Global Measures on ML/FT: BIS
Established in 1930, the Bank for International settlement (BIS ) is owned by 63 central banks, representing countries from around the world that together account for about 95% of world GDP. Its head office is in Basel, Switzerland and it has two representative offices: in Hong Kong SAR and in Mexico City, as well as Innovation Hub Centres around the world. Its mission is to support central banks' pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks.
The Basel Committee - initially named the Committee on
Banking Regulations and Supervisory Practices - was established by the central
bank Governors of the Group of Ten countries at the end of 1974 in the
aftermath of serious disturbances in international currency and banking markets
(notably the failure of Bankhaus Herstatt in West Germany).
The Committee, headquartered at the Bank for International
Settlements in Basel, was established to enhance financial stability by
improving the quality of banking supervision worldwide, and to serve as a forum
for regular cooperation between its member countries on banking supervisory
matters. The Committee's first meeting took place in February 1975, and
meetings have been held regularly three or four times a year since.
Since its inception, the Basel Committee has expanded its
membership from the G10 to 45 institutions from 28 jurisdictions
The
Basel Committee on Banking Supervision (BCBS) is the primary global standard
setter for the prudential regulation of banks and provides a forum for regular
cooperation on banking supervisory matters. Its 45 members comprise central
banks and bank supervisors from 28 jurisdictions.
The Basel
Committee’s previous guidance on customer due diligence and anti-money
laundering efforts has been contained in three papers. The Prevention of
Criminal Use of the Banking System for the Purpose of Money-Laundering was
issued in 1988 and stipulates several basic principles, encouraging banks to
identify customers, refuse suspicious transactions and cooperate with law
enforcement agencies. The 1997 Core Principles for Effective Banking
Supervision states that, as part of a sound internal control environment, banks
should have adequate policies, practices and procedures in place that
"promote high ethical and professional standards in the financial sector
and prevent the bank from being used, intentionally or unintentionally, by criminal
elements." In addition, supervisors are encouraged to adopt the relevant
recommendations of the FATF, relating to customer identification and
record-keeping, reporting suspicious transactions, and measures to deal with
countries with insufficient or no anti-money laundering measures. The 1999 Core
Principles Methodology further elaborates the Core Principles by listing a
number of essential and additional criteria.
In accordance with
the updated Core principles for effective banking supervision (2012), all banks
should be required to “have adequate policies and processes, including strict
customer due diligence (CDD) rules to promote high ethical and professional
standards in the banking sector and prevent the bank from being used,
intentionally or unintentionally, for criminal activities”.14 This requirement
is to be seen as a specific part of banks’ general obligation to have sound
risk management programmes in place to address all kinds of risks, including ML
and FT risks. “Adequate policies and processes” in this context requires the
implementation of other measures in addition to effective CDD rules. These
measures should also be proportional and risk-based, informed by banks’ own
risk assessment of ML/FT risks. This document sets out guidance in respect of
such measures. In addition, other guidelines are applicable or supplementary
where no specific AML/CFT guidance exists.
The BCBS, the global standard setter for the prudential
regulation of banks and a forum for cooperation on banking supervisory matters,
incorporated the FATF Recommendations into its overall framework of banking
supervision through guidelines on the sound
management of risks related to ML and TF, without modifying the content of the
FATF Recommendations.
AML
and CFT in banking supervision
General
principles
Banks' AML/CFT measures and related supervision should
follow a risk-based approach. This entails a differentiation of risk classes
and their separate management. Specifically, the risk-based approach requires
the identification and assessment of the individual risk at hand, application
of specific mitigation and monitoring measures, and documentation of the
strategy taken and any major decisions made. Examples of suitable candidates
for risk differentiation include:
- Politically exposed persons (PEPs) – individuals who
hold or have held important functions in the public or private sectors and
may have been exposed to corruption. As corruption is a predicate crime,
their wealth may be illicit, and hence transactions with PEPs warrant
enhanced due diligence
- Business areas that have a high cash turnover, eg
casinos, parking garages and construction, warrant enhanced due diligence
- Countries that are designated as non-cooperative by the
FATF
Governance
and organisation
The principal responsibility for a bank's ML/TF risk
management lies with the board of directors. It is responsible for defining and
overseeing a bank's AML/CFT policy and allocating operational responsibilities
and resources under the "three lines of defence" model:
- The "first line of defence" lies with a
bank's business units, eg its private banking or asset management
divisions. These units are responsible for identifying, assessing and
controlling ML/TF risks through the use of customer due diligence
practices.
- The "second line of defence" primarily refers
to the chief officer in charge of AML/CFT, the compliance function, as
well as human resources and technology. These entities should be
independent of business units, give independent advice to management and
act as main contact point for the relevant authorities. Conflicts between
the first and second lines of defence should be resolved at the highest
level.
- The "third line of defence" refers to the
independent internal audit function.
Banks'
due diligence
Banks' due diligence refers to the collection and
verification of client information at account opening and the monitoring of
client transactions.
The overarching principle at account opening is "Know
Your Customer" (KYC). This includes checking:
- the identity of an individual or a legal entity,
including corporate officers or proxies (attorneys-in-fact), through
appropriate documents (eg passports or certificates of incorporation)
- the financial and any criminal background of the
customer, as well as the nature of a business or company
- how the bank relationship fits into the client's
broader activities (eg salary account or operating account of a company)
The FATF has clarified that correspondent banks are not required to conduct due diligence on their respondent banks' clients, ie the ultimate payers or payees. Nevertheless, correspondent banks should assess the ML/TF risks associated with the correspondent banking relationship.
Transaction monitoring is a particularly important aspect of
banks' due diligence as it allows them to identify criminal activities and
report those activities to the relevant authorities. The size of transactions
and whether they are deemed suspicious govern escalation and reporting. With
"large" transactions, reporting is triggered if certain,
jurisdiction-specific thresholds are met. In terms of "suspicious"
transactions, national AML regimes typically qualify such transactions as
suspicious on the basis of the following patterns:
- The transactions do not "make economic
sense", eg they have unrealistically high profits.
- "Structured" transactions are employed, ie
multiple small transfers are used where one large transfer would have been
more convenient but would have met an AML threshold.
- The transactions involve unusual withdrawals,
especially if an account is closed and funds are withdrawn in cash.
Information
management
To ensure a proper audit trail, foster sound supervisory
reporting and, where necessary, support criminal prosecutions, banks should
ensure that all information obtained through client and transaction due
diligence is recorded and documented, including the inputting of transcripts
into the bank's information technology systems. Recorded information should be
retained for at least five years.
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