FATF issues new guidance for remittance providers, emphasizes risk-based approach
The Financial Action Task Force has issued fresh guidance on Money or Value Transfer Services (MVTS) to replace its older guidance directed at money services businesses. To reflect changes in technology and business models the global standard setter now treats MVTS as the industry sector representing remittance providers and other "value transfer" networks. The guidance is applicable to the entire MTVS sector, which includes both banking and non-banking institutions that offer transfers.
MVTS play an important role in the international financial system and in supporting financial inclusion, FATF said. The United Nations has estimated that developing countries received more than $400 billion in remittances from migrants living abroad in 2014. The FATF warned that, like other financial institutions, MVTS providers are also vulnerable to abuse for the purpose of money laundering and terrorist financing.
The FATF said it had updated its previous 2009 Guidance on a Risk-Based Approach for Money Services Businesses to bring it into line with the 2012 FATF Recommendations. This non-binding guidance is intended to assist countries and their competent authorities, as well as 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 with MVTS.
"The risk-based approach, the cornerstone of the FATF standards, requires that measures to combat ML/TF are commensurate with the risks. Such measures should not necessarily result into the categorisation of all MVTS providers as inherently high-risk. The overall risks and threats are influenced by the extent and quality of regulatory and supervisory framework as well as the implementation of risk-based controls and mitigating measures by each MVTS provider," the FATF said.
While the guidance is applicable to banks that offer MVTS, the FATF said it was primarily intended for the non-bank sector. It outlines the basis of the risk-based approach to anti-money laundering and counter financing of terrorism (AML/CFT) and details how this can be applied to businesses in the remittance sector.
One of the most important changes in the new guidance is the increased emphasis on the risk-based approach — especially in relation to preventive measures and supervision. Whereas the 2003 Recommendations provided for the application of a risk-based approach in some areas, the 2012 Recommendations consider the RBA to be an "essential foundation" of a country's AML/CFT framework. The new guidance reflects that over-arching regulatory ethos.
The guidance has clarified the FATF's views that while some MVTS providers may act as a conduit for illegal funds transfers, this should not result in the categorisation of all MVTS providers as inherently high ML/TF risk. The FATF's comments challenge the "de-risking" movement which has seen many banks withdraw their services from the non-bank MVTS sector.
"The overall risks and threats are influenced by the extent and quality of regulatory and supervisory framework as well as the implementation of risk-based controls and mitigating measures by each MVTS provider. The guidance also recognises that despite these measures, there may still be left some residual risk, which would need to be considered by competent authorities and MVTS providers in devising appropriate solutions," the FATF said.
The standard setter also stressed that remitters play an important role in supporting financial inclusion. "In general terms, financial inclusion is about providing access to an adequate range of safe, convenient and affordable financial services to disadvantaged and other vulnerable groups, including low income, rural and undocumented persons, who have been underserved or excluded from the regulated financial sector at an affordable cost in a fair and transparent manner. It is also about making a broader range of financial services available to individuals who currently may have access to only basic financial products," the FATF noted.
Online risks
The FATF also acknowledged that an increasing number of remittance providers are operating over the internet with no physical presence (i.e. head office, branch or agent network) in the country where the transaction is sent or received. The FATF said authorities in the host jurisdiction in which the MVTS provider provides services, despite not being physically present, should liaise with the MVTS's home authority to ensure that any ML/TF concerns are addressed. The host country may require the submission of STRs, other threshold reports or other relevant information to the local authorities of the country where the MVTS provider operates.
"For AML/CFT supervision or monitoring of the MVTS providers, the home country authorities should also engage with the competent authorities of the host country where MVTS provider provides services," the FATF said. "Cross-border provision of services (including through agents or over the internet or otherwise) highlights the importance of international cooperation among the competent authorities of the relevant jurisdictions. Such international cooperation can be spontaneous or on request depending upon the nature of the specific situation."
When it comes to conducting an ML/TF risk assessment, the FATF has advocated considering a number of categories. These include geographical risks, customer risks, product or service risks and agent risk (distributions channels). This type of assessment allows MVTS providers to subject their customers to proportionate controls and oversight.
"The weight given to these risk categories (individually or in combination) in assessing the overall risk of potential ML/TF may vary from one institution to another, depending on their respective circumstances and risk management. Consequently, MVTS providers will have to make their own determination as to the risk weights; however, parameters set by law or regulation may limit a business's discretion," the guidance stated.
The guidance also said that effective customer due diligence (CDD) was essential to allow MVTS providers assess the ML/TF risk associated with a proposed business relationship or occasional transaction that exceeds the remitter's risk threshold. The FATF said that initial CDD should consist of identifying the customer and, where applicable, the customer's beneficial owner and verifying the customer's identity on a risk-weighted basis.
"It also includes understanding the purpose and intended nature of the business relationship (where relevant) and, in higher risk situations, obtaining further information," the FATF said.
To download the guidance, click here.
MVTS play an important role in the international financial system and in supporting financial inclusion, FATF said. The United Nations has estimated that developing countries received more than $400 billion in remittances from migrants living abroad in 2014. The FATF warned that, like other financial institutions, MVTS providers are also vulnerable to abuse for the purpose of money laundering and terrorist financing.
The FATF said it had updated its previous 2009 Guidance on a Risk-Based Approach for Money Services Businesses to bring it into line with the 2012 FATF Recommendations. This non-binding guidance is intended to assist countries and their competent authorities, as well as 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 with MVTS.
"The risk-based approach, the cornerstone of the FATF standards, requires that measures to combat ML/TF are commensurate with the risks. Such measures should not necessarily result into the categorisation of all MVTS providers as inherently high-risk. The overall risks and threats are influenced by the extent and quality of regulatory and supervisory framework as well as the implementation of risk-based controls and mitigating measures by each MVTS provider," the FATF said.
While the guidance is applicable to banks that offer MVTS, the FATF said it was primarily intended for the non-bank sector. It outlines the basis of the risk-based approach to anti-money laundering and counter financing of terrorism (AML/CFT) and details how this can be applied to businesses in the remittance sector.
One of the most important changes in the new guidance is the increased emphasis on the risk-based approach — especially in relation to preventive measures and supervision. Whereas the 2003 Recommendations provided for the application of a risk-based approach in some areas, the 2012 Recommendations consider the RBA to be an "essential foundation" of a country's AML/CFT framework. The new guidance reflects that over-arching regulatory ethos.
The guidance has clarified the FATF's views that while some MVTS providers may act as a conduit for illegal funds transfers, this should not result in the categorisation of all MVTS providers as inherently high ML/TF risk. The FATF's comments challenge the "de-risking" movement which has seen many banks withdraw their services from the non-bank MVTS sector.
"The overall risks and threats are influenced by the extent and quality of regulatory and supervisory framework as well as the implementation of risk-based controls and mitigating measures by each MVTS provider. The guidance also recognises that despite these measures, there may still be left some residual risk, which would need to be considered by competent authorities and MVTS providers in devising appropriate solutions," the FATF said.
The standard setter also stressed that remitters play an important role in supporting financial inclusion. "In general terms, financial inclusion is about providing access to an adequate range of safe, convenient and affordable financial services to disadvantaged and other vulnerable groups, including low income, rural and undocumented persons, who have been underserved or excluded from the regulated financial sector at an affordable cost in a fair and transparent manner. It is also about making a broader range of financial services available to individuals who currently may have access to only basic financial products," the FATF noted.
Online risks
The FATF also acknowledged that an increasing number of remittance providers are operating over the internet with no physical presence (i.e. head office, branch or agent network) in the country where the transaction is sent or received. The FATF said authorities in the host jurisdiction in which the MVTS provider provides services, despite not being physically present, should liaise with the MVTS's home authority to ensure that any ML/TF concerns are addressed. The host country may require the submission of STRs, other threshold reports or other relevant information to the local authorities of the country where the MVTS provider operates.
"For AML/CFT supervision or monitoring of the MVTS providers, the home country authorities should also engage with the competent authorities of the host country where MVTS provider provides services," the FATF said. "Cross-border provision of services (including through agents or over the internet or otherwise) highlights the importance of international cooperation among the competent authorities of the relevant jurisdictions. Such international cooperation can be spontaneous or on request depending upon the nature of the specific situation."
When it comes to conducting an ML/TF risk assessment, the FATF has advocated considering a number of categories. These include geographical risks, customer risks, product or service risks and agent risk (distributions channels). This type of assessment allows MVTS providers to subject their customers to proportionate controls and oversight.
"The weight given to these risk categories (individually or in combination) in assessing the overall risk of potential ML/TF may vary from one institution to another, depending on their respective circumstances and risk management. Consequently, MVTS providers will have to make their own determination as to the risk weights; however, parameters set by law or regulation may limit a business's discretion," the guidance stated.
The guidance also said that effective customer due diligence (CDD) was essential to allow MVTS providers assess the ML/TF risk associated with a proposed business relationship or occasional transaction that exceeds the remitter's risk threshold. The FATF said that initial CDD should consist of identifying the customer and, where applicable, the customer's beneficial owner and verifying the customer's identity on a risk-weighted basis.
"It also includes understanding the purpose and intended nature of the business relationship (where relevant) and, in higher risk situations, obtaining further information," the FATF said.
To download the guidance, click here.
- Nathan Lynch is head regulatory analyst, Australia, for Thomson Reuters Regulatory Intelligence.