6AMLD Challenges: Remittance

With the EU’s 6th Anti-Money Laundering Directive in effect, the money remittance industry must adapt to new compliance challenges.The European Union’s 6th Anti-Money Laundering Directive (6AMLD) was implemented across all member states on June 3rd 2021. One of the key highlights of the directive is the harmonization of money laundering as an offence in the domestic legislation of all EU member states. In order to achieve that harmonization, 6AMLD set out a list of 22 money laundering predicate offenses, including 2 new offenses: cyber-crime and environmental crime.Beyond the harmonization of predicate offenses, 6AMLD also:

• Expands the definition of money laundering to include aiding and abetting.
• Extends criminal liability from individuals to include legal persons such as companies.
• Increases the minimum prison sentence for money laundering to 4 years. 
• Introduces information sharing requirements between jurisdictions.

Under 6AMLD, banks and other financial service providers must consider their risk exposure carefully, especially given the prospect of extended liability for crimes that occur within their companies. Following regulatory changes introduced by 5AMLD, the compliance challenge that 6AMLD entails may be more acute for financial services providers that operate in certain industries, and in particular the money remittance industry. 

Given the potential financial penalties, it is important that remittance firms understand the effects of 6AMLD on the industry, and how it will affect their ongoing AML/CFT efforts.

Remittance and 5AMLD

6AMLD was preceded by the 5th Anti-Money Laundering Directive, which was implemented across the EU on 10 January 2020. 5AMLD introduced several innovative AML/CFT measures, including regulations for cryptocurrency services, reporting requirements for the purchase of high-value goods, registers for beneficial ownership, enhanced due diligence for high-risk countries and public lists of politically exposed persons (PEPs). 

Each of 5AMLD’s AML requirements represented compliance challenges for remittance businesses, particularly in contexts involving the transfer of money across international borders. 5AMLD also brought regulatory clarity for remittance businesses: the high-value goods requirement, for example, involved the introduction of a €10,000 transaction reporting threshold, an unambiguous standard by which to gauge compliance. 

6AMLD, by contrast, focuses less on the enforcement of compliance standards than the practice of compliance, and specifically the need for financial services firms to understand AML/CFT regulations and adjust their risk-based responses accordingly. For remittance firms, this means rethinking their approach to AML/CFT to ensure that compliance is delivered on an ongoing basis.

6AMLD Remittance Challenges

In 2020, the global remittance industry handled around $702 billion in transfers – down from 2019’s $719 billion but showing surprising resilience to the economic effects of the Covid-19 pandemic, especially in low and middle-income countries. The global remittance industry is expected to return to growth with 2.1% growth in 2021, and 2.2% in 2022. By 2028, the global remittance industry is expected to be worth around $42.46 billion with a CAGR of 13.3%. 

The value of the remittance industry means that remittance services will continue to be a target for international money launderers and means that 6AMLD compliance will be scrutinized closely by authorities seeking to combat global financial crime. Accordingly, remittance firms should consider the following specific 6AMLD challenges:Identifying cross-border crimes: Money remittance services primarily involve the transfer of funds across international borders, which means firms are particularly vulnerable to certain money laundering predicate offenses. Examining the list of predicate offenses set out by 6AMLD, it’s clear that some, such as “murder and grievous bodily harm” or “robbery and theft,” are far less likely to include a cross-border component and therefore less likely to be relevant to a remittance service providers’ risk-based AML/CFT program. However, other predicate offenses on the list, such as sexual exploitation, drug trafficking and smuggling are more likely to involve a cross-border component and therefore pose a greater risk to remittance service providers. The two new predicate offenses added in 6AMLD — environmental crime and cyber-crime — are extremely likely to involve a cross-border component.

With this in mind, remittance firms will have to consider their risk assessments more carefully to ensure that, while they are able to detect high-risk cross-border customer activities, they do not neglect risks associated with the other predicate offenses included on the 6AMLD list. Practically, this will mean redirecting AML/CFT resources to handle the expanded compliance burden and meet all necessary monitoring obligations. 

Distinguishing offenses: Remittance firms must be able to distinguish between the various money laundering predicate offenses outlined by 6AMLD. While they may be discrete in a legal sense, many of the predicate offences are similar, both in terms of methodology and effect. Participation in organized crime, for example, exists on the criminal spectrum in proximity to drug trafficking, trafficking in stolen goods, and theft — to name just a few methodologically similar offenses. 

The challenge for remittance businesses lies in distinguishing between these offenses in the development and implementation of their AML/CFT program, especially when some offenses are part of, or committed concurrently with, others. Devising a risk response for every predicate crime on the 6AMLD list may be unfeasible and onerous but, alternatively, legislating for only a small number of offenses that a given remittance firm deems “relevant” to its operational scope may result in compliance blindspots. 

Environmental crimes: The new category of predicate offense, environmental crime, is particularly relevant to the remittance industry. Environmental crimes tend to involve the exploitation of natural resources or exotic animal species, often in countries with a low standard of domestic regulation. Examples of environmental crimes might include illegal logging in the Amazon rainforest, or the illegal hunting of elephants for the ivory trade in Africa. The products of those crimes are often transported for buyers around the world or involve foreign criminal elements as part of a distribution network, with illegal profits transferred via remittance. 

Given the risk of remittance firms becoming involved in environmental crime-related laundering, compliance teams must ensure that they prioritize the relevant criminal methodologies within their AML monitoring framework. Certain environmental crimes may be associated with countries or regions: in order to manage risk, firms should learn to spot red-flag indicators that customers are engaged in an environmental crime and are attempting to launder illegal proceeds. 

Adverse media: In order to manage an expanded risk landscape and fulfill their compliance obligations under 6AMLD, remittance firms should ensure that their AML programs are set up to screen for and capture adverse media that involves their customers and clients. 

The scope of potential offenses that now potentially involve remittance services means that firms must seek to capture adverse media from across the world. This means that remittance firms should implement adverse media monitoring measures to capture a variety of stories, including those from televised and online news outlets. Monitoring must be based on robust customer due diligence in order to ensure customer identities are verified accurately, and to ensure any associates, close family members, or beneficial ownership risk concerns are also taken into account. 

Conclusion: An Expanded Risk Landscape

At a glance, remittance service providers face significant compliance challenges under 6AMLD. The increased regulatory focus on accountability and penalties indicates that the EU wants firms to take on more AML/CFT responsibility, with less discretion for dismissing risks that were previously considered out of a compliance program’s scope.  

The 22 predicate offenses set out and harmonized by 6AMLD are relatively prescriptive. Given the difficulty involved in distinguishing between some of those offenses, remittance firms may struggle to implement AML measures for those that don’t present a realistic threat, no matter how capable or robust their compliance program. The philosophy behind risk-based AML suggests that firms adjust their response commensurate with the level of risk that they face: under the requirements of 6AMLD, however, most (if not all) remittance firms will be forced to cast a broad net to ensure they are able to respond to a wide range of scenarios.

Practically, the 6AMLD compliance burden may force some remittance firms to change the way they conduct their AML risk assessments. This may mean that firms must broaden the scope of their screening and monitoring measures, seeking to capture information relevant to the wider risk landscape. Screening, for example, may have to be account-focused rather than payment focused, and performed on a regular schedule rather than when a payment event occurs.

Regulatory Guidance

The costs of 6AMLD compliance may be onerous if not prohibitive to the budgets and business models of many remittance firms, and regulatory guidance, particularly at a local level, is crucial. 

Guidance from local regulators, in conversation with the EU’s AML legislators, may be a source of clarity for remittance firms seeking to prioritize and manage their compliance obligations, but the certainty that those regulators are able to provide will vary depending on the way that the directive has been interpreted by the relevant jurisdiction. 

As different member-states adjust to the directive, interpretations from financial regulators may ultimately prove counterproductive, and have the unintended effect of working against 6AMLD’s original harmonization objectives. With each country deploying its own framework to implement 6AMLD, and with remittance firms adapting their AML programs, legislative divergence has become likely. The situation is more complex still for international remittance firms which may find their competitiveness degraded depending on the jurisdiction in which they operate. 

Remittance firms must be involved in any ongoing dialogue between national regulators and the EU in order to manage the potentially onerous compliance burden of 6AMLD. As they continue to adjust to the new regulatory landscape, remittance firms should be ready to divert more resources towards compliance to ensure that they are ready for emergent challenges.

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