How will the financial services sector respond to the Financial Action Task Force's increased customer due diligence requirements?

Abstract

In May 2002, the Financial Action Task Force (FATF) released a consultation paper detailing likely changes to their Forty (antimoney laundering) Recommendations. They invited comments from interested parties on issues still under consideration. Following the receipt of comments, in June 2003 they released their substantially revised Forty Recommendations. The aim of this paper is to use the responses to the consultation paper as a means of judging the reactions of the financial services sector to the FATF's new customer due diligence (CDD) procedures contained in their updated Forty Recommendations. Some of the new CDD procedures encompass aspects of the old Recommendations; these will not cause any problems for financial institutions. Allowing simplified CDD procedures based on the perceived risk will allow financial institutions flexibility but will inevitably lead to different standards of application even within jurisdictions. Financial institutions now have to cope with the high-risk areas of politically exposed persons (PEPs) and correspondent banking without help from the FATF in identifying PEPs or providing details of the level of banking supervision across the globe. This will inevitably lead to financial institutions duplicating each other's work or not implementing anti-money laundering procedures to the required level. To achieve full implementation of these new CDD procedures financial institution regulators and anti-money laundering financial intelligence units will need to address issues where the FATF places the onus on individual financial institutions, if only to retain some measure of consistency within the financial services sector of their own jurisdictions. To leave the implementation of these updated CDD procedures to individual financial institutions is unrealistic, costly, inefficient and time-consuming without the likelihood of a corresponding increase in money laundering detection or prevention. The FATF may now be placing more responsibility on financial institutions than they are willing to bear without proof that the money laundering risks are high and that their unrelenting vigilance is effective.