjusting it to digital/remote onboarding interaction reduces the fragmentation of the EU KYC landscape and ensures a level playing field for cross-border services eliminating regulatory arbitrage opportunities. 

The three dimensions should not be considered in isolation or as inherently hostile since it is thought that development may be made in all three areas simultaneously. The high level of customer onboarding practices can be attributed to the deployment of digital ID solutions and may help in reducing the AML/CFT risk factors as emphasized by the EU regulatory authorities. 

Expansion of AML/CFT action

There is no doubt that all EU Member States recognize the EU approach to combat money laundering. To implement effective Anti-Money Laundering (AML) policies, the scope of AML/CFT action is expanded greatly, and the success of AML policies has been very limited. EU regulatory authorities recognized that the money launderers and criminals are aided by technology, which has necessitated continual adaptation of the AML/KYC regulatory framework. 

Given the ongoing monitoring and law enforcement challenges, the EU Commission and some member states have come out in favor of creating an EU-wide AML supervisory agency to assist in reducing the coordination and cooperation issues in the process of AML enforcement, particularly across borders. 

Based on the EU’s principles of proportionality, a thorough cost and benefit analysis for the AML rules could guide the way to a more measured and effective AML/KYC approach. 

Important Overview Of Key Regulation And Cdd And Kyc Requirements In Eu In 2022

AML supervision

The EU Member States acknowledge that the Europe-wide supervisory agency is the sole solution. AML supervision necessitates the participation of several supervisory bodies, including financial and non-financial supervisors, FIUs, and law enforcement officers, as well as the obliged entities themselves. In the EU, this entails a large number of supervisory agencies and tens of thousands of obligated organizations. It raises the question of EU competence, particularly within law enforcement. With a different and more effective governance structure, the European Banking Authority (EBA) is improving its ability to address the AML concerns and difficulties that institutions confront.

Joint action regarding the proper functioning of FIUs at the EU level and cooperation of the EU Member States is strongly recommended. The nature and tasks of the FIUs are better harmonized. The EU-wide interconnection of the FIUs is hosted by Europol because of data protection reasons. Policymakers are addressing the FIU cooperation at the EU level; 

Improvement in the process of data sharing

The EU member States established a uniform template for the suspicious transaction reports STRs to be integrated into the centralized platform. The focus of the regulatory authorities is to take appropriate measures to improve the process of data sharing between the enforcement bodies in the EU, including across national borders. This relates not just to types of data but amounts to the speed of data sharing and its security.

Final Thoughts

Although the performance of EU’s regulation against financial crimes has been nothing but impressive, improvements are still necessary for the safety of the member states’ financial safety. This article elaborates on ‘Overview Of Key Regulation And CDD And KYC Requirements In EU: Fight Against Illicit Activities KYC Requirements In EU In 2022’.