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FATF Revises International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation

Wednesday, February 22, 2012
Sarah Jane Leake | Bloomberg Law International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation – Financial Action Task Force Recommendations, Feb. 2012 On 16 February, the Financial Action Task Force (FATF) published a revised version of its International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (Standards), used by more than 180 governments across the globe to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction. As such, they are universally recognised as the international standard for anti-money laundering and countering the financing of terrorism (AML/CF). The revised Standards will provide governments with stronger tools to fight financial crime, and to take more effective action at all levels – from identifying those opening a bank account through to investigation, prosecution, and forfeiture. Moreover, at global level, the FATF will take a more active role in monitoring and promoting the sound implementation of the Standards.

The Standards: A Brief History

Given the diversity of legal, financial, administrative, and operational frameworks in use across the globe, it is inevitably impossible for each country to take identical steps to counter these threats. The Standards, therefore, seek to set an international standard, which each country should implement through measures adapted to their own unique circumstances. In particular, though, they set out the essential measures that countries should have in place within their criminal justice and regulatory systems in the pursuit of AML/CF. The Standards, which were first conceived in 1990 as an initiative solely to help combat the misuse of financial systems by persons laundering drug money, comprised 40 Recommendations, each accompanied by "interpretive notes." They were revised for the first time in 1996, to keep pace with money laundering trends and techniques, and, as such, to broaden their scope beyond drug-money laundering. Shortly after 9/11, the FATF expanded its mandate to deal with countering the funding of terrorist acts and terrorist organisations. As a result, it created eight (later expanded to nine) Special Recommendations on Terrorist Financing, otherwise known as the FATF IX Special Recommendations. The 40+9 Recommendations were further revised in 2003. To address new and emerging threats to the integrity of the financial system, such as the financing of the proliferation of weapons of mass destruction, and to clarify and strengthen several of the existing obligations, the FAFT began a further review and revision of the Recommendations in 2009, in collaboration with FAFT-Style Regional Bodies and observer organisations, including the United Nations, the World Bank, and the International Monetary Fund. The revised Recommendations are significantly stronger than before, in areas that are high risk, or where, in the FATF's view, implementation could be improved.

The Revision

— A Risk-based Approach The revised Recommendations advocate a risk-based approach to AML/CF, pursuant to which any preventative measures applied are commensurate with the nature of the risk posed. In other words, enhanced measures should be applied where the risks are higher, and simplified measures should be put in place where the risks are lower. It is thought that this will enable countries and the private sector to target their resources in a more effective fashion by focusing their energy and resources on high risk areas. In the FATF's view, this will help countries better understand the nature of the money laundering and terrorist financing risks that affect them specifically, and the way in which they should be dealt with in view of their legal, financial, administrative and operational systems. — New Threats & New Priorities Three new and emerging aggravated threats are specifically targeted – the financing of proliferation of weapons of mass destruction, tax crimes, and corruption and politically exposed persons (PEPs).

Financing of Proliferation

The proliferation of weapons of mass destruction is a significant safety concern, and, in the FATF's view, financial measures can be an effective way in which to combat this specific threat. To this end, the FATF has adopted a new Recommendation aimed at ensuring consistent, effective implementation of targeted, financial sanctions when they are called for by the UN Security Council.

Tax Crimes

The revised Recommendations expand the scope of money laundering predicate offices, by including, for the first time, serious tax crimes. This will therefore bring the proceeds of tax crimes within scope of the powers used to investigate and combat money laundering. The pre-existing offence of smuggling has been further defined, and now includes offences related to customs and excise duties and taxes. In the FATF's view, this will facilitate better co-ordination and co-operation between law enforcement, border, and tax authorities.

Corruption & Politically Exposed Persons

Over the years, there have been more and more calls for stronger requirements when dealing with corruption and PEPs. To this end, the revised Recommendations strengthen the requirements on financial institutions to identify those PEPs who may represent a higher risk of corruption by virtue of the positions that they hold. The requirement to apply enhanced due diligence to PEPs has now been extended from foreign PEPs to domestic PEPs and PEPs from international organisations, as well as to the family and close associates of all PEPs. — Improved Transparency According to the FATF, low levels of transparency regarding the ownership and control of legal persons and legal arrangements, or about the parties to a wire transfer, makes those instruments more vulnerable to misuse. The FATF has therefore revised the relevant Recommendations to strengthen transparency requirements in these areas. As such, the revised Recommendations require there to be reliable information about the beneficial ownership and control of companies, trusts, legal arrangements etc., and require more detailed information to accompany wire transfers. Implemented globally, these more stringent requirements, designed to increase transparency, will make it harder for criminals and terrorists to conceal their identities or hide their assets. — International Co-operation In view of the increasingly international nature of money laundering and terrorist financing threats, the FATF has enhanced the scope and application of international co-operation between national authorities. The revised Recommendations therefore seek to facilitate more effective co-operation at global level, including the exchange of information between relevant authorities, the pursuit of joint investigations, and the tracing, freezing, and confiscation of illegal assets. — Operational Tools The FATF Recommendations touching on law enforcement and Financial Intelligence Units have been expanded to clarify the role and function of the operational agencies responsible for fighting money laundering and terrorist financing. The revised Recommendations set out a wider range of more sophisticated operational tools, techniques, and powers that should be available to these operational agencies, to allow them to more easily obtain and analyse financial information about a suspect's financial accounts and transactions. — Terrorist Financing To reflect the fact that the financing of terrorism remains a serious concern across the globe, and remains a major focus of the FATF's work, the FATF IX Special Recommendations have now been fully integrated into the FATF's 40 Recommendations.

Future

The FATF will commence a new round of evaluations on the Recommendations with its member countries in 2013, with a focus on how effective these countries have been in implementing the revised Recommendations. Concurrently with the publication of the revised Recommendations, the FATF, as part of its ongoing review of compliance with the Standards, has identified several jurisdictions that, in its view, have strategic AML/CF deficiencies. Countries listed include Iran, the Democratic People's Republic of Korea, Cuba, Bolivia, Indonesia, Kenya, Myanmar, Pakistan, Sri Lanka, Syria, Thailand, and Turkey. The FATF will continue to work with these countries to address the deficiencies identified.1 Previously, a number of other countries, including Algeria, Argentina, Bangladesh, Brunei Darussalam, Cambodia, Mongolia, Nepal, Sudan, Turkmenistan, and Venezuela were identified as having serious AML/CF deficiencies. The FATF notes that each of these jurisdictions has provided it with a written high-level political commitment to address the identified deficiencies, and urges them to complete the implementation of their action plans in an expeditious fashion.2
1 Jurisdictions with strategic anti-money laundering and combating the financing of terrorism (AML.CFT) deficiencies – FATF Public Statement, 16 Feb. 2012. 2 Improving Global AML/CFT Compliance: on-going process – FATF Public Statement, 16 Feb. 2012. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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