International and regional bodies that combat money laundering (part B)

Introduction

Money laundering is a global phenomenon that thrives parasitically on the world’s financial markets. It ignores national boundaries in much the same way that the financial market place does. It has been accepted that this problem requires both national and international countermeasures.

Economies built on the back of criminal activity are unstable and pose significant risks to neighbouring countries and those with close economic ties. The impetus for international governmental action against money laundering also stems from a fear of national or regional economic destabilisation resulting from over exposure to illegally derived funds.

The global financial market provides criminals with unlimited opportunities to launder money. Global efforts to prevent money laundering are only as strong as the weakest national AML framework. International initiatives have been designed to encourage national governments into taking or strengthening measures to prevent money from being laundered within their borders. Such initiatives come from international bodies like for example the Financial Action Task Force (FATF) and prompt regional action such as EU Directives, which in turn result in national legislation.

The criminalization of money laundering is a relatively recent legal development and all the international efforts to prevent money laundering are relatively young:

• The first international initiative during the early 1980s focused on the prevention of the laundering of funds derived solely from drug trafficking.
• Then the focus was expanded to include the prevention of the laundering of the proceeds of a wider range of criminal activity.

After the terrorist attacks in the US on 11 September 2001, the international community recognized the importance of preventing the financing of terrorism and international and regional bodies previously responsible for money laundering prevention expanded their remits to include the prevention of terrorist financing.

Some of the most influential international and regional bodies in the anti money laundering

A.        The Financial action Task Force (FATF)

• In response to mounting concern over money laundering, the Financial Action Task Force on Money Laundering (FATF) was established by the G-7 Summit that was held in Paris in 1989.
• Recognising the threat posed to the banking system and to financial institutions, the G-7 Heads of State or Government and President of the European Commission convened the Task Force from the G-7 member States, the European Commission and eight other countries.
• The Task Force was given the responsibility of examining money laundering techniques and trends, reviewing the action which had already been taken at a national or international level, and setting out the measures that still needed to be taken to combat money laundering.  In April 1990, less than one year after its creation, the FATF issued a report containing a set of Forty Recommendations, which provide a comprehensive plan of action needed to fight against money laundering.
• In 2001, the development of standards in the fight against terrorist financing was added to the mission of the FATF.  In October 2001 the FATF issued the Eight Special Recommendations to deal with the issue of terrorist financing.  The continued evolution of money laundering techniques led the FATF to revise the FATF standards comprehensively in June 2003.  In October 2004 the FATF published a Ninth Special Recommendations, further strengthening the agreed international standards for combating money laundering and terrorist financing – the 40+9 Recommendations.
• One of FATF’s functions is to review and report on money laundering trends, techniques and methods (also referred to as typologies). To accomplish this aspect of its mission, FATF issues annual reports on developments in money laundering through its Typologies Report. These reports are very useful for all countries, not just FATF members, to keep current with new techniques or trends to launder money and for other developments in this area.
• During 1991 and 1992, the FATF expanded its membership from the original 16 to 28 members. In 2000 the FATF expanded to 31 members, and has since expanded to its current 36 members; 34 jurisdictions and 2 regional organisations (the Gulf Cooperation Council and the European Commission).

The 36 Members of the FATF

• The Financial Action Task Force (FATF) is an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing.
• The FATF is a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms to combat money laundering and terrorist financing.
• The FATF monitors members’ progress in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally.

The Financial action Task Force (FATF) – Self assessment and mutual evaluations

Monitoring the progress of members to comply with the requirements of the Forty Recommendations is facilitated by a two-stage process: self assessments and mutual evaluations. In the self assessment stage, each member responds to a standard questionnaire, on an annual basis, regarding its implementation of the Forty Recommendations. In the mutual evaluation stage, each member is examined and assessed by experts from other member countries.

Members of the FATF are strongly committed to the discipline of multilateral peer review. The mutual evaluation programme is considered as the primary instrument by which the FATF monitor progress made by member governments in implementing the FATF Recommendations.

The mutual evaluation and assessment processes are fundamental to the work of the FATF and all other AML/CFT assessment bodies.  In June 2010, the FATF Plenary approved a set of Key Principles for Mutual Evaluations and Assessments.  These Key Principles have been prepared by the FATF in collaboration with the FATF-style regional bodies (FSRBs), the IMF and World Bank. They set out the fundamental objectives, principles and essential underpinnings for the assessment processes, and their observance will enhance the quality and consistency of the mutual evaluation and detailed assessment reports and of the applicable procedures.

In the event that a country is unwilling to take appropriate steps to achieve compliance with the Forty Recommendations, FATF recommends that all financial institutions give special attention to business relations and transactions with persons, including companies and financial institutions, from such non-compliant countries and, where appropriate, report questionable transactions, i.e. those that have no apparent economic or visible lawful purpose, to competent authorities. Ultimately, if a member country does not take steps to achieve compliance, membership in the organisation can be suspended. There is, however, the process of peer pressure before these sanctions are enforced.

The Financial action Task Force (FATF) –NCCT

The FATF in order to encourage all countries to adopt measures to prevent, detect and prosecute money launderers, i.e. to implement The Forty Recommendations, has adopted a process of identifying those jurisdictions that serve as obstacles to international cooperation in this area. The process uses 25 criteria, which are consistent with the Forty Recommendations, to identify such non-cooperative countries and territories (NCCT’s) and place them on a publicly available list.

A NCCT country is encouraged to make rapid progress in remedying its deficiencies. In the event a NCCT does not make sufficient progress, counter-measures may be imposed. Counter measures consist of specific actions by FATF member countries taken against NCCT-listed countries.

In addition to the obligation of applying special attention to business relationships and transactions from such countries, the FATF can also impose further counter-measures, which are to be applied in a gradual, proportionate and flexible manner. These include:

• Stringent requirements for identifying clients and enhancement of advisories, including jurisdictions-specific financial advisories, to financial institutions for identification of the beneficial owners before business relationships are established with individuals or companies from these countries.
• Enhanced relevant reporting mechanisms or systematic reporting of financial transactions on the basis that financial transactions with such countries are more likely to be suspicious.
• In considering requests for approving the establishment in FATF member countries of subsidiaries or branches or representative offices of banks, taking into account the fact that the relevant bank is from a NCCT.
• Warning non-financial sector businesses that transactions with entities within the NCCTs might run the risk of money laundering.

Finally, these counter measures may include FATF-member countries terminating transactions with financial institutions from such a country. Most countries make a concerted effort to be taken off the NCCT list because it causes significant problems for their financial institutions and businesses with respect to international transactions, as well as their reputation internationally.

Measures to be taken with respect to countries that do not or insufficiently comply with the FATF Recommendations are also recommendations 18 and 19.

Recommendation 18

Financial institutions should be required to implement programmes against money laundering and terrorist financing. Financial groups should be required to implement group-wide programmes against money laundering and terrorist financing, including policies and procedures for sharing information within the group for AML/CFT purposes.

Financial institutions should be required to ensure that their foreign branches and majority owned subsidiaries apply AML/CFT measures consistent with the home country requirements implementing the FATF Recommendations through the financial groups’ programmes against money laundering and terrorist financing.

Recommendation 19

Financial institutions should be required to apply enhanced due diligence measures to business relationships and transactions with natural and legal persons, and financial institutions, from countries for which this is called for by the FATF. The type of enhanced due diligence measures applied should be effective and proportionate to the risks.

Countries should be able to apply appropriate countermeasures when called upon to do so by the FATF. Countries should also be able to apply countermeasures independently of any call by the FATF to do so. Such countermeasures should be effective and proportionate to the risks.