An analytical study of the financial intelligence units' enforcement mechanisms

Author:Mohammad Al-Rashdan
Position:Faculty of Law, Centre for Transnational Crime Prevention, University of Wollongong, Wollongong, Australia

Purpose – The purpose of this article is to analyse financial intelligence units' (FIUs') approaches in enforcing compliance and how these units can ensure the application of the most effective enforcement mechanism to secure the best outcome of such regulatory action. Design/methodology/approach – Sources of information consisted of scholarly books, papers and published articles... (see full summary)

1 Introduction

When studying any country's anti money laundering (AML) system, it needs to be borne in mind that while money laundering (ML) cannot be entirely eradicated, efforts can be made to regulate it. What countries should be calling for is the best possible regulation, regulation that is able to enhance the compliance culture and reduce, even minimise ML activities.

For instance, Levi (1997) discussed “regulatory compliance culture” and its influences on the establishment of an effective AML regime. He argues that various countries have different levels of willingness to control and regulate their systems. Countries establish their regulatory systems to ensure the stability and the efficiency of their economy. Alongside increased security and savings, a major role of regulatory bodies is protecting the national financial system from illicit approaches and misuse. However, the different approaches that countries adopt to regulate their systems differ in their operations and reveal different priorities in combating ML crimes. Many factors affect the way different countries respond in their efforts to combat such crimes. In her article, Gilboy (1998) states that such factors must be taken into account when looking to regulate any system, as it is shaped by the country's cultural forces, which have social, professional, organisational and work-group impacts.

However, AML systems rely on the power of their reporting regimes; therefore, the level of compliance determines a regime's strength. Regulators are always looking for compliant entities; nevertheless, in the presence of non-compliance although regulators may have sanctions at their disposal, their use of such sanctions appears uncertain, and often limited.

2 The need for FATF

The Financial Action Task Force (FATF) – the inter-governmental body whose purpose is the development and promotion of national and international policies to combat ML and terrorism financing (TF) – issued its 40 Recommendations to provide a complete set of countermeasures against ML. They covered the criminal justice system law enforcement, the financial system and its regulation, and international cooperation. With these recommendations FATF adopted principles for action and gave member countries a measure of flexibility in implementing these principles according to their constitutional frameworks, their financial system and legal culture1.

2. 1 FATF and the obligation to report

A number of important aspects have been covered by these international standards. One of the most important, core requirements was the obligation for reporting entities to report suspicious transactions (STR). Recommendation 13 states:

If a financial institution suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing, it should be required, directly by law or regulation, to report promptly its suspicions to the financial intelligence unit (FIU).

According to Ping (2005) , the STR obligation is a very important tool in combating ML crimes, and the most effective measure to accomplish cooperation between reporting entities and government authorities. Ping also states that the concept of “suspicious transaction” is not defined in the international documents. However, he did not posit the possible reasons for this, such as the different financial and legal cultures of various countries.

2. 2 FATF and the FIUs

Recommendation 13 of FATF's 40 Recommendations makes clear the reporting entity's obligation to report to the relevant FIU. On the issue of FIUs, an important contribution to this article has been the analyses by Reuter and Truman (2004) and Broome (2005) . They point out that the local AML regime is dominated by the influx of international AML standards. They note that the FATF Recommendations were the fundamental base for enhancing countries' compliance with its standards and starting the AML regulating process with the establishment of FIUs with respect to recommendations 26-32.

According to Ueda (2001) , the FIU is a very important body in any AML regime, with its role seen as a bridge between the reporting entities and law enforcement authorities. Ping (2005) similarly notes that in the STR system the FIU is the centre for information and plays a vital role in the cooperation between the financial institutions and governmental authorities by providing the possibility of information exchange and information sharing (Figure 1).

However, none of the above authors (with the exception of Broome (2005) ) discussed one very important issue: the different FIU models, and their roles and obligations in the STR system.

Okogbule (2007) and Broome (2005) clarify the availability of different FIU models. Okogbule (2007) argues the importance of such units, which by their role provide the required focus, increase effectiveness, and lead to better law enforcement. Significantly, Broome (2005) details different jurisdictions' experiences of establishing FIUs, and distinguishes the structure of various models. Although all play a vital role in the relationship between the AML system parties of their countries, they do so somewhat differently, illustrating cultural, technical and situational differences and variations.

Some FIUs have the right to collect and analyse information obtained from financial institutions before passing it to other regulatory agencies and law enforcement bodies (the “administrative model”). In this model the relationship between the FIU and other authorities indicates a strong, interactive relationship, and most countries have adopted it (for example, the USA, Monaco, Slovenia, France, and Australia among others).

In contrast, the “investigative model” carries out the investigative role in relation to ML activities either alone or with other regulatory agencies and law enforcement bodies. This reflects a direct relationship between the FIU, other authorities and the courts.

In the third model, the “judicial model” (adopted in Portugal and Luxemburg), the FIU is a part of the judicial sector, or reports directly to the judicial authorities after collecting and analysing information.

On the other hand, a fourth important model identified in Broome's study is the “law enforcement model”. Here, the FIU is a part of the police agency. This gives this the unit the opportunity to benefit from intelligence offered by law enforcement agencies and other regulatory bodies. However, this last model (adopted by the New Zealand and UK jurisdictions) ( Broome, 2005 ) makes financial institutions feel uncomfortable as they deal with an FIU which has a power of law enforcement.

Therefore, most countries, including Australia, follow the administrative model. According to Thony (1996) , Australia established its AUSTRAC in accordance with this model. By law, it has the authority to supervise and regulate the reporting entities' compliance with legal provisions on ML. AUSTRAC has created its own system of automatic reporting for cash transactions and reporting of suspicious activities and transactions. Such information is electronically transmitted from the reporting entities to AUSTRAC databases, where it is then accessible by partner agencies, law enforcement bodies and also foreign institutions that have agreements with AUSTRAC to do so ( AUSTRAC, 2008 ; Thony, 1996 ).

While a number of scholars mention that the choice of a particular FIU model depends on the regulatory culture of the country, the administrative model is a good model for FIUs, especially in relation to STRs. However, it is not perfect.

In his study, Ueda (2001) argues that the model chosen can play an important role in justifying an FIU's abilities and powers generally, such as in dealing with the AML process, and, more specifically, by enforcing compliance with the STR obligation. Ueda notes that the administrative model can have some problems. The Japan Financial Intelligence Office (JAFIO), for example, follows the administrative model but has limited powers to analyse STRs because it cannot carry out criminal investigations nor access the necessary criminal database. As a solution, Ueda suggests that JAFIO acquire investigative powers. These would enhance its enforcement mechanism by giving it the ability to obtain the necessary crime-related information from the reporting entities and law enforcement bodies. It would then be able to carry out high-quality analysis of the STRs and provide law enforcement bodies with high-quality information for their investigations. Although Ueda's suggestion involves enhancing JAFIO's enforcement mechanism, it should be clear that it would still differ significantly from the law enforcement model. It would remain an example of the administrative model, but...

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