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UPDATE 1-EU watchdog calls for streamlined rules to stop dirty money

(Adds more detail, background)

LONDON, Sept 10 (Reuters) - The European Union should create a single set of rules that are binding on member states to deal more effectively with money laundering and terrorist financing, the EU’s banking watchdog said on Thursday.

The European Banking Authority (EBA) said strengthening EU laws would plug gaps and tackle divergent national approaches to applying the bloc’s existing rules on money laundering (ML) and terrorist financing (TF).

The EBA is advising the EU on how to set up a new supervisor to crack down on dirty money.

EU states currently have room to interpret the rules as they have been transposed into 27 sets of national laws, leading to differences in how regulators check that banks have proper controls.

A directly binding single EU regulation would stop national practices that have had a significant adverse impact on preventing the financial system from being used for ML/TF purposes, the EBA said in a statement.

The scope of current rules, which focus on banks, could also be extended to include investment firms and funds, EBA said.

Such binding regulation would then mean that cooperation and information exchange across the EU single market “is no longer the exception, but the rule”, the EBA said.

It would also make possible the “effective and efficient” operation of a future EU-level supervisor, it added.

The EU found itself on the backfoot when it emerged that more than 200 billion euros of payments had passed through Danske Bank’s tiny Estonia branch, many of which the bank has said were suspicious.

Attempts by EBA officials to censure Estonian and Danish regulators were rejected by the watchdog’s own board, which is made up of national regulators.

EU finance ministers in December backed plans for greater powers to combat money laundering, saying an EU body with an independent structure and direct powers over banks should be considered.

Reporting by Huw Jones; Editing by Jan Harvey

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