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European Council Adopts Conclusions on Strategic Priorities on AML/CFT

The European Council (The Council) adopted anti-money laundering and counter terrorism financing conclusions in response to their 2019-2024 strategic agenda aimed at strengthening terrorism and cross border crime preventions, and improving cooperation and information sharing. The “Council urges for the swift transposition of all AML legislation into national law and for the strengthening of their effective implementation.” Furthermore, The Council has invited the European Commission (EC) to take action on the existing AML regulatory framework by considering:

  • “ways of ensuring a more robust and effective cooperation between the relevant authorities and bodies involved in anti-money laundering and terrorist financing, including through addressing impediments on exchange of information between them;
  • whether some aspects could be better addressed through a regulation;
  • possibilities, advantages and disadvantages of conferring certain supervisory responsibilities and powers to an EU body.”

WOCCU will continue to monitor The Council and the EC’s AML/CFT regulatory enhancements and any action or input the EC may provide. The “Council conclusions on strategic priorities on anti-money laundering and countering the financing of terrorism”, can be found here.

WOCCU Urges Proportionality for Credit Unions in FATF Digital Identity Guidance

In a comment letter to the Financial Action Task Force (FATF) regarding their Draft Guidance on Digital Identity, WOCCU urged (FATF) to implement further guidance to national-level regulators to focus on an effective system that avoids imposing overly burdensome requirements and provide some flexibility for the unique structure of credit unions and cooperative financial institutions. WOCCU responded to four questions posed by FATF regarding the role of digital identity in relation to money laundering and terrorist financing, financial inclusion, due diligence and transaction monitoring, and record keeping requirements. WOCCU concurs with FATFs risk-based approach to digital identify for customer due diligence as well as their endeavors to support financial inclusion, however, WOCCU emphasized the need to implement " guidance directing supervisors to consider some high level principles such as whether an institution has cross-border operations, the asset size, the institutions interconnectedness with the financial system, the degree to which they report to multiple prudential supervisors, the mix of business activities, the average level of transactions that occur in any account and that further corresponds to the size, and the complexity and risk of a financial institution."

WOCCU's comment letter to FATF regarding their draft guidance on digital identity can be found here.  



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FATF

Basel Committee Reinforces the Need for Proportionality

The Basel Committee on Banking Supervision (Basel Committee) and the Basel Consultative Group (BCG) issued a joint statement supporting the use of proportionality in implementing the Basel Framework.  WOCCU applauds this joint statement as it has been urging further guidance directing national-level authorities to tailor Basel standards to the size, complexity and risk of a credit union or other community-based mutual depository institutions.  National-level regulators often tend to use the highest standard which often times are not appropriate or are excessive for credit unions.  This joint statement reinforces the need to use the built-in proportionality contained in the Framework and not use the Basel Framework as a floor.    

A copy of the joint statement can be viewed here

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Basel

Basel Committee on Banking Supervision Publishes Guidelines on AML/CFT Supervision

The Basel Committee on Banking Supervision (BCBS) has published their consultation, Introduction of Guidelines on Interaction and Cooperation Between Prudential and AML/CFT Supervision, in order to amend their previously published guidelines entitled, Sound Management of Risks Related to Money Laundering and Financing Terrorism. The guideline aims to outline methods to implement mechanisms that will facilitate cooperation between prudential and AML/CFT supervisors, including: recommendations and principles for information exchange on authorization procedures of banks, on-going supervision, and enforcement actions. “The proposed changes to the Sound management of risks related to money laundering and financing of terrorism include a new provision in "The role of supervisors" section that recommends establishing an effective cooperative system and a supplementing annex with specific recommendations and descriptive examples to facilitate supervisory cooperation.”

WOCCU is analyzing this proposal to ensure that the role of credit unions is adequately contemplated in the guidelines and that appropriate direction to national-level regulators to consider proportionality when implementing the guidelines is provided.  BCBS is accepting comments on the consultation until February 6, 2020 and the document can be found here.

Financial Action Task Force Issues Guidance on Best Practices on Beneficial Ownership for Legal Persons

The Financial Action Task Force (FATF) has released its guidance on Best Practices on Beneficial Ownership for Legal Persons. It their executive summary, FATF states that: "The results of FATF Mutual Evaluations indicate that jurisdictions find it challenging to achieve a satisfactory level of transparency regarding the beneficial ownership of legal persons." The guidance seeks to provide solutions to the implementation of FATF Recommendations on AML/CFT.  According to the Guidance, "countries should use one or more of mechanisms (the Registry Approach, the Company Approach and the Existing Information Approach) to ensure that information on the beneficial ownership of a company is obtained by that company and available at a specified location in their country; or can be otherwise determined in a timely manner by a competent authority."   

The guidance also seeks to address the favorable use of a multi-pronged approach to Beneficial Ownership; the keys to an effective system; latest developments and case examples; and suggestions for "ensuring authorities can access getting information on beneficial ownership of overseas entities".

The guidance can be found here.

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FATF

The Financial Action Task Force Seeks Consultation on Digital Identity

The Financial Action Task Force (FATF) is seeking public consultation on their draft guidance regarding digital identity and its benefit to customer due diligence (CDD). FATF hopes that their guidance will "...help governments, financial institutions and other relevant entities apply a risk-based approach to the use of digital ID for CDD." In the guidance, FATF explains that the growth of digital financial transactions is an impetus for clarification of what digital identity technologies are currently utilized to identify and verify individuals in digital financial services. Effective authentication of consumer identity is critical for anti-money laundering and counter financing of terrorism (AML/CFT) efforts. 

The areas of focus for the consultation are: 

  • Specific money laundering / terrorist financing risks that arise from the use of digital identity systems for CDD, other than those already mentioned in Section IV of the guidance;
  • The role of digital ID systems in ongoing due diligence or transaction monitoring; 
  • How digital ID systems can support financial inclusion;
  • The use of digital ID systems for CDD and whether it raises distinct issues for implementing FATF record-keeping requirements.
FATF's request for public consultation on digital identity can be found here.
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FATF

European Commission Invites Public Consultation for BASEL III Reforms

The European Commission has opened a public consultation regarding the next stages in their implementation of final Basel III reforms in the EU. The EC aims to use the consultation as a means to shape the next wave of banking regulation proposals for next year. According to the EC, “the Commission services aim to gather stakeholders’ views on specific topics in the areas of credit risk, operational risk, market risk, credit valuation adjustment risk, securities financing transactions as well as in relation to the output floor.” The EC expects the solicited comments will ensure “convergent and consistent supervisory practices across the Union and alleviating the administrative burden.”[1]

WOCCU looks forward to responding to the EC’s questionnaire by the January 3, 2020 deadline, and will ensure that the critical issues that affect credit unions are represented.

[1] Public Consultation: Alignment EU rules on capital requirements to international standards (prudential requirements and market discipline) 

WOCCU Urges IADI to Consider Credit Union Deposit Insurance Schemes

WOCCU urged the International Association of Deposit Insurers (IADI) to consider credit unions when establishing their public policy objectives. These comments were submitted in response to the IADI’s  draft Guidance Paper, ‘Public Policy Objectives for Deposit Insurance Systems’. WOCCU stressed the contributions credit unions have made to financial inclusion through the support of the under-banked communities within their respective jurisdictions and asserted that a proportional approach to deposit insurance PPOs will aid in upholding IADI’s primary principals.  WOCCU supported IADI’s primary principles of deposit insurance which are to protect depositors and contribute to financial system stability.  Comment Letter to IADI on ‘Public Policy Objects for Deposit Insurance Systems’ can be viewed here.

Anti-money Laundering Action Plan Announced by EU Council

On October 10, 2019, the Council of the EU's Economic and Financial Affairs Council (ECOFIN), met to discuss key issues including anti money laundering matters and reforms. The Economic and Financial Affairs Council is set to adopt conclusions on the implementation of the anti-money laundering (AML) action plan that was presented last December. The Commission, in addressing shortcomings of the current AML policies, is pushing agreed upon reforms including: the 5th revision of the AML directive; new CRD5 capital requirements for banks and the revised European system of financial supervision; enhancing the cooperation and exchange of information between competent authorities; and further harmonizing AML rules by converting the current AML directive into concrete regulations, in addition to giving an EU body specific AML supervisory tasks.

The 5th directive on AML and terrorist financing compels the identification of third country jurisdictions with strategic deficiencies in the management of anti-money laundering and counterterrorist financing regimes, and that pose significant threats to the EU financial system. Accordingly, Ministers discussed a methodology for constructing this list and plan to release a new draft list in the form of a delegated act. The “Commission non-paper on key elements of a refined methodology for identifying high-risk third countries for AML purposes” can be found here.  WOCCU and ENCU will monitor these issues closely as they move to the process to determine any adverse impact on credit unions.

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European Commission

Bank for International Settlements Enters the Environmental Finance Ring

In response to a growing demand for climate-friendly investments, the Bank for International Settlements (BIS) launched an open-ended green bond fund for central bank investments. This green bond fund initiative will aid central banks in managing their reserves by incorporating environmental sustainability objectives.

The open-ended fund promotes green finance by pooling BIS client assets through a fund and creating “sizeable climate-friendly investments” using best market practices. An advisory committee composed of a global group of central banks was created in support of the fund. “The initiative is part of the BIS's broader commitment to supporting environmentally responsible finance and investment practices, in line with the Bank's participation in the Central Banks and Supervisors.”[1]

The Network for Greening the Financial System, First Comprehensive Report, was published in April 2019, by eight central banks and supervisors who established a Network of Central Banks and Supervisors for Greening the Financial System (NGFS). The report states that NGFS members acknowledge that “climate-related risks are a source of financial risk. It is therefore within the mandates of central banks and supervisors to ensure the financial system is resilient to these risks.” NGFS now includes 34 central banks and supervisors, and five observers, including BIS; and recently, the Basel Committee agreed to join NGFS as an observer, indicating the relevance and importance of environmental finance issues for years to come.

[1] See, BIS 26-09-2019 press release at: https://www.bis.org/press/p190926.htm

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Basel

European Commission President Announces New College of Commissioners

Last week, Ursula Von der Leyen, the new European Commission President, announced the new term of College of Commissioners. The most notable new Commissioner is Valdis Dombrovskis from Latvia who will serve as one three new Executive Vice-Presidents of the European Commission, as well as coordinate the work on "An Economy That Works For People". He will be the Commissioner for financial services, which is supported by the Dictorate-General for Financial Stability, Financial Services and Capital Markets Union. President-elect Ursula von der Leyen addressed the role Executive Vice-President Dombrovskis, stating, "We have a unique social market economy. It is the source of our prosperity and social fairness. This is all the more important when we face a twin transition: climate and digital. Valdis Dombrovskis will lead our work to bring together the social and the market in our economy." 

Dombrovskis' key priorities that will impact credit unions in the EU are outlined in President-elect Von der Leyen's Mission Letter, and include: 

  • Completing the Banking Union by finalizing the common backstop to the Single Resolution Fund;
  • Agreeing on a European Deposit Insurance Scheme;
  • Speeding up the work towards a Capital Market Union;
  • Improving cross-border investments, improve the supervisory system and better harmonize insolvency and tax proceedings;
  • Developing a green financing strategy to direct investment and financing to the transition to a climate-neutral economy;
  • Devising a FinTech Strategy to support new digital technologies in the financial system;
  • Developing a new private-public fund specializing in initial public offerings for SMEs;
  • Developing a comprehensive approach to combat money laundering and the financing of terrorist activities;
  • Ensuring a common approach with the Member States on cryptocurrencies; and
  • Developing proposals to improve European resilience against sanctions by third countries, and to ensure that EU sanctions are properly enforced.
To view the European Commission's (EC) press release regarding the President-elect's team and new structure of the EC, please click here.
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European Commission

Basel Proportionality Study under Pillar 2 Approach to Oversight of Internationally Active Banks

In July 2019, the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) published a study of the application of proportionality under Pillar 2 of the Basel framework. Sixteen jurisdictions were surveyed to examine their application of proportionality and how they implemented Pillar 2 principles. FSI stated that the key aim of the survey was, "to determine whether and, and if so, how supervisory authorities apply proportionality in tailoring risk management expectations and supervisory practices according to the size, complexity and risk profile of regulated entities."

The Basel Committee on Banking Supervision created a three pillar approach to the oversight of international banks, designating Pillar 1 to outline risk-based capital (RBC) rules, which are subject to supervisory review pursuant to Pillar 2 regulatory requirements and disclosure requirements set forth in Pillar 3. Pillar 2 requires an assessment of risk profile through a cumulative set of risk management requirements coupled with risk-based supervision (RBS). 

FSI's "Proportionality Under Pillar 2 of the Basel Framework", can be found here

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Bank of International Settlements, Basel

ENCU and WOCCU Appeal to Ukraine's National Commission Regarding CRD IV Exemption

On August 26, 2019, the European Network of Credit Unions (ENCU) and the World Council of Credit Unions (WOCCU) sent letters to Ukraine's National Commission for the State Regulation of Financial Service Markets regarding the revised Regulations on Mandatory Standards and Requirements Limiting the Risk of Operations with Credit Union Financial Assets, and their relationship to the European Union Capital Requirements Directive (CRD IV). Both ENCU and WOCCU urged the Commission to adopt new regulatory norms and regulations that will help strengthen the credit union system.  If adopted the norms should pave the way for and amendment to the EU-Ukraine's Association Agreement incorporating a CRD-IV exemption for credit unions.  This exemption will bring credit unions in line with numerous other EU countries that provide a similar exemption, all of which will assist credit unions with their operations. 

Comment Letters:
ENCU Comment Letter: Regulations on Mandatory Standards and Requirements Limiting the Risk of Operations with Credit Union Financial Assets and Ukrainian Exemption from EU Basel III Capital Requirements Directive (CRD IV)

WOCCU Comment Letter: Regulations on Mandatory Standards and Requirements Limiting the Risk of Operations with Credit Union Financial Assets and Ukrainian Exemption from EU Basel III Capital Requirements Directive (CRD IV)

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European Commission

WOCCU Urges Further Proportionality Guidance for Basel Framework

WOCCU urged the Basel Committee on Banking Supervision (Basel Committee) to include clearer guidance on the factors appropriate for national-level regulators to consider when developing proportionate approaches when implementing the Basel Framework. 

WOCCU noted that national-level supervisors often view the framework as a floor and either adopt the standard outright or even exceed the standard without proportionally tailoring the regulation to the size, complexity and risk of credit unions.  As such, stronger guidance that exceeds the clear statements on proportionality already included in the Basel framework are necessary.

The comments came as part of the consultation by the Basel Committee on is Consolidated Basel Framework which is designed to clearly and comprehensively set out the policy contained in the numerous published Basel standards adopted since the financial crisis.

A copy of the letter can be viewed here.

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Basel

ENCU Urges European Commission to Reduce Reg Burden on Distance Marketing Rules

ENCU urged the European Commission to avoid duplication and overlap of the implementation of the Distance Marketing of Financial Services Directive, particularly when there are product specific directives or national-level rules governing similar conduct.  ENCU noted that often inconsistencies or additional processes required by competing regulations often lead to additional costs and expenses without any corresponding benefit to consumers. 

The comments came as part of the European Commission’s Evaluation of the EU Rules on Distance Marketing of Financial Services that sets out what information a consumer should receive about a financial service and its provider before conducting a distance contract.

A copy of the comment letter can be viewed here.

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European Commission

Basel Seeks to Rein in “Window-Dressing” by Big Banks

The Basel Committee has finalised this disclosure requirement to address the issue of “window dressing” by big banks whereby they reduce their balance sheets for end-quarter reporting and end-year disclousure purposes.  This practice leads to disruptions in the lending market and possible misleading information to investors. 

WOCCU commented on this proposal noting that credit unions are cooperative depository institutions that are not publicly traded, rarely operate on a cross-border basis and do not typically engage in the “window dressing” behavior addressed by the proposal.  In fact, because members of credit unions are physical-person members and legal-person members (which are usually small and medium-enterprises), they often increase their deposits at the end of each quarter, driving their leverage ratios down for end-quarter or end-year reporting.

The final standard will likely not be applicable to most credit unions but apply to internationally-active banks and will require disclosure of quarter-end values and on average of daily values over the quarter as part of their Pillar 3 requirements, in addition to disclosure of the total leverage exposure and the leverage ratio calculated using an averaged value of securities financing transaction assets.

A copy of the standard can be viewed here.

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Basel

WOCCU Recommended Approach Included in Finalized Basel Standard on Client Cleared Derivatives

As urged by WOCCU, the Basel Committee revised the leverage ratio treatment of client cleared derivatives to generally align it with the standardized approach measuring counterparty credit risk exposures (SA-CCR) as used for risk-based capital requirements.

WOCCU encouraged this approach to the leverage ratio in order to help preserve community-based financial institutions’ access to interest-rate derivatives in order to hedge interest rate risk.

Continued access for credit unions and other community based-depository institutions to fair and affordable interest rate swaps and caps promotes safety and soundness by helping community-based institutions hedge interest rate risks related to fixed-rate mortgage loans held in portfolio and similar fixed-rate investments.

WOCCU continues to have concerns that the SA-CCR may itself have capital requirements for banks involved in client clearing of derivatives that are too high for credit unions and other community-based financial institutions to be able to maintain access to interest rate derivatives at fair rates and will continue to monitor this situation.

The revised standard can be viewed here.

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Basel

WOCCU Urges Further Proportionality to FSB in Too Big to Fail Evaluation

WOCCU urged the Financial Stability Board (FSB) to consider issuing clearer guidance on factors that should be considered by national level regulators when developing proportionate approaches to the numerous standards adopted since the financial crisis, many of which are targeted to the "Too-Big-To-Fail" institutions.  

WOCCU noted that the complexity, usefulness, and corresponding regulatory burden and costs for smaller non-systemically important credit unions often becomes questionable, particularly those that are only involved in deposit taking and simple retail consumer lending.  While many of the Too Big to Fail Reforms were necessary, the application to credit unions and other mutuals needs to be appropriately and proportionately tailored.

The comments came as part of the FSB's Evaluation of the Too-Big-To-Fail Reforms.

A copy of the letter can be viewed here.
 

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Financial Stability Board

FSB Issues Reports on Correspondent Banking

The Financial Stability Board (FSB), published two reports outlining its progress on its plan to assess and address the decline in correspondent banking relationships and or remittances service providers' access to banking service.  Notably the report notes that the decline in the number of correspondent banking relationships remains a source of concern for the international community, as the number of active correspondent banks declined by 3.4% in 2018, bringing the cumulative decline since 2011 to 19.3%. Concentration increased, as fewer correspondent banks are handling payments.

Access to correspondent banking relationships remains a critical issue in some regions and jurisdictions. WOCCU has consistently urged the continuation of efforts to reduce "de-risking" in the financial system which often creates obstacles for low risk credit unions trying to establish correspondent bank accounts or clear checks.

The FSB reports can be viewed here.

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Financial Stability Board

FSB Launces Evaluation of Too-Big-To-Fail Reforms

The Financial Stability Board (FSB) announced it is seeking feedback from as part of its evaluation of the effects of the "Too-Big-To-Fail" reforms for banks that were agreed by the G20 in the aftermath of the global financial crisis. The evaluation will assess whether the implemented reforms are reducing the systemic and moral hazard risks associated with systemically important banks and the broader effects of the reforms on the overall functioning of the financial system.  

Further information on the evaluation can be viewed here.

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Financial Stability Board

WOCCU Calls for Further Proportionality Guidance for Credit Unions

Following a meeting by representatives of the credit union industry, the World Council of Credit Unions wrote to the Basel Committee on Banking Supervision (Basel Committee) to ask for further guidance to achieve the goal of better proportionality in regulation for credit unions.

In its letter, WOCCU urged additional guidance in the form of a set of high-level principles or weighing-factors on when less complex regulatory approaches can be warranted.  WOCCU noted that without additional guidance, many national-level policymakers continue to feel obligated to apply Basel III and other Basel Committee standards to non-complex, purely domestic deposit-taking institutions such as credit unions.  This notwithstanding that the Basel framework is intended only for internationally active banks and the expensive compliance standards are not warranted for credit unions. 

This letter followed an effort led by WOCCU making the case for proportionality to the Basel Committee last week with several representatives of the credit union industry including Canadian Credit Union Association (CCUA) President & CEO Martha Durdin, Customer Owned Banking Association (COBA) President & CEO Mike Lawrence and Credit Union National Association (CUNA) Chief Advocacy Officer Ryan Donovan.

A copy of the letter can be viewed here.

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Basel

WOCCU Urges Further Proportionality to FSB to Increase SME Lending

WOCCU urged the Financial Stability Board (FSB) to continue with proportionality efforts in light of the voluminous regulatory reforms adopted since the financial crisis.  WOCCU noted that the additional complexity often filters down disproportionately to smaller, less complex institutions such as credit unions and other community based cooperative institutions.  WOCCU commented that these regulations need to be proportionately tailored and noted that the effects can have significant impact in their ability to lend to SMEs. 

These comments came as part of the FSB’s request for Feedback on the Effects of Financial Regulatory Reforms on SME Financing where they are evaluating how the regulatory reforms have affected SME lending.

A copy of the letter can be viewed here.

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Financial Stability Board

WOCCU Urges Basel Committee to Provide Flexibility with Leverage Ratio Disclosures

World Council urged the Basel Committee on Banking Supervision (Committee) to make the use of daily averages in disclosures optional for non-complex depository institutions such as credit unions and other community-based mutual depository institutions that follow standardized risk-based capital rules. 

The Committee is seeking input in its consultative document Revisions to Leverage Ratio Disclosure Requirements and is seeking to address the issue of “window dressing” that occurs with internationally active, publicly traded banks reduce their balance sheets for end-quarter and end-year disclosure purposes that have macroeconimic effects and can provide misleading information to investors. 

WOCCU notes that credit union do not typically engage in this “window dressing” behavior and thus the disclosures may result in disproportionate reporting burdens on credit unions.  WOCCU did urge the ability to have the option of using daily averages for reporting purposes.

A copy of the comment letter can be viewed here.

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Basel

WOCCU/CUNA Urge IRS to Reduce FATCA Regulatory Burden

WOCCU and the Credit Union National Association (CUNA) jointly urged the Internal Revenue Service (IRS) to reduce regulatory burden for Credit Unions in connection with the Foreign Account Tax Compliance Act (FATCA).  These comments came as part of the IRS’ FATCA rulemaking efforts looking for regulations that should be modified or eliminated in order to reduce unnecessary burdens. 

WOCCU and CUNA strongly supported many aspects of the rule that will reduce unnecessary regulatory burden for credit unions including the elimination of withholding on payments of gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States.

FATCA places significant compliance costs on U.S. credit unions, especially those that engage in remittances and/or have members who are not U.S. citizens. As a result, Americans living and working abroad have had their bank accounts closed, as well as loans and mortgages recalled and denied. This is in large part because many financial institutions simply cannot justify serving these members and customers due to the high costs associated with FATCA compliance. 

A copy of the comments can be viewed here.

ENCU Urges ESA to Minimize AML/CFT Regulatory Burdens

The European Network of Credit Unions urged the European Supervisory Authorities to use the increased communication and collaboration that will be gained as a result of the revised guidelines for the “AML Colleges” to reduce regulatory burden for credit unions. 

These comments came as part of the consultation process on the Draft joint guidelines on the cooperation and information exchange for the purposes of Directive (EU) 2015/849 between competent authorities supervising credit and financial institutions. The AML Colleges will be used to establish supervisory protocols when an institution crosses over multiple countries or jurisdictions for supervision regarding Anti-Money Laundering and Countering Financing of Terrorism.

ENCU noted that AML/CFT burdens are often disproportionately borne by credit unions as they do not have the economies of scale as larger institutions and are not-for-profit, member-owned cooperatives governed by a board of members who usually serve on a voluntary basis without receiving any remuneration for time and resources dedicated to the credit unions.

A copy of the comment letter can be viewed here.

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European Banking Authority