The EBA highlights key money laundering and terrorist financing risks across the EU

03 March 2021

The European Banking Authority (EBA) today published its biennial Opinion on risks of money laundering and terrorist financing (ML/TF) affecting the European Union's financial sector. The ML/TF risks identified by the EBA include those that are applicable to the entire financial system, for instance the use of innovative financial services, while others affect specific sectors, such as de-risking. The list also includes ML/TF risks that emerge from wider developments such as the COVID-19 pandemic that has an impact on both firms’ AML/CFT compliance and competent authorities’ supervision. The Opinion, therefore, sets out recommendations to competent authorities aimed at closing these gaps.

Some of the risks identified in this Opinion, such as those associated with virtual currencies and innovative financial services, had already been identified in the previous two Opinions on ML/TF risks and continue to be very relevant today. Others are included in the Opinion for the first time, such as differences in the treatment by competent authorities of financial institutions’ involvement in facilitating or handling tax-related crimes (‘cum-ex/cum-cum’). The EBA also observes a continuing trend of de-risking, which has implications from a ML/TF, consumer protection and financial stability point of view.

The COVID19 pandemic illustrates how new ML/TF risks can emerge unexpectedly and that can impact firms’ ability to ensure adequate AML/CFT compliance, and competent authorities’ ability to ensure the ongoing supervision of firms in the current context of restrictions on movement. Risks associated with COVID19, thus, require immediate attention and monitoring by competent authorities.

As a complement to this Opinion, the EBA has developed an interactive tool, which gives European citizens, competent authorities and credit and financial institutions access in a user friendly manner to all ML/TF risks covered in the Opinion. The interactive tool is available here

Legal basis

The Opinion has been issued in accordance with Article 6(5) of (EU) 2015/849 (The Fourth EU Anti-Money Laundering Directive), which requires the EBA to issue an Opinion on the risks of ML and TF affecting the EU's financial sector every two years. The Opinion and its associated report will inform the European Commission’s Supranational Risk Assessment (SNRA) and risk assessments carried out by competent authorities.

EBA publishes final revised Guidelines on money laundering and terrorist financing risk factors

01 March 2021

  • These Guidelines are central to the EBA’s work to lead, coordinate and monitor the fight against money laundering and terrorist financing (ML/TF).
  • The amendments to the revised Guidelines aim at strengthening the EU’s AML/CFT defences by aligning the requirements with recent changes in the legal framework in the EU, and addressing new ML/TF risks.
  • They also support effective and consistent supervision by competent authorities of financial institutions’ risk-based approaches to AML/CFT.

The EBA published today its final revised Guidelines on ML/TF risk factors. The revisions take into account changes to the EU Anti Money Laundering and Counter Terrorism Financing (AML/CFT) legal framework and address new ML/TF risks, including those identified by the EBA’s implementation reviews. In addition to strengthening financial institutions’ risk-based approaches to AML/CFT, the revision supports the development of more effective and consistent supervisory approaches where evidence suggested that divergent approaches continue to exist. The Guidelines are central to the EBA’s work to lead, coordinate and monitor the fight against money laundering and terrorist financing.

The Guidelines are addressed to both financial institutions and supervisory authorities. They set out factors that firms should consider when assessing the ML/TF risk associated with a business relationship or occasional transaction. In addition, they provide guidance on how financial institutions can adjust their customer due diligence measures to mitigate the ML/TF risk they have identified so as to make them more appropriate and proportionate. Finally, they support competent authorities’ AML/CFT supervision efforts when assessing the adequacy of firms’ risk assessments and AML/CFT policies and procedures.

In this revised version, the EBA strengthens the requirements on individual and business-wide risk assessments and customer due diligence (CDD) measures, adding new guidance on the identification of beneficial owners, the use of innovative solutions to identify and verify customers’ identities, and how financial institutions should comply with legal provisions on enhanced customer due diligence related to high-risk third countries. In addition, the EBA included new sectoral guidelines for crowdfunding platforms, corporate finance, account information service providers (AISPs) and payment initiation services providers (PISPs), and firms providing activities of currency exchanges offices. The revised Guidelines also provide more details on terrorist financing risk factors. Together, these changes will be conducive to the implementation by financial institutions of a more effective, risk-based approach to AML/CFT.

The EBA reiterates that there is no requirement for financial institutions to discontinue services to entire categories of customers that they associate with higher ML/TF risk (so-called ‘de-risking’): Instead, financial institutions should balance the need for financial inclusion with the need to mitigate and manage ML/TF risk. The guidelines can help financial institutions to achieve this balance.

The EBA also stresses the need for supervisory authorities and financial institutions to enhance their understanding of tax crimes, as set out last year in the EBA’s Report on competent authorities’ approaches to tackling market integrity risks associated with dividend arbitrage schemes (EBA/REP/2020/15).

Legal Basis, background and next steps

Articles 17 and 18(4) of Directive (EU) 2015/849, mandate the EBA to issue Guidelines addressed to both Competent Authorities and to credit and financial institutions on the risk factors to be considered and the measures to be taken in situations where simplified customer due diligence and enhanced customer due diligence are appropriate.

In June 2017, the three ESAs issued Guidelines on customer due diligence and the factors credit and financial institutions should consider when assessing the money laundering and terrorist financing risks associated with individual business relationships and occasional transactions (JC 2017 37). Since then, the applicable legislative framework in the EU has changed. On 9 July 2018, Directive (EU) 2018/843 (AMLD5) entered into force and has been applicable from 10 January 2020. Moreover, new risks have emerged and have been identified in the ESAs’ 2019 Joint Opinion. The European Commission’s post mortem report and the EBA’s implementation reviews have highlighted widespread challenges in the operationalisation and supervision of the risk-based approach to AML/CFT. Therefore, a review of the original Risk Factors Guidelines was warranted.

The original risk factors Guidelines will be repealed and replaced with the revised Guidelines.

The Guidelines will be translated into the official EU languages and published on the EBA website. The deadline for competent authorities to report whether they comply with the guidelines will be two months after the publication of the translations. The guidelines will apply three months after publication in all EU official languages.

The EBA’s role and mandate on AML/CFT is explained in a factsheet. The EBA regularly informs its stakeholders on its work and deliverables with a dedicated AML/CFT newsletter; all editions can be accessed via the EBA’s website.

EBA advises the Commission on KPIs for transparency on institutions’ environmentally sustainable activities, including a green asset ratio

01 March 2021

  • The proposed key performance indicators (KPIs), notably the Green Asset Ratio, will help stakeholders understand institutions’ pathway towards sustainability and financing activities such as those consistent with the Paris agreement.
  • Proportionality measures and policy recommendations to the Commission are advised in order to facilitate institutions’ disclosures and eventually extend the scope of the KPIs.
  • The EBA has developed this Advice in parallel and consistently with its Consultation Paper on Pillar 3 disclosures on ESG risks, including a common proposal for a Green Asset Ratio (GAR).

The European Banking Authority (EBA) published today an Opinion in response to the Commission’s call for advice on KPIs and related methodology for the disclosure by credit institutions and by investment firms of information on how and to what extent their activities qualify as environmentally sustainable in accordance with the EU Taxonomy. In the advice, the EBA underlines the importance of the green asset ratio, supported by other KPIs, as a key means to understand how institutions are financing sustainable activities and meeting the Paris agreement targets.

In the Opinion and accompanying report and annexes, the EBA elaborates on the KPIs that institutions should disclose, on the scope and methodology for the calculation of those KPIs, and on the qualitative information they should provide. In addition, the EBA  includes some policy recommendations to the Commission to put in place means to facilitate institutions’ disclosures and the eventual extension of the KPIs to all relevant assets, including sovereign and central banks’ exposures.

The main KPI proposed is the GAR, which identifies the institutions’ assets financing activities that are environmentally sustainable according to the EU taxonomy, such as those consistent with the European Green Deal and the Paris agreement goals. Information on the green asset ratio is supplemented by other KPIs that provide information on the taxonomy-alignment of institutions’ services other than lending and investing. The EBA has also integrated proportionality measures that should facilitate institutions’ disclosures, including transitional periods where disclosures in terms of estimates and proxies are allowed.

Background

The EBA is publishing this Advice following the Commission’s call for advice received in September 2020.

While the Commission’s call for advice is addressed to the three ESAs, it includes separate questions for EBA, EIOPA and ESMA, related to the corporates under the jurisdiction of each Authority, banks and investment firms in the case of the EBA. For this reason, the three ESAs are providing separate answers to the call for advice (EMSA,  EIOPA), although the responses have been coordinated in order to ensure consistent proposals.

 
ESAs issue recommendations on the application of the Regulation on sustainability-related disclosures

25 February 2021

The three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) have today published a joint supervisory statement on the effective and consistent application and national supervision of the Regulation on sustainability-related disclosures in the financial services sector (SFDR). The statement aims to achieve an effective and consistent application and national supervision of the SFDR, promoting a level playing field and protecting investors.

In the statement, the three ESAs recommend the draft RTS be used as a reference when applying the provisions of the SFDR in the interim period between the application of SFDR (as of 10 March 2021) and the application of the RTS at a later date.

The ESAs have also set out in an Annex more specific guidance on the application of timelines of some specific provisions of the SFDR, in particular on the application timeline for entity-level principal adverse impact disclosures and for financial products’ periodic reporting. In addition, the Annex includes a summary table of the relevant application dates of the SFDR, the Taxonomy Regulation and the related RTS.

Today’s statement complements the recently released Final Report including the draft regulatory technical standards issued by the ESAs Joint Committee on 4 February 2021.

National competent authorities are encouraged to refer financial market participants and financial advisers to the requirements set out in the draft RTS of the final report that has been submitted to the European Commission.

Next steps

The European Commission is required to endorse the RTS within 3 months of their publication. Subject to the non-objection by the European Parliament and Council of the European Union – within 3 months following the Commission’s endorsement – the RTS will be adopted by the Commission by means of a delegated regulation.

While financial market participants and financial advisers are required to apply most of the provisions on sustainability-related disclosures laid down in the SFDR from 10 March 2021, the application of the RTS will be delayed to a later date according to the European Commission’s letter to the ESAs of 20 October 2020 on the application of the SFDR. The ESAs have proposed in the draft RTS that the application date of the RTS should be 1 January 2022.

The ESAs will publish in March a consultation paper on taxonomy-related product disclosures under the Taxonomy Regulation which amends the empowerments in Articles 8(4), 9(6) and 11(5) of the SFDR.

EBA calls on national authorities to take supervisory actions for the removal of obstacles to account access under the Payment Services Directive

22 February 2021

The European Banking Authority (EBA) published today an Opinion on supervisory actions national competent authorities (NCAs) should take to ensure banks remove any remaining obstacles that prevent third party providers from accessing payment accounts, which restrict EU consumers’ choice of payment services.  The Opinion will contribute to a level playing field across the EU and to a consistent application and supervision of relevant requirements under the Payment Services Directive (PSD2) and the EBA Regulatory Technical Standards on strong customer authentication and common and secure communication (RTS on SCA&CSC).

The Opinion sets out the EBA’s expectations on the actions NCAs should take to ensure that remaining obstacles are removed from the interfaces of account servicing payment service providers (ASPSPs). National authorities should first assess the progress made by ASPSPs in their respective jurisdictions and, in cases where obstacles have not been removed, they should take supervisory actions by 30 April 2021.

The EBA also expects that, in cases obstacles continue to exist following the said deadline, NCAs should take more effective supervisory measures to ensure compliance with the applicable law, including, but not limited to, by revoking exemptions from the contingency mechanism already granted to ASPSPs and/or by imposing fines.

Background and legal basis

The EBA issued the Opinion in accordance with Article 29(1)(a) of its Founding Regulation, which mandates the Authority to play an active role in building a common Union supervisory culture and consistent supervisory practices, as well as in ensuring uniform procedures and consistent approaches throughout the Union.

PSD2 applies since 13 January 2018. The Directive requires ASPSPs to establish the access interfaces through which third party providers can access the customers’ payment accounts in a secure manner. Article 32(3) of RTS on SCA&CSC, which is applicable since 13 September 2019, requires ASPSPs that have implemented a dedicated interface to ensure that the latter does not create obstacles to the provision of payment initiation and account information services. In an Opinion published on 4 June 2020, the EBA identified a number of practices that are obstacles to the provision of third party provider services under the PSD2, which are, therefore, a breach of law and that have to be removed by ASPSPs.  

EBA publishes final draft technical standards on indirect exposures arising from derivatives underlying a debt or equity instrument

19 February 2021

The European Banking Authority (EBA) published today final draft regulatory technical standards (RTS) specifying how institutions should determine exposures arising from derivative and credit derivative contracts not entered directly into with a client but whose underlying debt or equity instrument was issued by a client. These draft RTS will ensure appropriate levels of consistency through different pieces of the regulatory framework for the calculation of large exposures.

As part of the Risk Reduction Measures (RRM) package adopted by the European legislators, the large exposure framework under the Capital Requirements Regulation CRR) was amended to ensure greater alignment with the Basel standard (LEX).

These draft RTS propose a methodology for the calculation of indirect exposures for different categories of derivative contracts and credit derivative contracts with a single underlying debt or equity instrument, namely:

  • options on debt and equity instruments;
  • credit derivative contracts;
  • other derivatives having as underlying a debt or equity instrument.

In addition, they provide a separate methodology for the calculation of exposures stemming from contracts with multiple underlying reference names. The proposed methodologies are expected to be easy to implement and applicable by all institutions in a standardised manner.

The final draft RTS have been developed in a way to ensure that they are compatible with the jump-to-default (JTD) approach under the Fundamental Review of the Trading Book (FRTB) and the CRR and the corresponding draft RTS on JTD that the EBA is currently developing. The basis of both draft RTS is the variation in price that would stem from the default of an issuer.

The EBA consulted on the draft RTS for three months, and the feedback received led to a clarification, on the treatment of derivatives and credit derivatives allocated to the trading book or non-trading book. Furthermore, the draft RTS have been amended to align the proposed rules applicable to multi-underlying derivatives with a structure (i.e. an index and collective investment undertakings) or without a structure, as well as the introduction of a partial look-though approach for this type of derivatives.

Legal basis 

Article 390(5) of the CRR, as amended by Regulation (EU) 2019/876, requires institutions to add to the total exposures to a client the exposures arising from derivative contracts listed in Annex II of the CRR and credit derivative contracts, where the contract was not directly entered into with that client but the underlying debt or equity instrument was issued by that client.

Article 390(9) of the CRR mandates the EBA “to specify how to determine the exposures arising from derivative contracts listed in Annex II and credit derivative contracts, where the contract was not directly entered into with a client but the underlying debt or equity instrument was issued by that client for their inclusion into the exposures to the client”.

EBA publishes final draft technical standards on disclosure of indicators of global systemic importance by G-SIIs

18 February 2021

The European Banking Authority (EBA) published today its final draft Implementing Technical Standards (ITS) on the disclosure of indicators of global systemically important institutions (G-SIIs). These standards help to identify which banks are GSIIIs and specify the formats and instructions in accordance with which G-SIIs disclose the information required under the Capital Requirements Regulation (CRR) and aim at ensuring consistency of information.

The ITS will amend the final draft ITS on institutions’ public disclosures with the strategic objective of defining a single, comprehensive Pillar 3 framework under the CRR that should integrate all the relevant Pillar 3 disclosure requirements. This will facilitate institutions’ implementation and enhance clarity for users of such information, as expressed in the EBA Pillar 3 roadmap.

Legal basis

The ITS on disclosure of indicators of global systemic importance by G-SIIs have been developed in accordance with the mandate included in Article 434a of Regulation (EU) N0 575/2013, which mandates the EBA to develop draft implementing technical standards specifying uniform disclosure formats, and associated instructions in accordance with which the disclosures required under Titles II and III of Part 8 of the CRR shall be made.

EBA publishes final guidelines on the conditions for the alternative treatment of “tri-party repurchase agreements” for large exposure purposes

16 February 2021

The European Banking Authority (EBA) published today final guidelines specifying the conditions for the application of the alternative treatment of institutions’ exposures related to ‘tri-party repurchase agreements’ for large exposure purposes. Under the alternative treatment, institutions are allowed to replace the total amount of their exposures to a collateral issuer due to tri-party repurchase agreements facilitated by a tri-party agent, with the full amount of the limits that the institution has instructed the tri-party agent to apply to those exposures.

If institutions perform such a replacement, the Capital Requirements Regulation (CRR) requires them to comply with three conditions, which are further specified in the final guidelines, namely:

  • the institution must verify that the tri-party agent has in place appropriate safeguards to prevent breaches of the limits instructed by the institution;
  • the competent authority has not expressed to the institution any material concerns;
  • the sum of the limit instructed by the institution to the tri-party agent, and any other exposures of the institution to the collateral issuer does not exceed the limit set out in Article 395(1) of the CRR.

In addition, the final guidelines set the requirements on the conditions and frequency for determining, monitoring and revising the limits specified by the institution.

The final guidelines were consulted for three months during which the EBA received feedback from stakeholders, which led to some minor amendments to clarify some aspects. The guidelines will apply from 28 June 2021.

Legal basis and background

The EBA has developed the final guidelines in accordance with Article 403(4) of Regulation (EU) No 575/2013 and Article 16 of its founding Regulation, which mandatesthe Authority to issue guidelines and recommendations addressed to competent authorities or financial institutions with a view to establishing consistent, efficient and effective supervisory practices within the European System of Financial Supervision, and to ensuring the common, uniform and consistent application of Union law.

The three European Supervisory Authorities publish Final Report and draft RTS on disclosures under SFDR

04 February 2021

The Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) delivered today to the European Commission (EC) the Final Report, including the draft Regulatory Technical Standards (RTS), on the content, methodologies and presentation of disclosures under the EU Regulation on sustainability-related disclosures in the financial services sector (SFDR).

The proposed RTS aim to strengthen protection for end-investors by improving Environmental, Social and Governance (ESG) disclosures to end-investors on the principal adverse impacts of investment decisions and on the sustainability features of a wide range of financial products. This will help to respond to investor demands for sustainable products and reduce the risk of greenwashing.

Steven Maijoor, Chair of the ESAs Joint Committee, said:

The significant set of rules issued today provide a strong basis to improve ESG reporting and combat greenwashing. They strike a careful balance between achieving common disclosures across the range of financial products covered by the SFDR and recognising that they will be included in documents that are very diverse in length and complexity. The ESAs have listened to the consultation feedback from stakeholders and have adjusted the proposed disclosures.

Main proposals

Entity-level principal adverse impact disclosures

The principal adverse impacts that investment decisions have on sustainability factors should be disclosed on the entity’s website. The disclosure should take the form of a statement showing how investments adversely impact indicators in relation to

  • climate and environment; and
  • social and employee matters, respect for human rights, anti-corruption and anti-bribery aspects.

The ESAs have updated the list of indicators for principal adverse impacts. The principal adverse impact reporting in the SFDR is based on the principle of proportionality – for companies with fewer than 500 employees, the entity-level principal adverse impact reporting applies on a comply-or-explain basis.

Product level disclosures

The sustainability characteristics or objectives of financial products are to be disclosed in an annex to the respective sectoral pre-contractual and periodic documentation in mandatory templates and on providers’ websites.

Proposals relate to:

  • Pre-contractual information should include details on how a product with environmental or social characteristics/ sustainable investment objective/ meets those/ that characteristics/ objective.
  • Information on the entity’s website on the environmental or social characteristics of financial products/ sustainable investment objective of the product and the methodologies used.
  • Information in periodic reports specifying: (I) the extent to which products met the environmental and/or social characteristics by means of relevant indicators; and (II) for products with sustainable investment objectives, including products whose objective is a reduction in carbon emissions.
  • Information in relation to the ‘do not significantly harm’ principle: specifying the details for how sustainable investments do not significantly harm sustainable investment objectives.

As the ESAs were not empowered to differentiate the disclosures between financial market participants and products, the RTS contain a harmonised approach to all financial products. Therefore, the same disclosures are required for a very broad range of products attached as annexes to existing sectoral disclosure documents that have different levels of granularity and length.

Next steps

The EC is expected to endorse the RTS within 3 months of their publication.

While financial market participants and financial advisers are required to apply most of the provisions on sustainability-related disclosures laid down in the SFDR from 10 March 2021, the application of the RTS will be delayed to a later date according to the EC letter to the ESAs. The ESAs have proposed in these draft RTS that the application date of the RTS should be 1 January 2022.

The ESAs plan to issue a public supervisory statement before the application date of SFDR in order to achieve an effective and consistent application of the SFDR’s requirements and consistent national supervision of the SFDR.

The ESAs will also publish a consultation on taxonomy-related product disclosures under the Taxonomy Regulation which amends the empowerments in Articles 8(4), 9(6) and 11(5) of the SFDR.

Background

On 9 December 2019, the SFDR was published in the Official Journal. The Taxonomy Regulation was published in the Official Journal on 22 June 2020.

The Final Report takes into account the feedback received on the consultation paper launched in April 2020.

EIOPA’s Board of Supervisors agrees on changes to the PRIIPs key information document

03 February 2021

The European Supervisory Authorities - ESAs (the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) submitted today to the European Commission draft Regulatory Technical Standards (RTS) on amendments to the key information document for packaged retail and insurance-based investment products (PRIIPs).

Following a request from the European Commission in December 2020, EIOPA’s Board of Supervisors further analysed the draft RTS which was adopted today by a qualified majority of EIOPA’s Board.

While some national competent authorities at EIOPA’s Board continued to express reservations on the draft RTS, they supported the proposal based on the further details provided by the European Commission on their approach to the broader review of PRIIPs Regulation, namely that the review will thoroughly examine the application of the PRIIPs framework, including:

  • how to achieve better alignment between PRIIPs, Insurance Distribution Directive and Markets in Financial Instruments Directive II regarding provisions on costs disclosure;
  • the scope of products as foreseen by the PRIIPs Regulation;
  • how to ensure that the KID contains the key information necessary for retail investors while avoiding too much or too complex information for these investors;
  • how to allow the creation of a digitalised KID allowing layered information and reviewing the default paper basis of the KID, taking into account the specific challenges for different types of products (e.g. multi-option products (MOPs));
  • the need for a more tailored approach, such as for MOPs, in order to maximise understanding and use of the information, while continuing to allow for comparability of similar products.

Background

In July 2020 the ESAs informed the European Commission of the outcome of a review that had been conducted on the PRIIPs key information document. This followed an ESA consultation paper published on 16 October 2019 on draft RTS to amend the technical rules on the presentation, content, review and revision of KID (Delegated Regulation (EU) 2017/653). At that stage, the draft RTS was adopted by the Board of Supervisors of ESMA and EBA, but did not receive the support of a qualified majority at the Board of Supervisors of EIOPA.

In December 2020, the Commission invited the ESAs to submit an RTS to amend the KID within a six week period referring to the need to make urgent amendments to European Commission’s Delegated Regulation (EU) 2017/653.

Following the submission to the European Commission, the ESAs draft RTS is now subject to adoption. If adopted by the European Commission, the RTS would be subject to non-objection by the European Parliament and the Council of the European Union.