Is the global financial system AML/CFT prepared?

Author:Jackie Johnson
Position:The University of Western Australia, Crawley, Australia
SUMMARY

Purpose – To gauge the extent to which the global financial system is anti-money laundering (AML)/countering the financing of terrorism (CFT) prepared by analysing and comparing the AML/CFT systems of Financial Action Task Force (FATF) members with countries belonging to regional AML organisations. Design/methodology/approach – Mutual evaluation data of 16 FATF members and 21 non-FAT... (see full summary)

 
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1 Introduction

Since, the September 11, 2001 terrorist attacks in the US money laundering and the financing of terrorism have been inexorably linked. The regulation of a country's financial system to counter money laundering being viewed as an essential component in the fight against the funding of terrorism. What was initially a move to combat the laundering of profits from the illegal drug trade is now also an initiative to stem the flow of terrorist funds. The rational being that starved of funds terrorists cannot carry out their campaign of destruction.

As a result of the change in focus, organizations originally set up with an anti-money laundering (AML) focus now include procedures for countering the financing of terrorism (CFT). The first of these was the Financial Action Task Force (FATF). With an international membership it has become the global standard setter for both AML and CFT programs. It has been followed by the formation of a number of regional bodies with essentially the same AML/CFT objectives.

The aim of this paper is to gauge the extent to which the global financial system is AML/CFT prepared. In order to do this the AML/CFT systems of FATF members and countries belonging to various regional bodies are analysed and compared. The expectation is that FATF members are better prepared given their experience, expertise, and years of commitment to their AML/CFT programs. Many members of regional bodies have only recently made a firm AML/CFT commitment and their systems have not, until recently, been rigorously assessed.

Section 2 outlines the FATF's approach to AML/CFT and the evaluation procedures used to assess a member's rules, procedures and legislation. Section 3 provides a brief background of the FATF-style regional bodies. The AML programs of FATF members and non-FATF countries are compared in Section 4, while Section 5 contains a comparison of their CFT programs. Conclusions are drawn in Section 6.

2 The Financial Action Task Force

The FATF was formed in 1989 by the G-7 group of countries, motivated by the General Assembly of the United Nations' (UN) adoption in 1988 of a universal pledge to put a halt to money laundering, fuelled largely at that time, by the laundering of profits from the illegal drug trade. The FATF currently has 34 members, the latest to join is China which was granted full membership in 2007.

One of the FATF's first tasks was to develop measures to combat money laundering and in April 1990, they issued a set of Forty Recommendations designed to provide a comprehensive strategy for action against money laundering. These were later revised in 1996 and updated substantially in FATF (2003a) . They cover the law and its enforcement, the financial system and its regulation and matters relating to international co-operation. Following the 2001 terrorist attacks in the USA, they developed a set of Special CFT Recommendations. Eight special recommendations were developed in December 2001 with a ninth added three years later.

FATF members have been evaluated over a number of years against the Forty Recommendations and more recently against the Nine Special Recommendations using self assessment and/or mutual assessment procedures. Self assessment is a questionnaire-based yearly exercise. Mutual evaluation involves an onsite visit by experts from other member countries in the areas of law, financial regulation, law enforcement, and international co-operation. They assess the country's compliance with each of the FATF's Recommendations identifying strengths and weaknesses in the country's AML/CFT systems. Since, the 1990s, FATF members have been through two rounds of mutual evaluations.

A third round of mutual evaluations began in 2005, evaluating members against the 2003 update and the Nine CFT Recommendations. Unlike previous mutual evaluations the FATF decided to make public their member's complete third round mutual evaluation reports. So far (August 2007), 16 FATF members have been evaluated: Australia; Belgium; China; Denmark; Greece; Iceland; Ireland; Italy; Norway; Portugal; Spain; Sweden; Switzerland; Turkey; the UK; and the USA.

In a mutual evaluation, a country is assessed as non-compliant (NC), partially compliant (PC), largely compliant (LC), or fully compliant (C) with each of the 40 + 9 Recommendations. The compliance rating is based only on the essential elements of each recommendation. Compliance levels are defined as follows ( FATF, 2007 ):

  • NC. There are major shortcomings, with a large majority of the essential criteria not being met.
  • PC. Some substantive action has been taken and there is compliance with some of the essential criteria.
  • LC. Only minor shortcomings, with a large majority of the essential criteria being fully met.
  • C. The recommendation is fully observed with respect to all essential criteria.
  • This trend of full disclosure is also being adopted by a number of FATF-style regional bodies that have been carrying out their own mutual evaluations, also based on the FATF's 40 + 9 Recommendations. With many mutual evaluations made public, there is an opportunity to analyse AML/CFT systems across FATF and non-FATF countries, based on the same criteria.

    3 Regional AML/CFT organisations

    Since, the establishment of the FATF a number of FATF-style regional bodies have been formed. Eight such organisations are described below:

  • The Caribbean Financial Action Task Force was formed in the early 1990s as an organization representing 30 countries within the Caribbean Basin. They agreed to a common approach to address the issue of money laundering and formulated 19 AML Recommendations which have specific relevance to the region.
  • The Eurasian Group (EAG) was established in 2004 and currently has seven members: Belarus, China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Uzbekistan. Their primary objective is co-operation throughout the Eurasian region in matters relating to AML/CFT with promotion of the FATF's 40 + 9 Recommendations to the extent that mutual evaluations are conducted according to FATF standards.
  • The Eastern and Southern Africa Anti-Money Laundering Group has been in operation since 1999 and currently has 14 members. Its aim is to combat money laundering by implementing the FATF's Forty Recommendations, taking regional factors into account in the implementation of AML measures. Following the 2001 terrorist attacks it included CFT measures in its brief. Members typically assess their own progress in implementing the Forty Recommendations by use of a self-assessment process. However, mutual...
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