Anti-Money Laundering And Combating The Financing Of Terrorism Research Articles

Comparative characteristics of Anti-money laundering and combating the financing of terrorism (AML/CFT) mechanisms Republic of Kazakhstan and Russian Federation

The research topic is related to the comparative analysis of the mechanisms of functioning of AML/CFT systems of the Russian Federation and the Republic of Kazakhstan. The object of the study is the mechanisms of functioning of the "Countering money laundering and terrorist financing" AML/CFT systems of the Russian Federation and the Republic of Kazakhstan in terms of identifying and reducing the risks of money laundering and terrorist financing of ML/FT. The subject of the study is a set of economic relations related to the functioning of the national AML/CFT systems of the Russian Federation and the Republic of Kazakhstan to identify and reduce the risks of money laundering and terrorist financing of ML/FT. The purpose of the study is to conduct a comparative analysis of the mechanisms of functioning of the "Countering money laundering and terrorist financing" AML/CFT systems of the Russian Federation and the Republic of Kazakhstan.   The purpose of the study is to analyze and compare the mechanisms of functioning of the "Countering Money laundering and terrorist financing" AML/CFT of the Russian Federation and the Republic of Kazakhstan. Results of the work - for the first time a comparative analysis was carried out and problem areas of AML/CFT systems of the Russian Federation and the Republic of Kazakhstan were identified. The value of the conducted research is to contribute to the further development and improvement of the national financial monitoring system of the Republic of Kazakhstan by identifying inconsistencies in the AML/CFT systems of the two countries and determining the points of their convergence and harmonization. Practical significance - the results of the comparative analysis will contribute to taking into account the current problems and prospects for the development of national AML/CFT systems of the Russian Federation and the Republic of Kazakhstan, will assist in eliminating the shortcomings inherent in these systems in terms of identifying and reducing the risks of ML/FT. Keywords: financial intelligence, financial monitoring, money laundering, AML/CFT system Keywords: financial intelligence, financial monitoring, money laundering, AML/CFT system

Virtual Assets and Anti-Money Laundering and Combating the Financing of Terrorism (1)

The purpose of this note is to assist countries in their understanding and mitigation of the money laundering (ML), terror financing (TF), and financing of the proliferation of weapons of mass destruction (PF) risks related to virtual assets (VAs). This is the first of two Fintech Notes dedicated to VAs and anti-money laundering and combating the financing of terrorism (AML/CFT). This first note is broad in scope. It explains why VAs are vulnerable for misuse for ML/TF/PF purposes and clarifies which assets and service providers should be subject to AML/CFT measures. It discusses the measures that all countries should take, and the type of action necessary in instances of criminal misuse of VA. A second Fintech note focuses on the AML/CFT regulatory and supervisory framework for virtual asset service providers (VASPs). Both notes are based on Financial Action Task Force (FATF) standards and draw heavily on the FATF’s 2019 “Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers.” They aim at providing policy makers and authorities with AML/CFT responsibilities with an overview of the legal and operational considerations that the implementation of a sound AML/CFT framework for VAs and VASPs raises. In some instances, the notes make reference to specific types of VAs, VASPs, and related products. These references are made for illustrative purposes only, and do not constitute an endorsement of the specific VAs, VASPs, and related products. Finally, at the time of drafting, no country had been assessed against the new standards and many country authorities were in the process of establishing how best to incorporate the new standards in their AML/CFT framework. For these reasons, this note does not refer to specific country examples.

Refocusing designated non-financial businesses and professions on the path of anti-money laundering and combating the financing of terrorism compliance

Purpose Designated non-financial businesses and professions (DNFBPs) are important actors both in the formal and informal sectors owing to the nature of services they offer. The DNFBPs are key players in financial and economic development and thus are highly vulnerable to money laundering (ML) and terrorist financing (TF) risks. Globally, and indeed, within the West African region, typologies studies have indicated several instances of misuse of DNFBPs for the laundering of proceeds of crime and to a lesser extent, TF. Factors that make DNFBPs vulnerable to ML and TF in the region, include limited understanding of ML/TF risk and anti-money laundering and combating the financing of terrorism (AML/CFT) obligations, and poor implementation of AML/CFT measures by the sector. As reporting institutions, DNFBPs are required to implement appropriate measures to mitigate the ML/TF risk facing them. Mutual evaluation reports (MERs) of countries in the region noted weak implementation of AML/CFT measures by DNFBPs compares to financial institutions. These coupled with the general poor monitoring and supervision of DNFBPs for compliance, make them a weak link in member states’ AML/CFT regime. This study examined how Economic Community of West African States member states can plug the loopholes in the DNFBPs to strengthen their AML/CFT regime and thus improve their performance during mutual evaluation. This study reviewed data from the publications of Inter-Governmental Action Group against Money Laundering in West Africa (GIABA), Financial Action Task Force (FATF) and other credible sources. Design/methodology/approach This study is more of desk-review based on secondary data, including information obtained from GIABA, and FATF publications, and websites as well as information obtained from reliable sources on the internet. The authors reviewed the MERs of GIABA member states that have been assessed under the second round, especially that of Ghana, Senegal, Cape Verde, Mali and Burkina Faso, with particular focus on sections of the reports relating to preventive measures and supervision. In general, this paper adopts a policy approach with a view to explaining the importance and benefits of implementing AML/CFT preventive measures by reporting entities, especially the DNFBPs. Findings This study found that there is a general lack of information on the exact size of DNFBPs across member states, the risk of ML/TF associated with DNFBPs is generally identified as high across member states (albeit at different levels), the extent and level of monitoring/supervision of DNFBPs for AML/CFT compliance trails what is obtainable in financial institutions; the institutional and operational frameworks for regulating, supervising and monitoring DNFBPs are either weak or poorly defined in many member states; and the focus of AML/CFT technical assistance has been more on financial institutions than DNFBPs. Although the number of MERs reviewed for this work may be few, the findings and conclusions in the concluded MERs reflect regional peculiarities, including high informality of the economies, preponderance use of cash in transactions, diversity of DNFBPs and the general weak application of AML/CFT preventive measures by these entities, and the weak AML/CFT supervision or monitoring of DNFBPs which cut across all GIABA member states. Although efforts to address the weaknesses in the DNFBPs, including training and supervision, have commenced, in most member states, these are still at rudimentary levels. Research limitations/implications However, this study is limited by the fact that it was desk-based review without direct inputs of industry players (DNFBPs and their supervisors). Practical implications In general, this paper adopts a policy approach with a view to explaining the importance and benefits of implementing AML/CFT preventive measures by reporting entities, especially the DNFBPs. It aims to bring to the fore the weaknesses of the DNFBPs in the implementation of AML/CFT preventive measures and therefore will be useful to national authorities who are striving toward strengthening their national AML/CT regimes and to DNFBPs who wish to protect the integrity and stability of their system. Originality/value It is imperative to mention that the weak compliance by DNFBPs, and indeed other challenges inhibiting effective implementation of preventive measures, is not peculiar to West Africa. A review of MERs of 17 African countries (eight countries in the Eastern and Southern Africa Anti Money Laundering Group region, five in GIABA region and three in the Middle East and North Africa region assessed under the current round as on October 2020, show a similar pattern of weak ratings under Immediate Outcome 4.

A Critical Analysis of the Effects of the Central Bank of Nigeria’s Digital Currency Named ENaira on Financial Inclusion and AML/CFT Measures

PURPOSE – On October 25, 2021, Nigeria, Africa’s largest economy launched the continent's first digital currency, the eNaira. The eNaira is the digital form of the Naira, issued by the Central Bank of Nigeria in line with Section 19 of the Central Bank of Nigeria Act. This paper critically examines the Central Bank of Nigeria’s digital currency, named eNaira. Its aim is to determine if the eNaira project does strike a fair balance between financial inclusion and anti-money laundering and combating the financing of terrorism (AML/CFT) measures. DESIGN/METHODOLOGY/APPROACH – The analysis took the form of a desk study, which analyzed various documents and reports such as the Central Bank of Nigeria’s 2021 Press Release on its Digital Currency Project; Central Bank of Nigeria’s Regulatory 2021 Guidelines on the eNaira; the Financial Action Task Force 2020 reports on ‘Money Laundering and Terrorist Financing Red Flag Indicators Associated with Virtual Assets; the Financial Action Task Force 2019 Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers; and the Financial Action Task Force (2012-2021), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (the FATF Recommendations). FINDINGS – This paper determined that the Central Bank of Nigeria’s regulatory approach to its digital currency named eNaira could foster financial inclusion and at the same time mitigate the AML/CFT risks associated with its digital currency. However, the paper identified “a poor culture of compliance” and “employee fraud and money laundering” as factors that could weaken the CBN’s anti-money laundering regime for the eNaira if left unchecked. ORIGINALITY/VALUE – While many have written articles on Central Bank of Nigeria’s Digital Currency named eNaira, none of those articles critically analyzed the effects of the eNaira project on financial inclusion and AML/CFT measures. This paper critically examines the effects of the Central Bank of Nigeria’s digital currency dubbed “eNaira” on financial inclusion and AML/CFT measures. Its aim is to determine if the eNaira project does strike a fair balance between financial inclusion and AML/CFT measures. The paper will provide recommendations on how the financial inclusion and AML/CFT measures of the eNaira could be strengthened. This is the only article to adopt this kind of approach.

International organizational and legal framework of the Eurasian group on combating money laundering and financing of terrorism

Anti-money laundering and combating the financing of terrorism (AML/CFT) is a complex area in which many state authorities of the countries of the world are involved, as well as numerous international organizations and institutions. One of these international institutions is the Financial Action Task Force on Money Laundering (FATF), the main organization in this area, but it is not the only one. Nine FATFStyle Regional Bodies (FSRB) were established at different times – nine regional organizations that have at the same time many similar goals and organizational and legal features which are different from those of the FATF. This article is dedicated to the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) – FSRB of the Eurasian region. It examines the activities of the EAG from the point of view of international law and examines in more detail the following aspects of its functioning: international legal status, typological researches and mutual evaluations, training and advanced training of employees of competent state bodies and private organizations in the AML/CFT field.

Usage of machine learning methods for early detection of money laundering schemes

The article presents the results of applying machine learning methods to identify organizations prone to money laundering. Methods of data preprocessing were analyzed: categorical features encoding, informative feature selection. Classification methods were studied, in particular, ensemble methods of machine learning, algorithms for selecting the optimal hyperparameters, and methods for assessing the quality of the model. The most significant anti-money laundering and combating the financing of terrorism (AML/CFT) features in suspicious organizations when opening a current account were determined. The use of combinations of different methods of transformation of categorical features with the type of cross-validation used in modeling of the mentioned task was explored. The expediency of using TargetEncoder with double cross-validation was demonstrated. A model for identifying organizations prone to money laundering is trained. The best prediction quality is achieved by using a gradient boosting algorithm over decision trees. The quality of hyperparameter selection using hyperopt and optuna Python libraries was studied, and the speed of obtaining the optimal set was estimated. The model can be used to form a list of the most important indicators for early detection of organizations involved in money laundering and terrorist financing (ML/TF), as well as to develop adequate recommendations to improve the compliance control process. A software tool in Python was developed that allows to solve the tasks of early detection of organizations prone to money laundering.

Denmark

The Danish authorities’ efforts to strengthen cross-border anti-money laundering and combating the financing of terrorism (AML/CFT) supervision continue to gather momentum. Since the Fund’s publication of a Selected Issues Paper on this subject in June 20192, the Danish authorities have made significant progress, including by conducting or participating in three multinational on-site inspections of banks; developing a new institutional risk assessment model; issuing an AML/CFT on-site inspection manual; and, via Act No. 1563 (2019), amending several pieces of legislation so as to bolster the monitoring and enforcement powers of the Danish Financial Supervisory Authority (DFSA), establish additional reporting requirements for the private sector, and stiffen the penalties for violations of AML/CFT obligations.

Malta

This technical note (TN) sets out the findings and recommendations of the Financial Sector Assessment Program (FSAP) for the Republic of Malta in the areas of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT). It summarizes the findings of a targeted review of several aspects of Malta’s progress in addressing AML/CFT vulnerabilities in the financial sector, specifically the banking sector. A full assessment of the AML/CFT framework against the current Financial Action Task Force (FATF) standard was conducted by MONEYVAL in 2018, and the mutual evaluation report was published in July 2019. 2,3 Although significant steps have been taken to strengthen the AML/CFT regime since the March 2012 fourth round MONEYVAL mutual evaluation report to bring the AML/CFT framework into line with the 2012 FATF standard and improve its effectiveness, overall effectiveness is still lacking. The authorities developed an ambitious national strategy and action plan for prioritizing AML/CFT policies and activities, but it is still in its initial phase of implementation.

Malta

The mission focused on selected topics in relation to the supervision of less significant institutions (LSIs), which are not directly supervised by the European Central Bank (ECB), and on non-European Union (EU) branches. The supervision of all banks’ anti-money laundering and combating the financing of terrorism (AML/CFT) policies and procedures was also included, as no tasks related to AML/CFT have been conferred upon the Single Supervisory Mechanism (SSM) of the eurozone. The mission took into account the findings and recommendations formulated by the 2018 euro area (EA) FSAP and coordinated closely with FSAP missions organized in France and Italy.

France

This technical note (TN) sets out the findings and recommendations made in the Financial Sector Assessment Program (FSAP) for France in the areas of anti-money laundering and combating the financing of terrorism (AML/CFT). The TN summarizes the findings of a targeted review of France’s AML/CFT framework with respect to measures to prevent and combat terrorist financing (TF), risk-based supervision of banks, real estate agents, company service providers and lawyers, measures to tackle cross-border crimes, and fintech. It provides a factual update on the key measures taken by the authorities since France’s previous assessment against the Financial Action Task Force (FATF) standard during 2010-2011. The TN is not, in any way, an evaluation or assessment of France’s AML/CFT system. France is scheduled to undergo a comprehensive assessment against the prevailing standard during 2020–2021 by the FATF.

Mexico: Report on the Observance of Standards and Codes-FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)

Mexico: Report on the Observance of Standards and Codes-FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)

The People's Republic of China: Financial Sector Assessment Program; Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)-Technical Note

The People's Republic of China: Financial Sector Assessment Program; Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)-Technical Note

Luxembourg

This Technical Note discusses the findings and recommendations made in the 2017 Financial Sector Assessment Program (FSAP) Update for Luxembourg in the area of anti–money laundering and combating the financing of terrorism (AML/CFT). Since the last FSAP update, important steps have been taken to strengthen the AML/CFT regime. Luxembourg’s risk profile appears to be evolving as a result of the authorities’ push for increased tax transparency. Transparency of the beneficial ownership of legal persons has also improved. AML/CFT supervision has been strengthened in recent years, but challenges remain, including with respect to lawyers.

Unintended Consequences of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)

Money laundering is illegal world-wide and constitutes a significant economic inefficiency. One must wonder why current anti-money laundering and combating the financing (AML/CFT) efforts are primarily driven by the threat of terrorism and drug-trafficking when the overwhelming majority of illicit money flows is due to other causes, primarily fraud. The significant costs imposed on financial institutions, together with ever increasing levels of regulation mandated by AML/CFT efforts and the minuscule in comparison illicit money flows intercepted by these efforts has thereby resulted in both moral hazard and conflicts of interest for financial institutions. Furthermore, AML/CFT efforts take on a new meaning when one realizes that illicit money, flows not only through traditional banks but also shadow banks and other non-bank financial intermediaries. The costs of compliance are enormous in comparison to the benefits with the “war on terrorism” superseding the more relaxed “war on drugs”, although even the latter was onerous in comparison to the even more relaxed efforts against the more widespread “white-collar” crime of fraud. In this paper, we trace the evolution of the present AML/CFT regime while at the same time assessing the costs and benefits of this government initiative on the efficiency of the financial system both in modern advanced economies and as well as the less developed economies of the world.

Role of Financial Intelligence Unit in Combating Money- Laundering and Terrorist Financing: An Analysis on the Functioning of Bangladesh Financial Intelligence Unit

Combating the crimes of money laundering and financing terrorism is essential to the integrity of financial systems. Recent efforts to develop effective strategies for anti-money laundering and combating the financing of terrorism (AML/CFT) bring together several distinct but related aspects of financial systems and criminal law. Financial intelligence units (FIUs) constitute an important component of these strategies. An FIU is a central national agency responsible for receiving, analyzing, and transmitting disclosures on suspicious transactions to the competent authorities. This paper briefly reviews the development of the global network of FIUs and their system of information gathering. This paper also looks back the overall functioning of the Bangladesh Financial Intelligence Unit (BFIU) keeping in line with the set international standards and gives recommendations on the areas to be improved to ensure its better functioning. This work is a theoretical analysis of the existing international instruments regulating the functioning of FIU worldwide and also the Bangladesh laws dealing with the working of Bangladesh Financial Intelligence UnitBFIU.

Kuwait's Administrative Risk-Based Model for the Prevention of Money Laundering: Costs and Benefits of Compliance with the Financial Action Task Force (FATF) Standards

In the period 2013-2015, Kuwait adopted the new administrative risk-based anti-money laundering and combating the financing of terrorism (AML/CFT) regulatory framework. This article analyzes the costs and benefits of the compliance of the new framework with the FATF’s standards, focusing on the structural changes: (1) a move from a hybrid-prosecutorial to a full-fledged administrative model of financial intelligence unit (FIU); (2) adoption of the risk-based approach to prevention of money laundering and terrorist financing (ML/TF); and (3) the enhancement of reporting obligations and preventive measures. There are two main arguments advanced in the article. Firstly, while the new framework is highly compliant with FATF standards and will maintain the already low level of ML/TF in Kuwait, in comparison with the pre-2013 anti-money laundering laws and regulations, the costs of compliance for private parties, particularly financial institutions and their customers, are considerably higher, and likely to continue increasing. Secondly, the new framework faces other challenges: the need for an improvement of data availability and statistics on ML/TF risks across various sectors, and the need for quality supervision of reporting parties. These challenges are analyzed, and suggestions on how to respond to them are provided, along with a cautionary note on the economic and social effects of compliance with the FATF standards.

Canada: Report on the Observance of Standards and Codes-FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)

This report evaluates the observance of standards and codes on Financial Action Task Force recommendations for anti–money laundering and combating the financing of terrorism (AML/CFT) in Canada. The findings reveal that the Canadian authorities have a good understanding of most of Canada’s money laundering and terrorism financing risks. AML/CFT cooperation and coordination are generally good at the policy and operational levels. All high-risk areas are covered by AML/CFT measures, except legal counsel, legal firms, and Quebec notaries. This constitutes a significant loophole in Canada’s AML/CFT framework. Law enforcement results are not commensurate with the money-laundering risk, and asset recovery is low.

Germany: Financial Sector Assessment Program-Anti-Money Laundering and Combating the Financing of Terrorism-Technical Notes

This paper sets out the findings and recommendations in the selected areas of Germany’s Anti- Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime made in the context of the Financial Sector Assessment Program. It summarizes the findings of a targeted review of Germany’s money laundering offense, measures to ensure the transparency of legal persons, and the implementation of AML/CFT measures by banks with cross-border operations. According to the 2010 Mutual Evaluation Report, Germany is vulnerable to ML and FT for following reasons: its strategic location in Europe and large economy, open financial center, open borders, and strong international linkages.

Islamic Finance and Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)

The money laundering (ML) and terrorist financing (TF) risks associated with conventional finance are generally well identified and understood by the relevant national authorities. There is, however, no common understanding of ML/TF risks associated with Islamic finance. Some are likely to be the same as in conventional finance, but there may also be different risks. This is notably due to: (i) the complexity of some Islamic finance products; and (ii) the nature of the relationship between the institutions and their clients. The limited capacity and experience in the supervision of Islamic finance, especially in jurisdictions that face higher ML/TF risk factors represents an additional vulnerability. The Financial Action Task Force (FATF) standards are implemented without any form of tailoring to the specificities of Islamic finance. The FATF, the Islamic finance standard-setters, and the national regulators should seek a greater understanding of the specific ML/TF risks that may arise in Islamic finance and develop an appropriate response.

Italy: Report on the Observance of Standards and Codes on FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)

Italy: Report on the Observance of Standards and Codes on FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)