FATF and the Fight against Money Laundering

In Depth

FATF and the Fight against Money Laundering

Narendra Gangan | September 2013

The term ‘money laundering’ is self-explanatory. A global menace, money laundering is a process where the source and ownership of money earned from illegal activities are disguised and converted into legitimate money using banking channels. The ways to save the banking system from this hazard have been on the top agenda of every government and financial regulator, prompting appropriate preventive and remedial measures from time to time. From the law enforcement and prosecutorial perspective, this commitment is reflected in an active pursuit of the financial aspects and financing of terrorism. Such efforts, however, go down the drain in the absence of lack of convictions and a firm case law.

India has progressively expanded and strengthened its preventive measures for the financial sector, which now apply to all but one of the financial activities required to be covered under the Financial Action Task Force standards, i.e. money laundering. The supervisory regime for financial institutions is generally sound, but its effectiveness with regard to Anti- Money Laundering and Combating the Financing of Terrorism (AML/CFT) has not yet been sufficiently demonstrated. Along with an overview of the Indian regulatory and statutory landscape, it would be imperative to address the technical shortcomings in the criminalization of both money laundering and terrorist financing. Despite the shortcomings, India’s serious commitment towards combating terrorism in all its forms must be acknowledged. The Global Forum on Transparency and Exchange of Information for Tax Purposes has issued a phase one peer review for India as under:

To broaden the customer due diligence obligations with clear and specific measures to enhance the current requirements regarding beneficial ownership;
To improve the reliability of identification documents, the use of pooled accounts, politically exposed persons, and non-face-to-face business;
To enhance the effectiveness of the suspicious transactions reporting regime;
To enhance the effectiveness of the financial sector supervisory regime and ensure that the country is adequately supervised;
To ensure that the competent supervisory authorities make changes to their sanctioning regimes to allow for effective, proportionate and dissuasive sanctions for failures to comply with AML/CFT requirements; and
To extend the Prevention of Money Laundering Act to the full range of designated non-financial businesses and professions, and ensure that they are effectively regulated and supervised.

GLOBAL FRAMEWORK

The Financial Action Task Force (FATF) — The international standard-setter in the fight against terrorist financing and money laundering was established in 1989by the Group of Seven (G-7) at the Summit held in Paris. The growing threat posed by money laundering to the banking system and financial institutions was recognized inter alia by the group, leading to the setting up of the FATF. This was followed by a series of money laundering recommendations in 1990, collectively known as the 40+9 Recommendations on the prominent threat of terrorist financing, with the intent to unite anti-money laundering and terrorist financing efforts into one universal instrument. Important among these recommendations were:

To develop and promote policies on a global platform in order to combat money laundering and terrorist financing;
To ensure global action to combat money laundering and terrorist financing;
To monitor techniques and countermeasures and reviews in order to combat the developing threat;
Having a bilateral operational framework; the member countries complete annual self-assessment style questionnaire subsequent to which FATF regularly conducts on-site Mutual Evaluation Report examinations on individual jurisdictions, assessing the effectiveness of their national policies in dealing with money laundering and terrorist financing;
To advise the member nations in order to implement the comprehensive, international standards embodied in the FATF Forty Recommendations on Money Laundering and the Nine Recommendations on Terrorist Financing.

FATF MONEY LAUNDERING RECOMMENDATIONS

To provide counter-measures against money laundering and encompass the criminal justice system, law enforcement, the financial system and its regulators, together with international co-operation. They also set out principles and minimum standards for action.
Countries are free to implement the details of the recommendations in the manner they choose, in order to fit them into their own constitutional frameworks.
Being recommendatory rather than mandatory, many countries have chosen to make a commitment to implement them in order to combat money laundering.
Published in 1990, and having subsequent revisions in 1996 and 2003, the recommendations are constantly reviewed and updated to consider any changes or anticipated changes in money laundering trends.
In 2003, the FATF amended the scope of the recommendations to include designated non-financial businesses and professionals, viz. — casinos, real estate agents, dealers in precious stones and metals, and lawyers, notaries, other independent legal professionals and accountants.

SUMMARY OF THE 40 RECOMMENDATIONS

The criminalization of money laundering on similar terms to those suggested in the 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and the 2000 UN Convention against Transnational Organized Crime, as well as for extended sanctions (civil and regulatory) to be applied to legal persons who fail to adhere to the Directive;
That countries adopting the recommendations should establish a national centre for receiving information about suspected money laundering transactions (a Financial Intelligence Unit or FIU) and ensure that there are designated law enforcement authorities that have responsibility and resources necessary to investigate such transactions;
The adoption of measures such as tracing in order to confiscate property and proceeds from money laundering, also recommending call for steps that prevent the State from recovering such property to be voidable;
That client due records should be completed by all financial institutions and non-financial businesses and professions, including lawyers, and reports to be kept for five years. The recommendations also call for ‘special attention’ to be paid to all complex and unusually large transactions and to those transactions involving new or developing technologies;
That there be a requirement for all financial institutions and non-financial businesses and professions including lawyers to report suspicious transactions to the Financial Intelligence Unit (FIU) and for protection/immunity to be offered to such informants;
Financial institutions should develop programmes such as internal policies, designed to combat money laundering and terrorist financing and ensure that all subsidiaries adhere to the recommendations to the extent the country has implemented them;
That all shell banks should be discontinued and all financial institutions should report all domestic and international currency transactions above a certain amount;
That there should be enhanced regulation, supervision and guidance offered to financial institutions and nonfinancial businesses and professions, in their compliance with the recommendations; and
That there should be improved efficiency regarding international co-operation, mutual legal assistance including possible extradition and information sharing among jurisdictions.

FATF TERRORIST FINANCING SPECIAL RECOMMENDATIONS

The nine special recommendations designed to combat terrorist financing were first published by the FATF in 2001, following the 9/11 terrorist attacks in the United States. They initially contained only eight recommendations encompassing the criminalization of terrorist financing and provision for combating the problem. The recommendations were updated in 2004 to include cash couriers:

“Cash couriers” are used by individuals who wish to transfer cash internationally. The benefits of the human courier system are understandable. There is no electronic transfer and, therefore, no lasting record of the transaction. These couriers carry significant risk in delivering the illegal money to the destination country.

Implementation has been monitored through a self-assessment questionnaire, designed to elicit details from different jurisdictions and also follow the progress of their execution. The special recommendations have been summarized as under:

The immediate ratification and implementation of UN anti-financing of terrorism instruments, such as the 1999 United Nations International Convention for the Suppression of the Financing of Terrorism;
The criminalization of the financing of terrorism, terrorist acts and terrorist organization and the freezing and confiscation of terrorist assets;
A national method of reporting suspected funds for terrorism, terrorist acts or terrorist organizations to be established;
The international co-operation and mutual legal assistance to ensure prompt and effective criminal/civil investigations and prosecutions of suspected terrorist financing, acts and organizational breaches;
Financial and non-financial entities providing a service for the transmission of money or value to be subject to all of the FATF recommendations;
Client due diligence to be completed by all financial institutions and for enhanced security measures to be adopted in relation to clients who do not provide complete originator information; and
Enhanced regulation of non-profit organizations and other entities particularly susceptible to abuse, together with enhanced measures designed to track the physical cross-border transportation of funds.

The ninth recommendation called for countries to adopt measures to detect and prevent the physical cross-border transportation of money related to terrorist financing and money laundering.The goal in providing these special recommendations was to ensure that financial institutions and other susceptible entities do not unwittingly hide or move terrorist funds. The FATF has also provided guidance on detecting terrorist financing activities for financial institutions and for the implementation of the special recommendations in general.