A MENA Trends and Roadmap of Financial Crime Issues

15 January 2018 by Bachir El Nakib (CAMS) Senior Consultant, Compliance Alert LLC

In the Middle East, deficiencies exist with multiple countries’ anti-money laundering regimes. Because the existence of a strong anti-money laundering legal framework is a necessary precursor to the existence of effective anti-money enforcement actions, effective enforcement actions are rarer in the Middle East than in Europe.

As a region, the Middle East witnesses constant development across a spectrum of financial crime issues. Over the past six months, each country has showcased its own approach to addressing the specific challenges faced in its jurisdiction. This article considers some of the more prominent campaigns.

Egypt – UNODC Anti-Corruption Campaign

During Ramadan this year, Egyptian national television was flooded with anti-corruption adverts as part of a targeted media campaign. Building on the success of last year’s initiative, the advert aimed to encourage public participation in Egypt’s fight against corruption, and was strategically aired more than 650 times per day during the holy month to maximise its audience. The media campaign was developed in close partnership with the United Nations Office on Drugs and Crime (UNDOC), which has been assisting Egypt’s drive for anti-corruption through its project “Supporting Measures to Combat Corruption and Money Laundering, and to Foster Asset Recovery in Egypt” since July 2011. UNODC has been cooperating with the Administrative Control Authority (Egypt’s monitory body for corruption and financial integrity), Egyptian Ministries of Justice and Interior, the Public Prosecutors Office, and the Money Laundering and Terrorist Financing Combating Unit to improve anti-corruption awareness throughout the various branches of government. The project has taken a multifaceted approach, targeting soft strategic elements such as awareness, whilst also making more pragmatic advancements in developing the legal framework, improving institutional capacity in combative measures and enhancing reporting mechanisms.

The project concludes on 30th September 2017 and Egypt will have to continue its anti-corruption efforts without the benefit of this particular source of UN, EU, Canadian and Romanian funding, which has contributed a total of more the $3.5 million over the past 6 years. Egypt is currently ranked by Transparency International as 108th out of 176 on the Corruption Perceptions Index 2016, with a failing score of 34%, indicating that a great deal more needs to be done before Egypt will feel real benefit from reduced corruption. As a member of the UN Convention Against Corruption (UNCAC), Egypt is committed to eradicating corruption in the public and private sector, though its low scores indicate limited progress since ratification in February 2005.

The success of the campaign will not come to light for some time but, moving forwards, future initiatives might do well to emulate the inclusive nature of UNODC’s program. Encouraging involvement across the civic sphere fosters an anti-corruption culture that, if properly sustained and utilised, could catalyse pro-active reform and a more robust political will to combat corruption.

Iran – Sanctions, Retaliation, and Escalation

The Joint Comprehensive Plan of Action (JCPOA) involving Iran and P5+1 powers (US, UK, France, China, Russia and Germany) is on unsteady ground after escalatory actions on both sides of the deal. Additional sanctions imposed by the United States and the prospect of more to come is creating a convoluted web of measures that make compliance a difficult task.

For now at least, the JCPOA remains intact, and trade between Iran and other countries should be feasible save for issues that directly relate to Iran’s missile programme, military procurement, terrorist and organised crime activity or the Revolutionary Guard Corps. In reality, even under the extensive sanctions relief provided by the deal, many businesses are still utilising a de-risking strategy when appraising trade opportunities. This trend has arisen due to a combination of residual fear of punitive measures attached to sanctions violations and confusion over the remaining measures. De-risking strategy is a commonly used term referring to the general practice of banks and other financial institutions of avoiding high risk business ventures. According to an International Monetary Fund (IMF) report released in February 2017, no Tier 1 large banks have started correspondent relationships with Iranian banks since the implementation of the deal. A lack of trade between larger institutions can have a detrimental impact on both commerce and investment, putting large-scale operations and development out of reach. Aversion to opening trade with Iran has severely diminished the economic upturn that the deal was intended to provide and this is unlikely to improve whilst the trade climate is constantly confused by frequent changes to sanctions programs.

The complexity of the remaining sanctions is not the only barrier to trade. Any plan to deal with Iranian parties is still subject to a extremely high compliance burden in light of Iran’s existing Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) deficiencies, as highlighted by the Financial Action Task Force (FATF). These challenges may dissuade interested parties, but doing business with Iran is still within the realm of possibility, provided that opportunities are viewed in parallel with adhering to internationally approved AML and CTF prevention programs. Subject to careful adherence to compliance standards and fastidious due diligence measures, being open to the possibility of new business could prove to be a lucrative avenue for institutions with big enough risk appetites.

Jordan – Pro-Enforcement Approach to New National Integrity and Anti-Corruption Strategy

A delegation from the Saudi Ministry of Civil Service visited the Jordan Integrity and Anti-Corruption Commission (JIACC) on 1st August 2017 in order to review the programs and impending plans involved in Jordan’s anti-corruption initiative. The visit marks the latest in a string of events that suggest the Jordanian national government are taking a much more effective pro-enforcement approach to the newest National Strategy for Integrity and Anti-Corruption (NSIAC), published in December 2016. The JIACC was established with the passing of Jordan’s new Integrity and Anti-Corruption Law on 16th June 2016, which introduced more comprehensive and vigorous provisions to Jordan’s anti-corruption legislation. As a fully independent body, the committee will assume primary responsibility for implementing the NSIAC over the coming 8 year period.

Awareness and receptiveness to corruption control seems to have gained momentum in Jordan since the publication of the Corruption Perceptions Index (CPI) 2016, which saw the country slide 12 places down the ranking to 57th in the space of just 12 months. Since its release in January 2017, parliamentarians have played a far more active role in advancing anti-graft measures, voting to refer more than 90 violations to the IACC in March alone, followed by a vote to refer three former ministers to the committee just one month later in April. Legislation has also been strengthened, with AML and CTF regulations expanded in April to apply to societies and non-profit organisations, at the recommendation of the National Committee for Anti-Money Laundering and Terrorism Funding. This measure, approved by the Council of Ministers, ensures that the services of such institutions cannot be co-opted for money laundering or terrorist financing purposes, and ensures that external funds received are legitimately spent. An Extraordinary Parliamentary Session was further convened in May to increase the penalties attached to crimes against public assets. These developments suggest that the government is prioritising corruption control in public office with genuine intent to close the gap between regulation and enforcement. Jordan’s existing legislative framework for combating corruption is relatively comprehensive, largely due to its efficient adoption of international best practices since ratifying the UN Convention on Corruption (UNCAC) in 2005.

From a regional perspective, Jordan’s renewed efforts are closely aligned with a wider regional trend of improving governmental transparency. Much of the anti-corruption agenda in Middle Eastern countries is grounded in both ideological aspirations of transparency and integrity but also a more pragmatic objective of improving business and social conditions. Collective awareness and proactive governance in anti-corruption measures make it more likely that the efforts of individual countries will be sustained, especially if states are prepared to collaborate to develop the most effective responses, as the visit from the Saudi delegation would suggest. Further developments will provide insight into how Jordan is benefiting from the mutual drive for corruption control across the region and whether or not it is able to sustain its enthusiasm for a pro-enforcement approach.

Oman – Improved Protection Against AML and CTF

Following the publication of its most recent Mutual Evaluation Report (MER) in April 2017, Oman has achieved a rating of at least Largely Compliant (LC) with FATF’s standards of AML and CTF control. The Middle East and North Africa Financial Action Task Force (MENAFATF) report reviewed Oman’s efforts to implement previous recommendations and considered its application to be moved to the biennial review process. Ultimately, the report concluded that Oman had successfully implemented key recommendations and had improved sufficiently to be moved to the lesser level of oversight, pending later approval at the 25th Plenary Session in April 2017.

The primary factor in its improved status was more robust implementation of the new AML / CTF legislation promulgated via the Sultani Decree No 30/2016 in June last year. Key improvements introduced by the new law included:

• Establishing the National Centre for Financial Information to operate with complete financial independence and autonomy;
• Strengthened preventative measures, including due diligence and Know-Your-Client (KYC) procedures, introducing greater accountability for financial and non-financial institutions in assessing their accounts and detecting suspicious transactions;
• Stiffened penalties across prison sentences and fines, with the Court granted discretionary powers for protecting whistleblowers; and
• New provisions to allow for international cooperation in cross-jurisdictional matters.

The MER denoted three primary areas of improvement that were instrumental in improving Oman’s compliance rating. First, there was proper implementation of provisions that prohibited Financial Institutions (FIs) from opening accounts for anonymous customers or individuals providing fictitious names. FIs must now also conduct ongoing checks on business relationships, ownership structures and customer transactions in order to determine and assess the risk attached to each account.

Secondly, Customer Due Diligence (CDD) was another key area for extensive reform, with the law providing clarification over where CDD requirements were necessary and prohibiting services, or even terminating relationships, in situations where CDD is impossible. The final critical area of improvement related to deficiencies in tools for freezing and confiscating terrorist funds and fully implementing the Convention for the Suppression of the Financing of Terrorism. Overall, the report found that Omani legislation and implementation has improved sufficiently across all areas to be ranked as Largely Compliant and promoted to biennial review status.

The MENAFATF review emulates the oversight structure and standards of FATF regulations so provides an accurate indication of how Oman ranks in the framework of international best practice. Since Oman is not a regional or offshore financial hub, it does not attract the same level of AML or CTF risk as some of its Gulf neighbours, but being able to present itself as a lower risk destination for investment may pay dividends in future. Strengthening AML and CTF regulations improves its domestic economic security and lends confidence to prospective backers. As MENAFATF now progresses with its second round of mutual evaluations with new FATF methodology, marked advancements like Oman’s reflect the efficiency of the regional institution and enhances its drive for AML/CTF best practice.

Qatar – MENAFATF Counter Terrorist Financing (CTF) Training

The Middle East and North Africa Financial Action Task Force (MENAFATF) and the UN Office of Drugs and Crime (UNODC) provided a four day regional training course in Doha in May 2017, aimed at improving states’ capacity to track and prevent the flow of illicit funds and money laundering. The Qatar National Anti-Money Laundering Centre hosted the event where sessions were delivered by experts from relevant organisations, including the Terrorism Prevention and the Corruption and Economic Crimes Branches of UNODC, and the Global Programme Against Money Laundering. MENAFATF member states in attendance were instructed on global good practice and gained valuable insights regarding specialised techniques in recognising the operations of terrorist funding networks, identifying vulnerability and deploying effective disruption techniques to immobilise terrorist network operations.

MENAFATF’s initiatives to improve CTF are aligned with wider international endeavours as global institutions have sought more effective ways of countering terrorist organisations, particularly Daesh and its affiliates. FATF reported on its progress in fighting terrorist financing to the G20 summit in Paris on 10th July and the UN Security Council issued Resolution 2331 calling on FATF and regional style bodies to conduct deeper analysis of terrorist financing flows, particularly where related to human trafficking.

International coverage of such events provides reassurance to the global community that MENA regional powers are adopting a pro-active approach to tackling issues related to CTF. Collective awareness and collaboration is a significant feature of MENAFATF’s efforts given UNODC’s emphasis on mutual cooperation as a vital tenet of combative measures and its long-term aim of helping member states to strengthen cross-border capacities. The initiative is not limited to terrorist financing but is intended to aid in developing a comprehensive responses to all fields of organised crime, trafficking, corruption and terrorism.

Saudi Arabia – Response to JASTA Cases in U.S. District Court of Manhattan

On 1st August 2017, the Kingdom of Saudi Arabia (KSA) submitted a filing to the U.S. District Court in Manhattan requesting a U.S. Judge to dismiss a total of 25 lawsuits seeking damages against the Kingdom for its alleged role in the 9/11 hijackings. U.S. District Judge George Daniels, who presides over the litigation, has already dismissed the cases brought by the victims’ families in 2015, but ruled to reopen them in light of the new provisions implemented by the Justice Against Sponsors of Terrorism Act (JASTA), enacted on 27th September 2016.

In his ruling on reopening the cases on 7th March 2017, Daniels stated that JASTA’s legislative history made it clear that it had been written to provide the widest possible basis to eliminate the Kingdom’s sovereignty defences. In allowing plaintiffs the assert direct claims against the KSA, removing non-textual judicial limitations on federal courts’ jurisdiction under the Foreign Sovereign Immunity Act (FSIA), and eliminating judicial constrictions on the Anti-Terrorism Act (ATA), JASTA has deliberately and effectively strengthened civil claims beyond the KSA’s routine defence of sovereign immunity.

The KSA’s renewed request to dismiss was the widely expected response to the amended cases. However, uncertainty now arises regarding how JASTA will now be implemented, and whether or not it will have the legal teeth to override the ingrained principle of national sovereignty. Even if the decision goes against the KSA, the onus still lies with the plaintiff to prove that the KSA knowingly and intentionally facilitated the bombings; a feat that all previous efforts have failed to achieve. However, if the KSA successfully defends its right to sovereignty, the JASTA’s legal potency will be effectively eradicated with one hit. This will leave Congress with a political dilemma; to continue to pursue the means to hold the KSA accountable in its court system, or to abandon the project and preserve recently improved Saudi-US diplomatic relations.

The US is particularly concerned with maintaining non-abrasive regional relations in the current political climate of the Middle East as it seek to find a diplomatic solution to the tensions between key allies in the Gulf. President Trump’s recent meetings with the KSA leadership seem to have brought new strength to the relationship and has been matched by significant promises of economic investment to the American economy. Future governmental action surrounding JASTA or anti-Saudi rhetoric has dangerous potential to derail a key strategic alliance.

For more insight into the Justice Against Sponsors of Terrorism Act (JASTA) and its regional implications, please refer to the article in our Dec-Jan 2017 edition of Law Update titled “Wait, JASTA Second...What about Sovereign Immunity? An Overview of the Controversial Justice Against Sponsors of Terrorism Act (JASTA) from a Middle East Perspective” by Ibtissem Lassoued

UAE, Kuwait, Lebanon and Bahrain – Increased Powers to Combat Tax Crimes

The UAE recently became the 109th jurisdiction to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters at the Organisation for Economic Cooperation and Development (OECD) headquarters in Paris on 21st April 2017. The agreement was formed as a means for implementing the Standard for Automatic Exchange of Financial Account Information in Tax Matters by the OECD and G20 countries. In practice, it works to improve cooperation between tax authorities and enhance their capacity to tackle offshore tax evasion and avoidance, whilst also reinforcing protections for tax payers’ rights. Due to the proliferation of signatory countries and the multilateral nature of the agreement, the government will have a vastly upgraded ability to detect and prevent illicit tax activity.

Changes relating to the convention will not go into immediate effect in the UAE, but the first exchanges will start to occur as early as 2018. It includes provisions that will allow the Federal Tax Authority (FTA), established in September last year by Decree No. 13 of 2016, to automatically exchange financial account information with foreign tax administrations and implement the exchange of country-to-country reports detailing the tax affairs of multinational corporations on an automatic basis. Establishing such procedures will provide the FTA with streamlined access to an enormous base of information and will radically expedite incoming or outgoing tax enquiries. Improving the capacity of the FTA marks an important priority of the UAE government in light of the impending introduction of Value Added Tax (VAT), which will be introduced across GCC nations from 1st January 2018.

 

The UAE is not the only regional power to take this step towards greater tax control. Kuwait, Lebanon and Bahrain similarly followed suit and signed the agreement on 5th May, 12th May and 29th June respectively, becoming the 110th, 111th and 112th participating jurisdictions. Following the same timeline of enforcement, each country is expected to begin exchanging reports from the beginning of 2018. Aside from these recent additions, no other countries in the Middle East are signatory to the agreement, suggesting that there is some way to go before there is full transparency and mutual assistance across the region.

Money launderers and terrorist financiers rely mostly on the attempt to misuse the services provided by the financial institutions and the DNFBPs to conduct their operations. The services vary according to the type of entity which provides them, i.e. the services provided by banks differ from the services provided by the insurance companies and securities companies and so on; they also differ from the services provided by any of the categories of the DNFBPs. These services vary within the same type of entities (i.e. the banks provide the services of opening accounts, cashing cheques, opening letters of credit, money transfer, and such).

This difference and variety in the entities and services had an impact on the variety and development of ML/TF techniques, which in turn called for working on the recognition of the ML/TF Trends and Indicators where cases involving ML/TF methods are relied on. Such methods include:

− Mechanism: It may include the financial institutions, the DNFBPs and the legal arrangements.

− Instrument: It may include cash, cheques (banking and travellers’ cheques), letters of credit, jewellery and precious stones, real estates and securities.

− Technique: It may include money deposit in bank accounts, money transfer, currency exchange and over- and- under invoicing as part of an import /export transaction.

 The Money Laundering-Terrorism Financing trends has the due attention of the decision makers and the technical experts as it provides them with the materials that would help them develop the AML/CFT system in general. It also helps in developing the indicators used to detect ML/TF activities, the regulatory entities to develop regulatory standards that consider the high-risk aspects in the ML/TF field, and the private sector (the financial institutions and the DNFBPs) within the framework on reporting the suspicious transactions, and in implementing the risk based approach for the due diligence measures towards clients, geographical regions and operations (financial products or services).

Due to this importance, a MENAFATF Plenary Meeting approved the "ML/TF Trends and Indicators in the MENA Region" Project.

Of the 11 countries on the Financial Action Task Force’s (FATF’s) list of countries with strategic deficiencies in their anti-money laundering regimes, four are located in the Middle East. Each of these countries – Afghanistan, Iraq, Syria and Yemen – is war-torn and has a weak central government.

The deficiencies identified in these countries’ anti-money laundering regimes are wide-ranging. For example, Afghanistan lacks an adequate anti-money laundering supervisory and oversight programme for its financial sector. The Afghani government also has not fully implemented its legal framework for identifying, tracing and freezing terrorist assets. Effective controls for cross-border cash transactions also are lacking. Likewise, efforts by the Iraqi government to criminalise money laundering and terrorist financing remain incomplete. Financial institutions in Iraq are not necessarily subject to customer due diligence and suspicious transaction reporting requirements, and the country’s financial sector lacks an adequate anti-money laundering supervisory and oversight programme. Iraq also lacks a legal framework and procedures for identifying and freezing terrorist assets.¹³

The FATF also regards Iran as a high-risk jurisdiction, as Iran has neither effectively implemented suspicious transaction reporting requirements nor criminalised terrorist financing.¹⁴

Encouragingly, in some politically unstable countries in the Middle East, steps have been taken recently to implement anti-money laundering regimes. In 2015, the government in Afghanistan issued amended cross-border regulations for declaring the physical transportation of cash and negotiable bearer instruments. Similarly, a new anti-money laundering and terrorism financing law has entered into force in Iraq, although the FATF considers that strategic deficiencies still remain. Yemen also has criminalised money laundering and terrorist financing, established mechanisms to identify and freeze terrorist assets, and improved customer due diligence and suspicious transaction reporting requirements. Its financial sector’s supervisory authorities’ monitoring and supervisory capacity have improved, and a financial intelligence unit has been established and is now operational.¹⁵

In stable Middle Eastern jurisdictions that are financial services hubs – such as the United Arab Emirates and Qatar – sophisticated anti-money laundering frameworks exist.

For instance, the UAE first passed legislation criminalising money laundering in 2002, recently widened the scope of its money laundering and terrorist financing offences, and imposed higher penalties for related offences.¹⁶ While the State of Qatar passed AML/CFT Law (4) of 2010, and in process to launch a new updated Law-version by 2018, and Qatar National AML Risk Assessment by 2019. Nevertheless, these countries’ geographic proximity to less stable countries in the region makes them vulnerable to efforts to launder money. In addition, the reliance in the region on hawala – informal value transfer systems based on trust where money is exchanged without physically being moved – presents additional challenges from an anti-money laundering standpoint.

North Africa

While many North African nations are highly susceptible to money laundering, and while enforcement of money laundering regulations is often lacking in the region, some progress recently has been made.

In early 2016, the FATF removed Algeria and Angola from its blacklist of countries that have strategic anti-money laundering deficiencies. As a result, only one African nation – Uganda – is now on the FATF’s list of jurisdictions with strategic deficiencies.¹⁷ In addition, the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) – which attempts to implement the FATF’s recommendations while taking into account regional factors – is actively working to combat money laundering in Eastern and Southern Africa by coordinating with other similar international organisations, studying emerging regional typologies, developing institutional and human resource capacities, and coordinating technical assistance where necessary.

Increasing attention also is being paid to anti-money laundering compliance at an institutional level in Africa, particularly in the financial services sector.¹⁸ In a 2012 study, 66 per cent of financial institutions in Africa surveyed by KPMG reported that their boards of directors take an active interest in anti-money laundering efforts.¹⁹ In South Africa, Angola, Botswana, Mauritius, and Zambia, this number is over 80 per cent.²⁰ Only 2 per cent of financial institutions in Africa reported that their boards took no interest in such matters.

Of course, developing and passing anti-money laundering laws and enforcing those laws are two different matters. African regulators are not nearly as active as those in western Europe, although regulators in certain African countries, such as South Africa, are improving their anti-money laundering efforts. Nevertheless, while progress has been made in some African countries, more work remains to be done to combat effectively money laundering in the region. This is particularly the case in the money and value transfer services sector and the currency exchange sector, which are particularly active in Africa due to the continent’s widespread cash-based economies and the high-level of remittances from immigrants in the region.

Robust compliance policies: the first line of defence

The message emanating from across EMEA is clear: the enactment of increasingly stringent anti-money laundering laws, and the robust enforcement of anti-money laundering regulations, is on the rise, and this trend likely will continue for the foreseeable future. In light of this, financial services firms and their advisers should implement robust compliance policies to detect and prevent money laundering and should ensure that they are compliant with all applicable anti-money laundering regulations. Non-compliance with anti-money laundering laws can be very costly. To take one example, authorities in the US imposed a US$1.9 billion fine in 2012 for money-laundering related offences.

Of course, compliance with applicable anti-money laundering regulations is not always straightforward. Regulations change rapidly, as does the landscape that they regulate. New ‘app-based’ banking, contactless payments and virtual currencies, for example, create new compliance challenges.

At a minimum, financial services firms and their advisers should ensure that the following robust systems and controls are in place:

• AML policies: a firm must ensure that it has a clear, comprehensive and state-of-the-art anti-money laundering policy.
• Risk-based customer due diligence: a firm should verify the identity of each current and potential client (and, where appropriate, beneficial owner), collect information on the engagement’s purpose and nature, and conduct enhanced due diligence on clients who present higher risks, such as politically exposed persons (PEPs).
• Suspicious activity reporting: a firm should ensure that it has clear procedures in place about how to identify and report suspicious activity, both internally and to the relevant enforcement authorities. In particular, a firm must ensure that its employees are not reticent to file suspicious activities reports out of concern for harming commercial relationships.
• Sanctions screening: a firm must ensure that the transactions it effectuates on behalf of its clients do not infringe upon, or seek to evade, applicable sanctions laws.
• Whistleblower policies: a firm should actively encourage whistleblowing and have policies in place to protect those who come forward to report wrongdoing. Without such policies in place, an employee who does not feel that he or she can report wrongdoing either may remain silent in the face of wrongdoing or may leak information publicly.
• Regular training: all employees – including senior management – should be informed about, trained regarding, and engaged in their institution’s anti-money laundering policies and procedures.
• Engagement of senior management: senior managers should engage with anti-money laundering issues and promote a culture of awareness and respect regarding anti-money laundering efforts. Regulators are increasingly mindful of whether an institution fosters a ‘culture of compliance,’ as opposed to shirking compliance to maximise profit margins.
• Regular review: a firm should ensure that its anti-money laundering policies are regularly evaluated and, if appropriate, tested by an independent, qualified and unbiased third party.

 

The steps set forth above are only a sampling of the minimum steps that financial institutions and their advisers should take to ensure that they have robust and defensible anti-money laundering compliance programmes in place. Each institution’s actual anti-money laundering policies should be designed with input from experienced legal counsel and should take into account the nature of the institution’s business and the laws applicable to it.

Coordinated global response strategies: the second line of defence, while the existence of a robust compliance policy should reduce a firm’s risk of becoming the target of an anti-money laundering investigation, it will not eliminate this risk altogether, especially with respect to conduct that occurred before implementation of the policy. Firms should therefore be prepared to respond to such investigations. Today, such investigations frequently occur in a cross-border context – often with regulators from more than one country involved – and firms should be ready to deploy a coordinated global response to such investigations.

Although regulators from different countries sometimes have in place mechanisms for sharing information with one another, the coordination of investigations by authorities from different countries often is lacking. As Mark Steward, head of enforcement at the FCA, recently stated: ‘Most [authorities] are set up to do a domestic job, not to do things internationally. Collaboration is easier said than done.’²³

One result of the leak of the Panama Papers will be a renewed effort at coordinating investigations among enforcement regulators worldwide. Indeed, shortly following the leak, tax authorities from 28 countries, led by the Joint International Tax Shelter Information and Collaboration network, announced a meeting in Paris to launch an international inquiry into potential crimes set out in the leaked documents. These tax authorities are intending to work together to analyse the leaked documents as part of a new global strategy to crack down on offenders.²⁴ This represents an unprecedented level of international cooperation and is a harbinger for future cooperation of this sort.

While money laundering and tax evasion are distinct legal concepts, as discussed above, the two often overlap because they exploit similar vulnerabilities in legal and financial systems. We expect that as the fallout from the leak of the Panama Papers continues, countries will extend such coordinated international efforts specifically to combating money laundering. This likely will encompass, among other things, the joint sharing among regulators of financial and legal records and similar information.

In addition, we expect to see increased political pressure for coordination and information sharing (eg, the sharing of corporate register information) among those regulators who establish companies, such as Companies House in the UK. A key first step to making such cooperation effective is to ensure that accurate information on beneficial ownership is held by regulators. The beneficial ownership rules being introduced under the Fourth Money Laundering Directive should assist in this regard. Furthermore, a small group of countries including France, Nigeria and the Netherlands will join the UK in committing to set up public registers of beneficial ownership. A further six countries, including Australia, are considering doing the same.²⁵

As regulators coordinate their efforts globally, potential and actual targets of anti-money laundering investigations must be prepared to respond with coordinated global response strategies. Among other things, a target of a cross-border anti-money laundering investigation should, as part of its global response strategy:

• Retain lead legal counsel: a target firm should retain sophisticated legal counsel with expertise managing complex cross-border anti-money laundering investigations, to coordinate and lead the firm’s global legal defence strategy. Legal counsel with only domestic experience in one jurisdiction likely will not be the best choice for this role.
• Retain local counsel, as necessary: a target firm should consider retaining local counsel in jurisdictions where it is, or might be, under investigation (and where its lead legal counsel does not have an office), so as to support its lead legal counsel.
• Develop and implement strategies for handling the numerous complex issues that can arise in a cross-border anti-money laundering investigation: in connection with its legal advisers, a target firm should develop strategies for handling complex cross-border issues that likely will arise. These issues include, among other things, how to manage legal privilege across multiple jurisdictions, information sharing and data privacy across borders, and coordinating settlement strategies across jurisdictions (eg, when a firm is being investigated in two countries, one of which expects a settlement or plea but the other does not and would use a settlement or plea against the firm).
• Managing public and government relations: as appropriate, a target firm also should be prepared to manage the public relations and government relations aspects of any anti-money laundering investigation against it. Its lead legal counsel, internal public and government relations teams, and potentially external public and government relations advisers should be prepared to coordinate with each other to this end.

The steps outlined above provide a general framework for a global response strategy to a cross-border anti-money laundering investigation. They are, however, only the first of many steps that a target firm should take in response to such an investigation. A firm facing a cross-border anti-money laundering investigation therefore should consult at the earliest possible time with experienced legal counsel to design an appropriate and effective global response strategy.

Conclusion: be prepared for stricter anti-money laundering laws and more active enforcement actions

As set out above, we anticipate in the foreseeable future an increase in anti-money laundering investigations and prosecutions in EMEA, as well as the passage of more stringent anti-money laundering regulations. Financial and professional services firms that might become the target of such investigations should act now to ensure that they have robust compliance regimes in place to identify and prevent money laundering and to ensure that they are in compliance with all applicable laws and regulations. Firms also should be ready to deploy a global response strategy if they become the subject or target of a cross-border anti-money laundering investigation. Having a protocol in place for deploying such a strategy is a first step that firms would be wise to take now, so as to manage proactively the risks of potential future enforcement actions.

US-MENA Private Sector Dialogue (PSD)

Washington, 16 October 2017

“Combating Terrorism and Enhancing Relations with Correspondent Banks”

 FATF and its current priorities

• The FATF was created in 1989, in order to deprive the cartels of the proceeds of drug trafficking. Our remit was then extended to counter terrorist financing and the financing of the proliferation of weapons of mass destruction. The core of FATF’s approach is simple: money drives crime and enables terrorism, FATF provides a forum for countries to understand the ML/TF threats and the risks; set firm and clear standards to combat these; assess and enforce implementation; and do all this at a global level so there are no weak links.
• Right from the start financial integrity and financial inclusion has been and remains at the heart of our mission at FATF. I wholly endorse the importance Juan placed on this in his remarks this morning. The financial system shines a light on and enables the prevention and detection of all illicit flows – whether we are talking about ml or tf, tax evasion, corruption and sanctions evasion by rogue regimes such as Iran and North Korea.
• Today the global network of FATF comprises 37 members, one of which is the Gulf Cooperation Council, the IMF, World Bank, United Nations and 9 regional bodies, including MENAFATF. As a result, today 203 jurisdictions have committed at the highest level to implement the FATF standards and to be assessed by their peers against these standards.
• We have regular exchanges and a constructive dialogue with the private sector, and the banking sector in particular. We are pleased that the Union of Arab Banks is closely involved in our Private Sector Consultative Forum.
• As a result of our work over 27 years, most countries now have the legal, regulatory and operational frameworks in place to be able to prevent and detect money laundering and terrorist financing. We are now seeing successful investigations and prosecutions every day in countries all around the world. Indeed much – though far from all - de-risking is a result of the AML/CFT regime working effectively. Regulators and law enforcement agencies have done their jobs – that wasn’t always the case. As a result they have found many global banks wanting, failing to apply proper checks. The banks are now well into the process of fixing this and as they do our hope and expectation is that their confidence in effectively managing risk will return and we will start to see the banking system re-connect with its respondents and customers.
• We are now focused on assessing how effectively countries are using these measures and it will come as no surprise that our top priority is counter terrorist financing.

FATF and decline in correspondent relationships due to de-risking

• The decline in correspondent banking relationships due to de-risking has been a major concern to the FATF for some time. We have been working hard to understand the nature of the problem, and to make sure that the over-zealous application of AML/CFT rules is not contributing to de-risking.
• The loss of correspondent banking services is bad news for all of us. It undermines financial system resilience; hinders competition; creates obstacles to trade; causes financial exclusion; and promotes underground financial channels which will be misused by criminals or terrorists.
• We have been particularly concerned at the possible loss of access to banking services for particular regions and types of customers who are often wrongly seen as uniformly high-risk - including charities and money remitters. To this end I strongly endorse the remarks of the US Assistant Secretary this morning.
• There is nothing in the FATF Standards which requires or encourages de-risking:

-   The FATF standards do not envisage financial institutions cutting-off entire classes of customer without taking into account, on a case-by-case basis, an individual customer’s level of risk or applicable risk mitigation measures. Such behaviour has the potential to force financial transactions underground which, in turn, introduces higher risk and less transparency into the global financial system.

-   Under the risk-based approach, financial institutions are expected to identify, assess and understand their money laundering and terrorist financing risks and take commensurate measures in order to mitigate them. Financial institutions are required to terminate customer relationships, on a case-by-case basis, only where the money laundering and terrorist financing risks cannot be mitigated.

• But there are concerns that the FATF standards might be mis-applied, and this could be a driver of de-risking. There has been a lot of research into the causes and drivers of de-risking - by the FATF, the World Bank, the Centre for Payments and Markets Infrastructure, and others. 
• The picture that emerges from the research is complex:

-   Overall we are seeing a fall in the number of correspondent relationships, but at the same time an increase in the volume of correspondent banking business (i.e. consolidation in the correspondent banking market).

-   But the picture is different in each region – from the recent study, it seems that 39% of banks in the Arab region have been significantly affected. Overall, the Caribbean region has been impacted more than others.

-   The underlying reason why banks are exiting correspondent relationships is a combination of profitability, at times due to increased costs associated with capital requirements and compliance costs. The results of the survey conducted in the Arab region confirm many causes for the termination of correspondent banking relationships. Banks are looking to increase profitability, which has been hit since the financial crisis by the requirements to increase capital and reserves and the low-interest rate environment.

• One of the main strands of FATF’s work at the moment is to clarify the requirements of the FATF standards in this area, and clarify the expectations regulators have when applying them at national level. We believe that more precise guidance from regulators or increased compliance comfort could make banks re-evaluate their decision to exit relationships. The FATF is working hard to promote this :

-   In February last year, we published guidance on a risk based approach for money and value transfer services (MVTS). It is intended to assist, among other, the practitioners in the MTVS sector and in the banking sector that have or are considering MVTS providers as customers, to apply the risk-based approach associated to MVTS.

-   In October last year we published guidance on correspondent banking services, which looks at the risk-based approach in the context of correspondent banking, including the expectations concerning customer due diligence and processing of wire transfers. We have consulted with the private sector on this, including the banks from the Arab region - Egypt, Jordan, Oman and Saudi Arabia. In short, banks are not required to know their customer’s customer. There will however be occasions where correspondent banks need more information from their respondents on their customer base. Indeed the Wolfsburg Group has just published guidance building on our own to reinforce this and describe best practice in more detail. All this should help. As mentioned, addressing the risk stemming from remittances poses particular challenges, notably de-risking.

‒       As we’ve heard this morning, the remittances sector is vulnerable to potential misuse for terrorist financing and other criminal activities. We can only deal with this through building trust and collaboration, not by cutting off these vital actors. The dialogue with the remittance and the banking sectors in March 2017 together with the FSB, GPFI, and G20 highlighted that de-risking is continuing within the remittance sector, and could reduce the availability of affordable, safe, regulated channels for remittances.

‒       FATF is supporting further work on this issue by the FSB, through its Remittance Task Force to understand the extent of the problem and identify potential responses. Separately, the FATF will conduct further work to better understand how FATF guidance is being used in the national context by national supervisors and the private sector, and to identify ways to improve its traction. This initiative will be conducted with Basel Committee on Banking Supervision.

 

• Our engagement with forums like this is essential, to help us understand the dimensions of the challenge and to address them. We will continue to work with the private sector, and the Union of Arab Banks in particular, to make sure that we provide adequate support and clarification on the applicable standards.

Notes

 

1. https://www.lexology.com/library/detail.aspx?g=9b7f709a-e0a2-4238-a40e-4d14199db554
2. United Nations Office on Drugs and Crime, ‘Money Laundering and
3. Financial Action task Force, ‘Improving Global AML/CFT Compliance: on-going process – 19 February 2016’ (available at www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/fatf-compliance-february-2016.html).
4. Financial Action task Force, ‘Improving Global AML/CFT Compliance: on-going process – 19 February 2016’ (available at www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/fatf-compliance-february-2016.html).
5. Financial Action Task Force, FATF Public Statement – 19 February 2016 (available at www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/public-statement-february-2016.html).
6. Financial Action Task Force, ‘Improving Global AML/CFT Compliance: on-going process – 19 February 2016’ (available at www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/fatf-compliance-february-2016.html).
7. Federal Law No. 4 of 2002 concerning the Criminalization of Money Laundering, amended by Federal Law No. 9 of 2014; Federal Law No. 7 of 2014.
8. Financial Action Task Force, ‘Improving Global AML/CFT Compliance: on-going process – 19 February 2016’ (available at www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/fatf-compliance-february-2016.html); ‘High-risk and non-cooperative jurisdictions’ (available at www.fatf-gafi.org/countries/#high-risk).