Statement of


Alliance for Securing Democracy, the German Marshall Fund of the United States



“Anti-Money Laundering: Toward a Better Enforcement of AML Rules” December 1, 2021

Chair Tinagli, Chair López Aguilar, and esteemed committee members, thank you honoring me with the opportunity to speak about the future of anti-money laundering (AML) supervision and enforcement in the European Union. It is encouraging to come before you in the wake of the Commission’s strong, well-crafted proposal for the creation of a centralized European AML supervisory agency. I hope to see the Parliament and Council build on the Commission’s work and pass legislation to make the new agency a reality expeditiously.

In October 2018, my colleague Nicolas Véron of Bruegel and I coauthored on a paper in which we called for a new AML agency to supervise credit institutions and non-banks across the common market. We emphasized that this agency must be independent and well-resourced, and that it should have the ability to supervise the most important or problematic institutions directly (jointly with national competent authorities), while coordinating indirect supervision of other institutions with the NCAs.

At the time we wrote our paper, the EU was reeling from a series of scandals at banks prominent and obscure, in member states large and small. Although the particulars varied, many of the incidents involved the laundering of billions of dollars through non-resident shell company accounts. Criminal and regulatory authorities had been late to act or ineffectual. Home and host sometimes pointed the finger at one another. They were often outgunned, as large offshore sectors had built up in small jurisdictions with modestly resourced administrative apparatuses.

The European Central Bank, responsible for bank licensing and prudential supervision in the euro area, protested that someone should do something but made clear that it did not want the responsibility for AML supervision itself. In short, it was unclear whether member states and the Commission would garner the political will to tackle a complex, cross-border illicit finance problem that caused reputational and real-world harm but fell within the official purview of no one in particular. On top of that, building a new AML agency touched a sensitive nerve, as it implied national competent authorities could not handle the task alone. It would also potentially subject national champions to unwanted outside scrutiny.

Fortunately, the Commission took a bold approach, proposing in July of this year a robust, independent agency of 250 personnel to supervise banks and non-banks alike. It supported extending the agency’s remit beyond the euro area, and it contemplated a hybrid model of both direct and indirect supervision. In my opinion, the Commission answers the big questions wisely. If I had to critique the proposal, I would offer one significant criticism and two small quibbles.

Most importantly, the Commission proposal contains problematic selection criteria for the determination of which institutions will be categorized as “selected obliged entities” subject to direct supervision. The proposal requires a bank to operate in at least seven, and a non-bank to operate in at least ten, member states to be eligible for direct supervision. Once that threshold is crossed, the proposal sets out a matrix of risk factors for consideration, including transaction volume, products and services offered, and the percentage of non-resident accounts and politically exposed person customers. The argument in favor of this scheme is that it relies on “objective criteria” that will steer the new agency to direct its resources most effectively and prevent undue politicization.

This thinking is misguided. By all means, direct supervision should be established by fair and reasonable criteria that will also serve as guardrails to prevent politicization. But illicit finance risk is not something that can be quantified mechanistically or formulaically. Moreover, the greatest problems are sometimes found at minor institutions that pose no prudential, systemic threat. The proposal itself acknowledges this truth, allowing for the EU-level agency to “take over from a national supervisory authority’s supervision of any financial sector obliged entity in emergency circumstances if there are indications of breaches of AML/CFT legislation which are not being efficiently and adequately dealt with by a supervisory authority.” In other words, when it is too late.

I urge Parliament to consider striking a different balance. The new agency should select obliged entities for direct supervision on the basis of both quantitative and qualitative factors. Most importantly, an institution’s limited size and geographic reach should not preclude direct supervision.

As for the quibbles. First, the Commission proposes that the new agency take shape in 2023 and conduct its first examinations in 2026. Sooner is better. Second, a staff of 250 makes an excellent starting point. The immediate priority of the new agency will be to buttress supervision of the banking sector, which is the pillar of the financial system. As the agency gets its sea legs, though, it will delve deeper into depths beyond banking. At some point, 250 staffers may need augmentation. A centralized, specialized AML supervisor at the EU level should eventually transform into a global AML leader that others will emulate and collaborate with. The attention is currently on banking, and rightly so. But the new agency can and should – in a second stage of growth –raise supervision of e-payments companies, private investment funds, and cryptocurrency firms to the stringent, demanding standard that it is expected to set for banks in coming years. In the long run, failure to do so will simply and inevitably push illicit activity one layer out, from the bank core to the non-bank periphery of the system.

I am grateful for the invitation to testify today. I would be happy to answer any questions you may have.

The views expressed in GMF publications and commentary are the views of the author alone.