Assessing Financial System Integrity—Anti-Money Laundering and Combating the Financing of Terrorism

Both the World Bank and IMF have long been involved in international efforts to strengthen financial sector supervision and to promote good governance, which, among other things, both contribute to reducing financial crime and enhance the integrity of the international financial system. Since 2001, the Bank-Fund involvement in those issues has been intensified, with a sharper focus on both anti-money-laundering (AML) measures and efforts aimed at combating the financing of terrorism (CFT). Both the Bank and the Fund have worked closely with the Financial Action Task Force on Money Laundering (FATF), the standard setting body in this area, to develop a methodology for assessing the observance of international standards on the legal, institutional, and operational framework for AML-CFT.1 The Bank and the Fund conduct assessments of AML-CFT regimes as part of the FSAP assessments and, in the case of the Fund, as part of OFC assessments. Assessments are also conducted as part of the mutual evaluations for FATF members, which are done by FATF or FATF-style regional bodies (FSRB).2

The FATF standards draw on and complement a wide range of United Nations (UN) conventions and resolutions that promote international cooperation in preventing and containing drug trafficking, organized crime, corruption, and efforts to finance terrorism. In addition, all financial supervisory standards have core principles to enhance know- your-customer (KYC) rules, suspicious transactions reporting, and other due diligence requirements that help to support AML-CFT regimes. Box 8.1 contains an overview of key UN conventions and resolutions that complement FATF standards, and box 8.2 highlights key aspects of financial sector supervisory standards that support an effective AML-CFT regime.

Money laundering is “transferring illegally obtained money or investments through an outside party to conceal the true source.”3 The number and variety of transactions used

Box 8.1 United Nations Conventions and Security Council Resolutions
in Support of AML-CFT Regimes

 

The 2004 Methodology (FATF 2004a) identifies three United Nations (UN) conventions and several UN Security Council Resolutions that are incorpo­rated into the requirements of the FATF standards on AML-CFT regimes. UN conventions have the effect of law in a country once that country has signed, rati­fied, and implemented the convention, depending on the country’s constitution and legal structure. Under certain circumstances, the Security Council of the United Nations has the authority to bind all member countries, regardless of other action or inaction on the part of an individual country. This box summa­rizes the relevant provisions of these United Nations instruments.

• United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988; the Vienna Convention)—The Vienna Convention, as it is commonly known, deals pri­marily with the illicit drug trade and related law enforcement issues. It is the first UN convention to define the concept of “money laundering,” even though it does not use that term, and it calls on countries to criminalize the activity. This convention is limited, however, to drug­trafficking offenses and does not address the preventative aspects of the crime.

• The International Convention against Transnational Organized Crime (2000; the Palermo Convention)— This convention contains a broad range of provi­sions to fight organized crime. With respect to money laundering, it requires countries to

– Criminalize money laundering and include all serious crimes as predicate offenses of money laundering (not just drug-related offenses), plus permit the required criminal knowledge or intent to be inferred from objective facts, not proven individually.

– Establish regulatory regimes to deter and detect all form of money laundering.

– Authorize domestic and international coop­eration and exchanges of information among administrative, regulatory, law enforcement, and other types of authorities.

 

– Promote the establishment of governmental units to centrally collect, analyze, and dis­seminate information.

• International Convention for the Suppression of the Financing of Terrorism (1999)—This conven­tion requires countries to criminalize terrorism, terrorist organizations, and terrorist acts. Under this convention, it is unlawful for any person to provide or collect funds with the intent or knowledge that the funds will be used to carry out any defined acts of terrorism.

• Security Council Resolution 1373—This reso­lution obligates all countries to criminalize actions to finance terrorism. This resolution also obligates countries to deny all forms of support to terrorist groups and to freeze assets of those involved in terrorist acts. It also encour­ages cooperation among countries for crimi­nal investigations and for sharing information about planned terrorist acts.

• Security Council Resolution 1267 and Its Successors—Security Council Resolution 1267 required all countries to freeze the assets of the Taliban and entities owned or controlled by them, as determined by the “Sanctions Committee.” Later, Resolution 1333 added the assets of Osama bin Laden and al-Qaeda to the freezing list. Subsequent resolutions established monitoring arrangements (Resolution 1363), merged earlier lists (Resolution 1390), pro­vided some exclusions (Resolution 1452), and improved implementation measures (Resolution 1455). Together, the various lists for freezing assets are maintained and updated by the “1267 Committee” and are published on the UN’s Web site.

The UN documents noted above are available at the Web homepages of the United Nations and the United Nations Office of Drugs and Crime: UN conventions are accessible at http://www. undoc. org/ undoc/index. html; and the security council resolu­tions at http://www. un. org/documents/scres. htm.

 

to launder money has become increasingly complex, often involving numerous financial institutions from many jurisdictions, and increasingly using nonbank financial institu­tions (e. g., bureaux de change, wire remittance services, cash couriers, insurers, brokers, traders), as well as nonfinancial businesses and professions (e. g., lawyers, accountants, and trust and company service providers). Money-laundering methods are diverse and

 

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Box 8.2 Core Principles and Guidelines of Financial Sector Supervision
in Support of AML-CFT Regimes

 

The Basel Committee on Banking Supervision (Basel Committee), International Association of Insurance Supervisors (IAIS), and International Organization of Securities Commissioners (IOSCO) have each issued broad supervisory standards and guidelines on a wide range of supervisory issues, including money launder­ing as it relates to banking, insurance, and securities. FATF incorporates those standards and guidelines in its 40 recommendations.

The Basel Committee

The Basel Committee has issued three documents covering money-laundering issues:

• Statement on Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering—This statement contains essentially four principles that should be used by banking institutions:

– Proper customer identification

– High ethical standards and compliance with laws and regulations

– Cooperation with law enforcement authori­ties

– Policies and procedures to be used to adhere to the statement

• Core Principles for Effective Banking Supervision— These principles set out a comprehensive blue­print for supervisory issues, which cover a wide range of topics. Core Principle 15 deals with money laundering by stipulating that bank super­visors must determine that banks have adequate policies and procedures in place, including strict know-your-customer (KYC) rules.

• Customer Due Diligence for Banks—This paper provides extensive guidance on appropriate standards for banks to use in identifying their customers. The paper was issued in response to a number of deficiencies noted on a global basis with regard to the KYC procedures noted above. In addition, the standards go beyond the fight against money laundering and are intend­ed to help protect banks in terms of safety and soundness.

 

IAIS

This association has issued its Guidance Paper 5, “Anti-Money-Laundering Guidance Notes for Insurance Supervisors and Insurance Entities,” which parallels the Basel Committee’s statement on pre­vention. It contains four principles that should be embraced by insurance entities:

• Comply with anti-money-laundering laws.

• Have know-your-customer procedures in place.

• Cooperate with all law enforcement authori­ties.

• Have internal anti-money-laundering policies, procedures, and training programs for employees.

IOSCO

This organization passed its “Resolution on Money Laundering” to be implemented by securities regu­lators in individual countries. It consists of seven specific areas for securities regulators to consider in establishing requirements for firms under their jurisdiction:

• The extent of customer identifying informa­tion with a view toward enhancing the ability of authorities to identify and prosecute money launderers

• The adequacy of record-keeping requirements to reconstruct financial transactions

• Whether an appropriate manner is used to address the reporting of suspicious transactions

• What procedures are in place to prevent crimi­nals from obtaining control of securities busi­nesses and to share information with foreign counterparts

• Whether means are appropriate for monitoring compliance procedures designed to deter and detect money laundering

• The use of cash and cash equivalents in securi­ties transactions, including documentation to reconstruct transactions

• Whether means are appropriate to share infor­mation to combat money laundering

 

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are constantly evolving. Money launderers may also operate outside financial systems, for example, through alternative remittance systems.

Terrorist acts and terrorists who commit or assist in such acts are defined in various UN conventions and resolutions. Various UN resolutions seek actions to freeze or con­fiscate funds to designated terrorists. Although the origin of the funds used in support of

 

terrorism may be either legal or illegal, often, the methods used to channel funds for ter­rorist purposes are the same as those used by money launderers.

This section explains and motivates the main elements of FATF standards for AML-CFT regimes, provides an overview of the underlying assessment methodology, and highlights the main lessons of recent assessment experience. Some special topics that frequently arise in AML-CFT assessments are highlighted in light of their importance for effective AML-CFT regimes. Some of the key elements of AML-CFT regimes are already covered as part of the assessments of financial supervision standards. AML-CFT standards go beyond financial supervision aspects and cover legal, institutional, and law enforcement aspects that go beyond the financial sector and that include certain other businesses and professions.

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