EFFECTIVENESS OF AML SYSTEMS
After each FATF Plenary meeting, usually held in February, June and October each year, FATF publishes a list of jurisdictions that they have been identified as having strategic deficiencies in their AML/CFT systems. The list is currently divided into the following categories:
High-Risk Jurisdictions subject to a Call for Action
High-risk jurisdictions have significant strategic deficiencies in their regimes to counter money laundering, terrorist financing, and financing of proliferation. For all countries identified as high-risk, the FATF calls on all members and urges all jurisdictions to apply enhanced due diligence, and in the most serious cases, countries are called upon to apply counter-measures to protect the international financial system from the ongoing money laundering, terrorist financing, and proliferation financing (ML/TF/PF) risks emanating from the country. This list is often externally referred to as the “black list” (as at February 2021 - North Korea and Iran).
Jurisdictions under Increased Monitoring
Jurisdictions under increased monitoring are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing. When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed time-frames and is subject to increased monitoring. This list is often externally referred to as the ‘grey list’.
The FATF and FATF-style regional bodies (FSRBs) continue to work with the jurisdictions and to report on the progress made in addressing the identified strategic deficiencies. The FATF calls on these jurisdictions to complete their agreed action plans expeditiously and within the proposed time-frames. The FATF welcomes their commitment and will closely monitor their progress.
As at February 2021 the list comprised Albania, Barbados, Botswana, Burkina Faso, Cambodia, Cayman Islands Ghana, Jamaica, Mauritius, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Senegal, Syria, Uganda, Yemen and Zimbabwe.
The FATF continues to identify additional jurisdictions on an on-going basis that have strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing. A number of jurisdictions have not yet been reviewed by the FATF and FSRBs.
FATF Mutual Evaluation Reports
The technical compliance assessment addresses the specific requirements of the FATF Recommendations, principally as they relate to the relevant legal and institutional framework of the country, and the powers and procedures of the competent authorities. These represent the fundamental building blocks of an AML/CFT system.
The effectiveness assessment differs fundamentally from the assessment of technical compliance. It seeks to assess the adequacy of the implementation of the FATF Recommendations, and identifies the extent to which a country achieves a defined set of outcomes that are central to a robust AML/CFT system. The focus of the effectiveness assessment is therefore on the extent to which the legal and institutional framework is producing the expected results.
Although the old method of Mutual Evaluations is no longer being undertaken, these are the only ones available for countries who have not yet undertaken the 4th round Mutual Evaluation and , therefore, although they can be useful with regard to assessing a country’s AML/CFT regime, they were limited because of: -
Focus on formal compliance of pre-defined standards - Little emphasis on outcome effectiveness
Repeat violations of AML/CFT regimes in deemed 'AML effective' countries seemingly ignored
Levels of corruption & illicit money flows ignored
National Risk Assessments
One of the key requirements of the FATF Recommendations is for countries to identify, assess and understand the money laundering (ML) and terrorist financing (TF) risks that they are exposed to. Once these risks are properly understood, countries will be able to implement anti-money laundering and counter terrorist financing measures that mitigate these risks.
This approach, the risk-based approach, is central to the effective implementation of the FATF Standards and also applies to financial institutions and designated non-financial businesses and professions.
Many countries have chosen to publish information about the ML/TF risks to their financial system in the form of a national money laundering and terrorist financing risks assessment. The publication of such a national risk assessment is not a mandatory requirement of the FATF Standards. However, sharing this information will increase global understanding of ML/TF risk and may help countries identify, assess and understand where their own vulnerabilities lie.
Each country can determine how it will assess these risks, however the FATF has developed guidance which explains the general principles and stages of a risk assessment.
NRAs provide valuable information on what countries have identified as their key vulnerability areas, well worth taking into account when doing business there.
INCSR - US State Department
On an annual basis the US State Department publishes a country by country report on global money laundering. Historically, countries were categorised as Primary Concern, Concern or Monitored, depending upon the perceived state of money laundering. However, since 2016, the report has concentrated on major money laundering countries.
The statute defines a “major money laundering country” as one “whose financial institutions engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking” and is derived from the US State Department International Narcotics Control Strategy Report (Drugs and Chemical Control) and based on indicia of significant drug related money laundering activities including money laundering activity trends, the activities of non-financial businesses and professions or other value transfer systems.
It should be noted that inclusion within this list is not an indication that a jurisdiction is not making strong efforts to combat money laundering or that it has not fully met relevant international standards. The INCSR is not a “black list” of jurisdictions, nor are there sanctions associated with it.
Exchange of Information
Over 100 countries have signed up to the Common Reporting Standard (“CRS”). CRS was developed in response to the G20 request, approved by the OECD Council on 15 July 2014, and calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
There are two different forms of exchange of information: -
The Egmont Group of Financial Intelligence Units, which has around 160 country members, has agreed principles for the exchange of information between Financial Intelligence Units relating to money laundering, associated predicate offences, and the financing of terrorism.
Local Reporting Requirements
Understanding local reporting requirements can also help to mitigate risks. For instance if your customer is a politically exposed person, is there a legal requirement within their country of office to submit asset declarations and, if so, are those asset declarations public?
Furthermore, the availability and accessibility of public information that could be used as independent verification tools with regard to any customer, and the due diligence documentation provided by them, may also be a mitigator of overall risk.
Local Due Diligence Requirements
The OECD has identified a number of jurisdictions who offer Residence/Citizenship by Investment schemes. These are deemed to pose a high risk to the integrity of Common Reporting Standards due diligence obligations. In particular, Identity Cards and other documentation obtained through such schemes can potentially be misused to misrepresent an individual's jurisdiction(s) of tax residence.