Article, Criteria for the Evaluation of AML Compliance Regimes of Nations and Offshore Financial Centers

Criteria for the Evaluation of AML/Compliance Regimes of Nations and Offshore Financial Centers

By

Benjamin M Musau

Criteria for the Evaluation of AML/Compliance Regimes of Nations and Offshore Financial Centers

 
The Financial Action Task Force (an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering and terrorist financing) has issued recommendations which define the criminal justice and regulatory measures that should be implemented to counter money laundering and terrorist financing.
 
The measures developed through these recommendations include international co-operation and preventive measures to be taken by financial institutions and others such as casinos, real estate dealers, lawyers and accountants.
 
These FATF recommendations are recognised as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard.
 
 
The Anti-Money Laundering/Combating Terrorist Financing (AML/CFT) Methodology 2004, including the assessment criteria, is designed to guide the assessment of a country’s compliance with the international AML/CFT standards as contained in the FAFT 40 Recommendations 2003 (updated as of October 2004) and the FATF Nine Special Recommendations on Terrorist Financing 2001 (updated as of February 2008) (referred to jointly as the FATF Recommendations).
 
The AML/CFT Assessment Methodology is a key tool to help assessors when they are preparing AML/CFT detailed assessment reports/mutual evaluation reports.  The methodology helps assessors in identifying the systems and mechanisms developed by countries with diverse legal, regulatory and financial frameworks, in order to implement effective AML/CFT systems.  The Methodology will also help individual countries in reviewing their own systems, including in relation to technical assistance projects.
 
The various experiences that have been brought to bear in developing the Methodology include those of the following organisations:
 

1. FATF;
2. FATF-style regional bodies (FSRBs) from their mutual evaluations;
3. The International Monetary Fund (IMF) from the Offshore Financial Center assessment program; and
4. The World Bank in the Financial Sector Assessment Program.

 
The assessments need to be based on and refer to the following:
 

• The relevant underlying information e.g. the quantum and type of predicate offences for money laundering;
• The vulnerability of the country to money laundering or terrorist financing, the methods, techniques and trends used to launder money or fund terrorists;
• The structure of the financial system and the nature of the sectors dealing with designated non-financial businesses and professions;
• The nature of the underlying criminal justice system, and any changes that have been made to the AML/CTF system in the relevant period;
• An assessment of whether the Recommendations have been fully and properly implemented and the AML/CFT system is effective by reference to quantitative data and the results that have been achieved, or based upon more qualitative factors.

 
In order for the AML/CFT system to be effective it is necessary to have an adequate legal and institutional framework, which should include the following:
 

• Laws that create money laundering (ML) and terrorist financing (FT) offences and provide for the freezing, seizing and confiscation of the proceeds of crime and terrorist funding;
• Laws, regulations or in certain circumstances other enforceable means that impose the required obligations on financial institutions and designated non-financial businesses and professions;
• An appropriate institutional or administrative framework, and laws that provide competent authorities with the necessary duties, powers and sanctions; and
• Laws and other measures that give a country the ability to provide the widest range of international co-operation.

 
The structural elements, not covered by the AML/CFT assessment, and that should be in place for effective AML/CFT systems include:
 

• The respect of principles such as transparency and good governance;
• A proper culture of AML/CFT compliance shared and reinforced by government, financial institutions, designated non-financial businesses and professions, industry trade groups, and self-regulatory organisations (SROs);
• Appropriate measures to prevent and combat corruption, including, where information is available, laws and other relevant measures, the jurisdictions’ participation in regional or international anti-corruption initiatives (such as the United Nations Convention against Corruption) and the impact of these measures on the jurisdiction’s AML/CFT implementation;
• A reasonably efficient court system that ensures that judicial decisions are properly enforced;
• High ethical and professional requirements for police officers, prosecutors, judges, etc. and measures and mechanisms to ensure these are observed;
• A system for ensuring the ethical and professional behaviour on the part of professionals such as accountants and auditors, and lawyers.  This may include the existence of codes of conduct and good practices, as well as methods to ensure compliance such as registration, licensing, and supervision or oversight.

 
The assessment of individual recommendations based on the assessment criteria as well as any findings based on the structural elements may lead to broader conclusions on the global effectiveness of a country’s AML/CFT system, which conclusions should be mentioned in both the mutual evaluation report/detailed assessment report and in the executive summary as part of the report’s overall findings on the AML/CFT system in the country.
 
This criterion is applicable to all countries although the legislative, institutional and supervisory framework for AML/CFT may differ from one country to the next.
 
The essential criteria for Recommendation 26 requires countries to establish a Financial Intelligence Unit (FIU) that serves as a national centre for receiving (and if permitted, requesting), analyzing, and disseminating disclosures of STR and other relevant information concerning suspected ML or FT activities.  The FIU can be established either as an independent governmental authority or within an existing authority or authorities.
 
The essential criteria requires criminalization of money laundering on the basis of the 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention) and the 2000 UN Convention against Transnational Organized Crime (the Palermo Convention) i.e. the physical and material elements of the offence[1].  The offence of money laundering should extend to any type of property, regardless of its value, that directly or indirectly represents the proceeds of crime.
 
Beneficiary financial institutions should be required to adopt effective risk-based procedures for identifying and handling wire transfers that are not accompanied by complete originator information.  The lack of complete originator information may be considered as suspicious and, as appropriate, whether they are thus required to be reported to the financial intelligence unit or other competent authorities.  Is some cases, the beneficiary financial institution should consider restricting or even terminating its business relationship with financial institutions that fail to meet SR. VII standards.
 
In the context of the criteria for AML/CFT compliance as developed by FATF SARs are actually addressed as Suspicious Transaction Reports.  The criteria requires that a financial institution should be required by law or regulation to report to the FIU (a suspicious transaction report –STR) when it suspects or has reasonable grounds to suspect that funds are the proceeds of criminal activity.  At a minimum, the obligation to make a STR should apply to funds that are the proceeds of all offences that are required to be included as predicate offences under Recommendation 1.  This requirement should be a direct mandatory obligation, and any indirect or implicit obligation to report suspicious transactions, whether by reason of possible prosecution for a ML offence or otherwise (so called “indirect reporting) is not acceptable.
 
A short list of the assessment criteria is as follows:

1. Money laundering criminalised?
2. Offence of money laundering applicable at least to natural persons that knowingly engage in ML activity.
3. Laws providing for the confiscation of property that has been laundered.
4. No financial secrecy law inhibits the implementation f FATF recommendations.
5. Financial institutions should not be permitted to keep anonymous accounts or accounts in fictitious names.
6. Financial institution should be required to put in place appropriate risk management systems to determine whether a potential customer, a customer or the beneficial owner is a politically exposed person (PEP).
7. Financial institutions should (in relation to cross-border correspondent banking and other similar relationships) be required to gather sufficient information on the respondent’s business, AML/CFT controls, etc.
8. Financial institutions should be required to have policies in place or take such measures as may be needed to prevent the misuse of technological developments in money laundering or terrorist financing schemes.
9. If financial institutions are permitted to rely on intermediaries or other third parties to perform some of the elements of the CDD process.
10. Financial institutions should be required to maintain all necessary records on transactions, both domestic and international, for at least 5 years following completion of the transaction (or longer if requested by a competent authority in specific cases and upon proper authority).
11. Financial institutions should be required to pay special attention to all complex, unusual large transactions, or unusual patters of transactions, that have no apparent or visible economic or lawful purpose.
12. DNFBP should be required to comply with the requirements set out for casinos, real estate agents, dealers in precious metals and dealers in precious stones, lawyers, notaries, other independent legal professionals and accountants in relation to activities covered.
13. A financial institution should be required by law or regulation to report STRs to FIU.
14. Financial institutions and their directors, officers and employees (permanent and temporary) should be protected by law from both criminal and civil liability for breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision, if they report their suspicions in good faith to FIU.
15. The type and extent of measures to be taken for each of the requirements on internal procedures, policies and controls established and maintained by financial institutions should be appropriate having regard to the risk of money laundering and terrorist financing and the size of the business.
16. Is the reporting requirement for DNFBP’s extended to the rest of the professional activities of accountants, including auditing?
17. Countries should ensure that effective, proportionate and dissuasive criminal, civil and administrative sanctions are available to deal with natural or legal persons covered by the FATF Recommendations that fail to comply with national AML/CFT requirements.
18. Countries should not approve the establishment or accept the continued operation of shell banks.
19. Countries should consider the feasibility and utility of implementing a system where financial institutions report all transactions in currency above a fixed threshold to a national central agency with a computerised data base.
20. Countries to consider applying the criteria to non-financial businesses and professions (other than DNFBP) that are at risk of being misused for money laundering or terrorist financing.
21. Financial institutions should be required to give special attention to business relationships and transactions with persons (including legal persons and other financial institutions) from or in countries which do not or insufficiently apply the FATF Recommendations.
22. Financial institutions should be required to ensure that their foreign branches and subsidiaries observe AML/CTF measures consistent with home country requirements and the FATF Recommendations, to the extent that local (i.e. host country) laws and regulations permit.
23. Countries should ensure that financial institutions are subject to adequate AML/CFT regulation and supervision and are effectively implementing the FAFT Recommendations.
24. Countries should ensure that casinos (including internet casinos) are subject to a comprehensive regulatory and supervisory regime that ensures they are effectively implementing the AML/CFT measures required under the FAFT Recommendations.
25. Competent authorities should establish guidelines that will assist financial institutions and DNFBP to implement and comply with their respective AML/CFT requirements.
26. Countries should establish an FIU that serves as a national centre for receiving (and if permitted, requesting), analysing, and disseminating disclosures of STR and other relevant information concerning suspected ML or FT activities.
27. There should be designated law enforcement authorities that have responsibility for ensuring that ML and FT offences are properly investigated.
28. Competent authorities responsible for conducting investigations of ML, FT and other underlying predicate offences should have powers to be able to:

(a)   Compel production of,
(b)   Search persons or premises for, and
(c)    Seize and obtain
transaction records, identification data obtained through the CDD process, account files and business correspondence, and other records, documents or information, held or maintained by financial institutions and other businesses or persons.

1. Supervisors should have adequate powers to monitor and ensure compliance by financial institutions, with requirements to combat money laundering and terrorist financing, consistent with the FATF Recommendations.
2. FIUs, law enforcement and prosecution agencies, supervisors and other competent authorities involved in combating money laundering and terrorist financing should be adequately structured, funded, staffed, and provided with sufficient technical and other resources to fully and effectively perform their functions.
3. Policy makers, the FIU, law enforcement and supervisors and other competent authorities should have effective mechanisms in place which enable them to co-operate, and where appropriate, co-ordinate domestically with each other concerning the development and implementation of policies and activities to combat money laundering and terrorist financing.
4. Countries should review the effectiveness of their systems for combating money laundering and terrorist financing on a regular basis.
5. Countries should take measures to prevent the unlawful use of legal persons in relation to money laundering and terrorist financing by ensuring that their commercial, corporate and other laws require adequate transparency concerning the beneficial ownership and control of legal persons.
6. Countries should take measures to prevent the unlawful use of legal arrangements in relation to money laundering and terrorist financing by ensuring that it’s commercial, trust and other laws require adequate transparency concerning the beneficial ownership and control of trusts and other legal arrangements.
7. Countries should sign and ratify, or otherwise become a party to, and finally implement, the Vienna Convention, the Palermo and the 1999 United Nations International Convention for the Suppression of the Financing of Terrorism (the Terrorist Financing Convention).
8. Countries should be able to provide the widest possible range of mutual legal assistance in AML/CFT investigations, prosecutions and related proceedings.
9. To the greatest extent possible, mutual legal assistance should be rendered in the absence of dual criminality, in particular, for less intrusive and non compulsory measures.
10. There should be appropriate laws and procedures to provide an effective and timely response to mutual legal assistance requests by foreign countries related to the identification, freezing, seizure, or confiscation of:

(a)   Laundered property from,
(b)   Proceeds from,
(c)    Instrumentalities used in, or
(d)   Instrumentalities intended for use in,
the commission of any ML, FT or other predicate offences.
 

1. Money laundering should be an extraditable offence.  There should be laws and procedures to extradite individuals charged with a money laundering offence.
2. Countries should ensure that their competent authorities are able to provide the widest range of international cooperation to their foreign counterparts.
3. Countries should sign and ratify, or otherwise become a party to, and fully implement, the Terrorist Financing Convention.
4. Terrorist financing should be criminalized consistent with Article 2 of the Terrorist Financing Convention.
5. Countries should have effective laws and procedures to freeze terrorist funds or other assets of persons designated by the United Nations Al-Qaida and Taliban Sanctions Committee in accordance with S/RES/1267(1999).  Such freezing should take place without delay and without notice to the designated persons involved.
6. A financial institution should be required by law or regulation to report to the FIU (a suspicious transaction report –STR) when it suspects or has reasonable grounds to suspect that funds are the proceeds of criminal activity.  At a minimum, the obligation to make a STR should apply to funds that are the proceeds of all offences that are required to be included as predicate offences under Recommendation 1.  This requirement should be a direct mandatory obligation, and any indirect or implicit obligation to report suspicious transactions, whether by reason of possible prosecution for a ML offence or otherwise (so called “indirect reporting) is not acceptable.
7. Countries should ensure that criteria 36.1-36.7 (in Recommendation 36) also apply to the obligations under SR.V.
8. Countries should designate one or more competent authorities to register and/or license natural and legal persons that perform money or value transfer services (MVT service operators), maintain a current list of the names and addresses of licensed and/or registered MVT service operators, and be responsible for ensuring compliance with licensing and/or registration requirements.
9. SR.VII applies to cross-border and domestic transfers between financial institutions subject to the exceptions provided.
10. Review of domestic non-profit sector – countries should review adequacy of domestic laws and regulations that relate to non-profit organisations, use all available sources of information to undertake domestic reviews of or have the capacity to obtain timely information on the activities, size and other relevant features of their non-profit sectors for the purpose of identifying the features and types of non-profit organisations (NPOs) that are at risk of being misused for terrorist financing by virtue of their activities or characteristics, and conduct periodic reassessments by reviewing new information on the sector’s potential vulnerabilities to terrorist activities.
11. The supra-national jurisdiction will require a supra-national assessment to determine jurisdictional compliance and all member jurisdictions should adhere to modified essential criteria.

 
I concur with J.C. Sharman arguments in his paper entitled The Global Anti-Money Laundering Regime and Developing Countries: Damned if they Do, Damned if they Don’t? that there are significant challenges especially in view of the costs that developing countries face in adopting new international anti-money laundering (AML) standards.  It is also safe to argue that there are serious costs for these countries in failing to comply with these standards.  The AML regulations that are required in the assessment criteria are quite expensive to implement.  They appears to be designed for developed countries and not developing ones.  G-7 governments and the FATF are putting pressure on all states to implement the regulations.  In view of the adverse economic, social and political consequences of terrorist and money laundering activities, it is necessary for each country to achieve a considerably high degree of implementation of the measures that are used to judge compliance with AML/compliance regimes from the FATF.
 
 
References:
 

1. http://www.fatf-gafi.org/dataoecd/16/54/40339628.pdf
2. The Global Anti-Money Laundering Regime and Developing Countries: Damned if they Do, Damned if they Don’t?

 
 
 
Date: March 3, 2011

Dr. Benjamin Musau

I am a Kenyan Advocate and the Managing Partner of B M Musau & Co., Advocates, a position I have held since 1999. My work encompasses regulatory reforms, reduction of administrative burdens, the structure of business entities, joint ventures, acquisitions, banking, foreign investment and other general corporate areas