The AML/CFT: International Cooperation
In the combat against ML & FT , International bodies of nations/market supervisors have joined hands more vigorously after the 9/11 attacks of 2001.
New Global Standards on Automatic Exchange of
Information
To combat the problem of offshore tax evasion and avoidance and stashing of unaccounted money abroad requiring cooperation amongst tax authorities, the G20 and OECD countries working together developed a Common Reporting Standard (CRS) on Automatic Exchange of Information (AEOI). The CRS on AEOI was presented to G20 Leaders in Brisbane on 16th November, 2014. The Hon’ble Prime Minister of India, speaking on the occasion, supported the new global standard as it would be instrumental in getting information about unaccounted money hoarded abroad and in its eventual repatriation. The CRS on AEOI requires the financial institutions of the “source” jurisdiction to collect and report information to their tax authorities about account holders “resident” in other countries, such information having to be transmitted “automatically’ on yearly basis. The information to be exchanged relates not only to individuals but also to shell companies and trusts having beneficial ownership or interest in the “resident” countries. Further, the reporting needs to be done for a wide range of financial products, by a wide variety of financial institutions including banks, depository institutions, collective investment vehicles and insurance companies. The Standard is available atAppendix B.
Global market supervisors like Basel Committee on banking Supervision (BCBS), BIS is prominent among them as most of the financial activities are one way or other linked to banking entities. This post examines the activities undertaken by BCBS, BIS followed by Financial Action Task Force(FATF), FATF Style Regional Bodies, The EGMONT Group , The Wolfsberg group, the APG Group and finally The Transparency International in that order
1. Basel Committee on Banking Supervision (BCBS), BIS
Introduction of guidelines on interaction and cooperation between prudential and AML/CFTsupervision.[Nov 2019]
A.
General provisions
B.
B. Cooperation and exchange of information in
the authorisation process
B.1 Licence of a bank
B.2 Assessment of major shareholders, acquisitions and increases of
qualifying holdings
B.3 Assessment of natural
persons
C. Cooperation and exchange of information in
ongoing supervision
D.
Cooperation and exchange of information regarding enforcement actions
E.
Mechanisms for cooperation, information exchange and confidentiality treatment
E.1 Cooperation and information exchange
between prudential and AML/CFT supervisors
E.2 Cooperation and information exchange
between supervisors and third parties
E.3 Confidentiality and data protection
provisions
2. Financial Action Task Force
In February 2012, the FATF completed a thorough review of its standards and published the revised FATF Recommendations. This revision is intended to strengthen global safeguards and further protect the integrity of the financial system by providing governments with stronger tools to take action against financial crime. They have been expanded to deal with new threats such as the financing of proliferation of weapons of mass destruction, and to be clearer on transparency and tougher on corruption. The 9 Special Recommendations on terrorist financing have been fully integrated with the measures against money laundering. This has resulted in a stronger and clearer set of standards
The FATF Recommendations set out the essential measures that countries should have in place to:
·
Identify the risks, and develop policies and
domestic coordination;
·
Pursue money laundering, terrorist financing and
the financing of proliferation;
·
Apply preventive measures for the financial
sector and other designated sectors;
·
establish powers and responsibilities for the
competent authorities (e.g., investigative, law enforcement and supervisory
authorities) and other institutional measures;
·
Enhance the transparency and availability of
beneficial ownership information of legal persons and arrangements; and
·
Facilitate international cooperation.
3. FATF Style Regional Bodies(FSRBs)
The 9 FATF-Style Regional
Bodies help construct and support AML/CFT compliance policies and updates in
every major region in the world. FSRBs disseminate the FATF’s global standards
in order to help the 200+ countries under their jurisdictions understand and
comply with FATF’s AML/CFT expectations.
AML/CFT typologies refer to
the many methods that money launderers and terrorist financiers employ to carry
out their illicit financial behavior. As these activities happen around the
world in vastly different socio-economic conditions and are tailored to often
unique situations, these techniques tend to vary a lot from each other.
Due to this unpredictability
and constant variations in criminal activity, FATF requires its members to
observe illicit activity and trends in their local jurisdictions and report
back to the organization. FATF collects the information, then tries to analyze,
identify and describe it, so that it can be discussed for the purposes of a
possible induction into the FATF Standards by way of its 40+9 Recommendations and
be used in yearly typology reports to inform the general public.
FSRBs take different
approaches in dealing with typology information. For example, the Asia-Pacific
Group (APG) FSRB uses a strategic framework that gathers, studies and spreads
the information provided in typologies. The APG’s framework requires
its members to “consider and analyze” typologies in 4 parts:
• Establish a
working group to analyze typology topics
• Generate analytics-driven
typology reports and summaries
• Host yearly
workshops for regulators to discuss typologies with law enforcement
• Publish typology
reports annually
Main duties of FATF-Style Regional Bodies
An FSRB will
periodically evaluate the AML/CFT systems of its member
countries, and offer recommendations for improvement as needed.
FSRBs collect and
study typologies, the most commonly-used money laundering, and
terrorism-funding methods so that it may devise counter-measures to stop its
proliferation.
FSRBs then analyze the
results of their typology research, compile best practice guidelines and disseminate this
to relevant parties such as the private sector, regulators, the
research community and law enforcement.
In certain cases, regional
bodies will also intermediate between member countries who
require technical assistance (TA) and donors.
Nine FATF-Style Regional Bodies
• Asia/Pacific
Group on Money Laundering (APG) based in Sydney, Australia;
• Caribbean
Financial Action Task Force (CFATF) based in Port of Spain, Trinidad and
Tobago;
• Eurasian
Group (EAG) based in Moscow, Russia;
• Eastern
& Southern Africa Anti-Money Laundering Group (ESAAMLG) based in Dar es
Salaam, Tanzania;
• Central
Africa Anti-Money Laundering Group (GABAC) based in Libreville, Gabon;
• Latin America
Anti-Money Laundering Group (GAFILAT) based in Buenos Aires, Argentina;
• West
Africa Money Laundering Group (GIABA) based in Dakar, Senegal;
• Middle
East and North Africa Financial Action Task Force (MENAFATF) based in Manama,
Bahrain;
• Council
of Europe Anti-Money Laundering Group (MONEYVAL) based in Strasbourg, France
(Council of Europe).
FSRB Mutual Evaluations
A very important measure
that ascertains the state of member countries’ compliance with the 40+9
Recommendations is called Mutual Evaluations.
In order to measure how well
their member countries’ AML/CFT regimes adhere to the FATF Standards,
FATF-style regional bodies periodically undertake mutual evaluations of a
specific member country. During this process, the individual member state is
assessed by the other countries in their FSRB, and possibly the FATF and
related organizations such as the IMF and World Bank. If the country is
found to be lacking a strong enough AML/CFT regime, the FATF and FSRB will work
with it to help establish the right framework.
Based on the FATF’s special
methodology of 2004 ( updated in 2009). Mutual evaluations
normally follow a fixed schedule.
4. The EGMONT Group
Recognizing
the benefits inherent in the development of a FIU network, in 1995, a group of
FIUs at the Egmont Arenberg Palace in Brussels decided to establish an informal
group for the stimulation of international co-operation. Now known as the
Egmont Group, these FIUs meet regularly to find ways to cooperate, especially
in the areas of information exchange, training and the sharing of expertise.
Countries must go through a formal procedure established by the Egmont Group in
order to be recognised as meeting the Egmont Definition of an FIU. The Egmont
Group as a whole meets once a year. Since the Egmont Group is not a formal
organisation, there is no permanent secretariat. Administrative functions are
shared on a rotating basis. Aside from the Egmont Support position, Working
Groups and the Egmont Committee are used to conduct common business. One of the
main goals of the Egmont Group is to create a global network by promoting
international co-operation between FIUs.
5. The Wolfsberg Group
The Wolfsberg Group is an association of thirteen global banks which aims to develop frameworks and guidance for the management of financial crime risks, particularly with respect to Know Your Customer, Anti-Money Laundering and Counter Terrorist Financing policies.
The Group came together in 2000, at
the Château Wolfsberg in north-eastern Switzerland, in the company of
representatives from Transparency International, including Stanley Morris, and
Professor Mark Pieth of the University of Basel, to work on drafting anti-money
laundering guidelines for Private Banking. The Wolfsberg Anti-Money Laundering
(AML) Principles for Private Banking were subsequently published in October
2000, revised in May 2002 and again most recently in June 2012.
The Wolfsberg Principles are
a non‐binding set of best practice guidelines governing the establishment and
maintenance of relationships between private bankers and clients. Over the past
decade much has been written about money laundering, the problems it creates
for the economic, political and social institutions of countries, and the need
to combat the phenomenon. Most initiatives to date have been public sector led
by governments and their regulatory and law enforcement agencies, or by
government representatives acting through international forms such as the
Financial Action Task Force (FATF) and the Basel Committee of Bank
Supervisors.
Consequently, most
initiatives have focused on enacting new criminal laws, implementing reporting
requirements, and developing codes of best practice. The fact that the private
sector has taken the initiative to establish the Wolfsberg Principles is
therefore worthy of closer analysis.This includes submitting comments on behalf
of the Wolfsberg Group to public consultations on changes to financial crime
regulation, for example those issued by the Financial Action Task Force, the
Financial Stability Board, the EU, UK and FinCEN.
Country Risk Analysis
In 2006, the Wolfsberg Group of International Financial Institutions1 issued guidance on the Risk Based Approach (RBA) to Managing Money Laundering Risks, which set out a number of commonly used risk criteria to measure money laundering risks, including a country risk factor. Since the publication of that guidance, the industry has evolved its understanding of money laundering risks and how to implement appropriate controls to manage those risks. This is particularly true of country risk and its means of assessment, although challenges in this area still remain.
Country Risk in the context of Financial Crime
Compliance
The term
“country risk” has typically referred to the additional risk created by
investing in, or lending cross border to, a foreign country in the context of
credit facilities. With the introduction of the RBA as the overriding principle
in the fight against financial crime, country factors (amongst others) were
identified as being relevant to assessing the financial crime risk of the
customer. These country factors could
include a customer’s domicile or country of incorporation, centre of activity
or other nexus, such as country of tax residency. Therefore, when assessing a
customer’s risk profile, Financial Institutions (FIs) need to consider not only
the financial crime risk related to the customer and the customer’s source of
wealth, but also the legal frameworks and their effectiveness, as well as the
political environment in the countries where the customer is active. For
reasons of differentiation, these FAQs will refer to this type of country risk as
financial crime country risk (FCCR), which reflects the assessment of whether a
particular country’s attributes would result in a higher probability that a
customer connected to that country presents a higher risk of financial crime.
It is to be noted here that even a higher FCCR should not necessarily preclude
business being undertaken in any such rated country, but rather that FIs will
need to ensure that the control environment is appropriately robust to manage
that risk.
The starting point for effective assessment of an FI’s
FCCR rating methodology is based on the FI’s initial understanding of the
country’s risks and context in the widest sense, as well as elements which
contribute to them. These may cover:
• The nature and extent of money laundering, terrorist financing, corruption, tax evasion risks, amongst others
• Factors which could significantly influence the effectiveness of a country’s anti money laundering (AML) and counter terrorist financing (CTF) measures, including the maturity and sophistication of the regulatory and supervisory regime in the country
• Legal AML/CTF frameworks
• Structural elements which underpin the AML/CTF system, for example: political stability; a highlevel commitment to address AML/CTF issues and indicators of financial secrecy
• The circumstances of the country, for example, the relative importance of different parts of the financial sector, the extent to which the economy is cash-based; estimates of the size of the informal sector and/or shadow economy
Other geographical factors such as trading or cultural links, or what are commonly known as nexus risks, where geographic proximity may drive a higher risk rating; this is particularly true for sanctions and terrorist financing considerations
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