Action against money laundering and terrorist finance

With the emergence of new technological challenges, the global community must intensify and coordinate its response to abuse of the international financial system to fund terrorism, urges Roger Wilkins AO, President, Financial Action Task Force
Criminals, including terrorists, need access to the financial system in order to launder the proceeds of crime or finance terrorist activities.
The recommendations made by the Financial Action Task Force (FATF) are the global standards for preventing abuse of the international financial system to launder money and finance terrorism and the proliferation of weapons of mass destruction. When the FATF standards were first published in 1990, few countries had any legal or regulatory provisions to detect and punish such activity. Today, the FATF has grown from the original 16 members to a global network of eight FATF-style regional bodies and more than 190 members globally – all of which have committed to implementing the FATF Recommendations.
Urgent concerns
The risks and methods of money laundering and terrorist financing continue to evolve, as must the global response to combat such abuse of the international financial system. A number of issues in particular require urgent attention and are at the top of the FATF agenda: the rise of the terrorist organisation Islamic State in Iraq and the Levant (ISIL), de-risking, transparency and beneficial ownership, and virtual currencies.
Recent developments and the sudden rise of ISIL have made the fight against terrorism and terrorist financing a global priority. However, many countries have not yet implemented effective measures to criminalise terrorist financing and freeze terrorist assets, without delay, using targeted financial sanctions.
As a priority, the FATF will immediately review whether all countries in the global network have implemented adequate measures to criminalise terrorist financing and cut off terrorism-related financial flows by using targeted financial sanctions, as required by the FATF Recommendations. The FATF will put pressure on countries that have failed to do so and will report to the G20 in October 2015 on the outcomes of this review, as well as offering additional proposals to strengthen anti-money laundering and countering the financing of terrorism (AML/CFT) tools.
G7 members can help by ensuring, as a matter of priority, that they have fully criminalised terrorist financing and implemented targeted financial sanctions, in line with the FATF Recommendations and relevant United Nations instruments.
The FATF Recommendations require financial institutions to terminate or restrict a client relationship when money-laundering and terrorist-financing risks cannot be mitigated. Such a decision should be made case by case, using a risk-based approach. What is not in line with the FATF Recommendations is the wholesale termination or restriction of business relationships with clients or categories of clients in order to avoid risk, rather than manage it (so-called ‘de-risking’). This potentially forces financial flows into less regulated or unregulated channels that impede the effective implementation of measures against money laundering and terrorist finance, and can negatively affect other important policy objectives, such as financial inclusion and legitimate charitable activity.
The FATF recently issued a document entitled Risk-Based Approach Guidance for the Banking Sector. It is developing further guidance to assist countries in the proper implementation of the risk-based approach, which should be the cornerstone of an effective AML/CFT system and is essential to properly managing risks. Special attention is being given to this issue in the context of supervision and enforcement, and customer relationships with non-profit organisations and money- or value-transfer service providers. The FATF is also gathering information on de-risking in order to gain a better understanding of the causes and scale of this phenomenon. By working with their financial regulators and the private sector, G7 members can ensure proper implementation of the risk-based approach and encourage other countries to take similar action.
Transparency and beneficial ownership
Organised crime groups often launder the proceeds of their crimes and move illicit funds through the financial system using complex networks of corporate vehicles such as companies and trusts. Lack of transparency in the financial system enables them to do so undetected and facilitates the commission of corruption and tax crimes. Even though this issue has been high on the agenda of both G7 and G20 leaders in recent years, many countries have still not implemented effective measures to ensure that accurate information on the beneficial ownership of corporate vehicles is available to the competent authorities on a timely basis.
The FATF recently issued Guidance on Transparency and Beneficial Ownership, which will help countries to identify, design and implement risk-based measures to prevent the misuse of corporate vehicles. The FATF continues to actively engage with other international bodies, including the G20 and the Organisation for Economic Co-operation and Development (OECD), to raise awareness of these issues and promote a common definition of beneficial ownership.
Completing full implementation of the national action plans adopted by the G8 members after their 2013 Lough Erne Summit will enhance transparency and access to beneficial ownership information.
The threat of virtual currencies
Finally, swift technological advances and developments in providing financial services are posing unique challenges, particularly in relation to virtual currencies. Existing legal frameworks do not always cover virtual currencies adequately or in the same way. This impedes risk mitigation and creates regulatory arbitrage. The FATF recently issued a report titled Virtual Currencies: Key Definitions and Potential AML/CFT Risks, which gives examples demonstrating how virtual currencies have already been abused for money-laundering purposes. The FATF is now working on a guidance paper to help countries manage and mitigate these risks.
G7 members should set an example in taking action to mitigate the risks of virtual currencies, in line with the FATF Recommendations and guidance on this issue.
The FATF assesses how well different countries are implementing the FATF standards, including the specific measures indicated above.
Meeting the technical requirements of the FATF Recommendations is not enough. The FATF’s main focus is how effectively a country’s system is working to combat money laundering and terrorist financing. The FATF has mechanisms for applying political pressure to countries that have not effectively implemented the FATF standards.
A sound international financial system relies on the global implementation of AML/CFT standards and, in particular, global progress on the priority issues described above. G7 members play an important role, by setting an example and taking the necessary action, and encouraging G20 members to do the same.