AML/CTF, Sanctions and Insider Trading

EU Countering Money Laundering by Criminal Law Directive Will Apply From December 2020

On November 12, 2018, the EU Countering Money Laundering by Criminal Law Directive was published in the Official Journal of the European Union. The Directive will complement the Fifth Money Laundering Directive, which was adopted in May 2018.

The U.K., Ireland and Denmark have not adopted the new Directive. In the U.K., this mirrors the approach taken by the U.K. in relation to EU criminal sanctions for market manipulation where it has implemented its own national regime.

The new Directive will enter into force on December 3, 2018. EU member states that have adopted the Directive must transpose the new provisions into national law by December 3, 2020.

The new Directive establishes minimum rules on the definition of criminal offences and sanctions in the area of money laundering. Member states will be required to implement national laws providing for money laundering offences by individuals to be punishable by a maximum term of imprisonment of at least four years. National laws will continue to provide for additional measures, such as fines, temporary or permanent exclusion from public tender procedures, grants and concessions, and national laws will also provide for national courts to take into account any aggravating factors for sentencing.

In addition, the new Directive establishes corporate liability for money laundering in certain circumstances and provides for corporates to face various sanctions, such as exclusion from entitlement to public benefits or aid, temporary or permanent exclusion from public tender procedures, grants and concessions, temporary or permanent disqualification from the practice of commercial activities, placing under judicial supervision, judicial winding-up and temporary or permanent closure of the establishments used for committing the offence.

The new Directive also includes rules for establishing jurisdiction and for cross-border cooperation between member states.

The Directive is available at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L1673&from=EN .

Financial Stability Board Progress Report on Addressing Correspondent Banking Decline

On November 16, 2018, the Financial Stability Board published a progress report addressed to the G20 Finance Ministers and Central Bank Governors on the FSB's four-point action plan to assess and address the decline in correspondent banking relationships. The progress report is accompanied by an update to the Correspondent Banking Data Report published by the FSB March 2018. The updated data report includes additional data from July – December 2017 derived from information provided by SWIFT to the FSB, through the intermediation of the National Bank of Belgium. The data report shows a further decline in active correspondent banking relationships in 2017.

The progress report sets out actions taken since the FSB's March 2018 progress report. Actions taken by the FSB since March include:

  1. Data collection and analysis further examining the scale of the issue, its effects and its implications.
  2. Clarifying regulatory expectations, including further work from the Financial Action Task Force and the Basel Committee on Banking Supervision on their guidance.
  3. Domestic capacity-building to improve and build trust in the supervisory and compliance frameworks in jurisdictions that are home to affected respondent banks.
  4. Strengthening tools for due diligence by correspondent banks, through supporting the implementation of the recommendations in the July 2016 report of the Committee on Payments and Market Infrastructures on correspondent banking.
  5. Monitoring of the implementation of the FSB's 19 recommendations in its March 2018 report on improving remittance service providers' access to banking services.

The FSB states in the progress report that, now that the international components of the correspondent banking action plan are largely in place, the focus of the FSB's Correspondent Banking Coordination Group is now turning to the monitoring of implementation and of developments. Next steps in the continuation of monitoring work are outlined in the progress report.

The progress report is available at: http://www.fsb.org/wp-content/uploads/P161118-3.pdf , the updated Correspondent Banking Data Report is available at: http://www.fsb.org/wp-content/uploads/P161118-2.pdf  and details of the FSB's March 2018 progress report and action plan on remittance service providers' access to banking services are available at: https://finreg.shearman.com/financial-stability-board-action-plan-on-access-t .

Bank Prudential Regulation & Regulatory Capital

EU Final Draft Technical Standards on Estimating and Identifying an Economic Downturn in IRB Modelling

On November 16, 2018, the European Banking Authority published final draft Regulatory Technical Standards on the specification of the nature, severity and duration of an economic downturn in accordance with the Capital Requirements Regulation. The aim of the RTS is to ensure that institutions using the Internal Ratings- Based approach to calculating capital requirements can use a well-defined and common specification of the nature, duration and severity of an economic downturn for portfolios relating to comparable types of exposure.

The nature of the economic downturn is defined as a set of relevant economic factors and its severity is specified via the most severe values observed on the relevant economic factors over a given historical period. The duration of an economic downturn is specified using the concept of a "downturn period," namely the period of time where the peaks or troughs, which relate to the most severe values of one or several economic factors, are observed.

The EBA has submitted the final draft RTS to the European Commission for endorsement. Once adopted, the RTS are expected to apply directly across the EU from January 1, 2021.

The EBA is in the process of finalizing related Guidelines on the estimation of loss given default (LGD) appropriate for conditions of an economic downturn. Once finalized, those Guidelines will also apply from January 1, 2021.

The final draft RTS is available at: http://www.eba.europa.eu/documents/10180/2459703/EBA+BS+2018+xxx+%28Final+draft+RTS+on+economic+downturn%29_final+%28002%29.pdf  .

European Central Bank Publishes Final First Chapter of Its Guide to Internal Models

On November 15, 2018, the European Central Bank published the final first chapter of its guide to internal models. The CRD requires the ECB to assess and grant permission for banks directly supervised by the ECB to use internal models for credit risk, counterparty credit risk and market risk. The ECB's guide sets out how the ECB intends to approach the assessment of whether a firm meets the necessary requirements for the permission to be granted. This chapter is on general topics, comprising overarching principles for internal models, implementation of the IRB approach, internal model governance, internal validation and audit, model use, change management and third-party involvement. The ECB recently consulted on model-specific chapters, including for credit, market and counterparty credit risks.

The ECB notes that the guide may need to be amended if the European Commission adopts a different version of the EBA's final Draft RTS on assessment methodology for the IRB approach.

The guide is available at: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.guidegeneraltopics201811.en.pdf  and the feedback statement is available at: https://www.bankingsupervision.europa.eu/legalframework/publiccons/pdf/internal_models/ssm.guidegeneraltopics_feedbackstatement201811.en.pdf .

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