Financial Action Task Force Research Articles

Transnational regulatory networks: a study in compliance and legitimacy in counter-terrorist financing

Purpose This paper aims to explore the case of counter-terrorist financing (CTF) within the transnational regulatory network (TRN) of the Financial Action Task Force (FATF). The paper demonstrates how the structure and operation of the FATF reflect those of a TRN and shows how the FATF has been successful in securing formal compliance with CTF policies. Design/methodology/approach The paper stresses that formal compliance does not guarantee actual compliance or effective enforcement. It is argued that the FATF and the CTF regime must balance concerns for legitimacy with those of flexibility and efficiency. Traditionally, TRNs have focused on flexibility, efficiency and informal cooperation over legitimacy. This paper demonstrates that legitimacy concerns cannot be ignored. Findings A lack of legitimacy may ultimately result in non-compliance and ineffectiveness. On this basis, current efforts to build legitimacy through the FATF are noted but deemed insufficient. If this balance is not struck, the FATF may be doomed to failure through an overreliance on coercive methods. Particularly in the case of CTF, coercion is insufficient for meaningful compliance. Global enforcement by diverse states is a necessary condition for the success of the regime. Originality/value This paper will fill the gaps existing in the literature by examining CTF, as well as the FATF as an example of TRN. This approach differs from other literature in the field, which deals solely with the effectiveness of the FATF and the global CTF without considering the effect of legitimacy on compliance.

Investigating the relationships between FATF recommendation compliance, regulatory affiliations and the Basel Anti-Money Laundering Index

Money laundering (ML) is harmful as it provides an opportunity for criminals to launder (or legitimise) criminal proceeds and reinvest laundered funds into their activities. ML also creates economic distortions, erosion of financial sectors, reduced government revenue and other socioeconomic effects. To reduce potential ML, governments use security intelligence and financial regulation. To enhance financial security and reduce the illicit ML opportunities, countries will benefit from understanding how the adoption of the Financial Action Task Force (FATF) Recommendations and their regulatory affiliations affect the risk of ML. Our findings reveal irregularity in the guidelines used by countries to develop AML regulatory policy, which undermines AML security. Further, highly FATF-compliant countries tend to enjoy lower ML risk and are often affiliated with well-established regulatory groups. This suggests the need to maintain ongoing and consistent compliance standards across all affiliation groups and further facilitate cross-jurisdictional cooperation among financial intelligence agencies to maximise the spillover effect from highly compliant and low ML-risk jurisdictions.

Am I my corporate’s keeper? Anti-money laundering gatekeeping opportunities of the corporate legal officer

ABSTRACT This article analyses the importance of including corporate legal officers (also termed general counsel or chief legal officers) in the anti-money laundering (AML) international standard set by the Financial Action Task Force – in particular, the Recommendations dealing with the legal profession. It deconstructs the origins and development of the standard and explores the reasons that led to the inclusion of the legal profession in the AML regime and the ways in which the standard has reshaped regulatory regimes globally. The article fills a void in the existing literature by contemplating the future of the legal professional and the role of corporate legal officers, providing a case study of a profession that is not (yet) required to comply with the AML international standard. This approach differs significantly from that of other literature in the field, which deals comprehensively with the appropriateness of including legal professionals in the AML regime, without considering the impact of exempting CLOs from the regime. The article aims to demonstrate that an understanding of the role of CLOs in the legal profession can shed light on the gaps in the international standard and the consequent risks to the AML regime.

Canada’s financial intelligence unit: FINTRAC

PurposeInternational bodies, such as the Financial Action Task Force , have mandated the use of financial intelligence units (FIU) to address organized crime and money laundering. The purpose of this paper is to examine Canada’s FIU, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), and explore its current effectiveness and future challenges.Design/methodology/approachThis paper examines FIUs in general and then looks more specifically at Canada’s FIU, its policy and legislative basis as well as future challenges for the FIU.FindingsThe challenge money laundering poses to society is a mirror of the challenge that organized crime poses: a test of the values and the importance of rule of law. The FIU is an important mechanism to address this challenge generally, and there are important changes in the environment that must be addressed if the future policy objectives of the FIU are to be met.Research limitations/implicationsSome of the policy nostrums that are baked into the anti-money laundering system, such as placement, layering and integration, need to be revisited and researched to incorporate changes in the licit and illicit marketplaces.Practical implicationsFinancial institutions and other intermediaries must comply with domestic anti-money laundering laws. Compliance is always contextual, and this paper will outline the role of the regulator and the environmental challenges that need to be met.Social implicationsEffectively addressing money laundering and organized crime is critical to the maintenance of rule of law and the protection of the financial system.Originality/valueThis is a brief but very fulsome review of Canada’s FIU, FINTRAC, which captures broader challenges in addressing money laundering, economic crime and regulatory systems designed to protect rule of law and the integrity of the financial system. The paper not only examines the current state of the FIU but also explores challenges on the horizon.

Toward a Public-Key Management Framework for Virtual Assets and Virtual Asset Service Providers

The recent Financial Action Task Force (FATF) Recommendations define virtual assets and virtual asset service providers (VASPs), and require under the Travel Rule that originating VASPs obtain and hold the required and accurate originator information and the required beneficiary information on virtual asset transfers. In this paper, we discuss the notion of key ownership evidence as a core part of originator and beneficiary information required by the FATF Recommendations. We discuss the approaches to securely communicate the originator and beneficiary information between VASPs, and review the existing standards for public-key certificates as applied to VASPs and virtual asset transfers. We propose the notion of a trust network of VASPs in which originator and beneficiary information, including key ownership information, can be exchanged securely off-chain while observing the individual privacy requirements.

Reverse engineering legal professional privilege in a globalising world – the Australian case

PurposeThis paper aims to explore the ways in which the international standards in the field of anti-money laundering (AML) and counter-terrorist financing (CTF) have reshaped regulatory regimes in a globalised world.Design/methodology/approachThis paper deconstructs the origins and development of international standards in the field of AML and CTF dealing with longstanding legal professional privilege. This paper adopts both qualitative and quantitative research methodologies. The qualitative aspect comprises a literature review of sources, including scholarly works, Financial Action Task Force (FATF) recommendations, reports and domestic laws. The quantitative aspect analyses a unique and comprehensive table reproduced below, that indicates Australia’s compliance with all the FATF recommendations over more than a decade with full alternation to FATF’s revisions of its recommendations.FindingsThis paper demonstrates that an understanding of the influence of the FATF norms can shed light on the departure from regular lawmaking processes and emerging forms of international governance. The conclusion suggests that tranche II is coming and Australia will amend it in domestic regime to comply with the international standard, applying the AML/CTF regime to the legal profession and thus interfering with legal professional privilege. The question is not if but when.Originality/valueThis paper fills the gaps in the existing literature by contemplating the future of legal professional privilege globally and in Australia, which provides a case study of a regime that does not yet comply fully with AML and CTF international standard. This approach differs significantly from that of other literature in the field, which deals comprehensively with the theoretical foundations of legal professional privilege, as well as its practicalities and limitations, without considering the influence of the international non-binding norms.

FATF requirements on regulation of cryptocurrencies: problems of implementation into national legislation

The object of this research is the international standards AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism) for the sphere of virtual assets (cryptocurrencies) developed by FATF (Financial Action Task Force), and possibilities of their effective implementation into the national legislation. The author examines new revision of the Recommendation 15 and Glossary (of October 2018), explanatory note to new revision of the Recommendation 15, and implementation guidance of the risk-oriented approach towards virtual assets and service providers in the sphere of virtual assets (of June 2019); considers provisions of the Federal Law of July 31, 2020 No.259-FZ “On Digital Financial Assets, Digital Currency, and Amendments to Certain Legislative Acts of the Russian Federation” becoming effective in January 2021. Based on the analysis of most recent international and Russian acts on the questions of legal regulation of cryptocurrencies turnover, the need is underlined for introducing amendments to the Russian legislation with regards to exercising financial monitoring of transactions with cryptocurrencies in Russia. The author indicates certain fundamental aspects related to collection and validation of personally identifying information on the holders of cryptocurrency and tracing of their transactions.

Pakistan-United States Relations in Trump Era and FATF

The Financial Action Task Force (FATF) has become a modern diplomatic instrument for the United States of America to use it the way it wants for. As the U.S. led Afghan peace process embraced the victory, Washington, Afghan Taliban and Kabul government have agreed upon limited ceasefire and withdrawal of troops from Afghanistan soil. Pakistani authorities are equally ready to cease the movement, amid the challenges posed by the FATF, by facilitating U.S.-Taliban peace deal in Qatar on Feb 29, 2020, the biggest development happened ever in South Asian region. It happened for the first time of grinding warfare since the U.S. invasion in 2001 which is considered to be a vital step to end the insurgency altogether in the region. Pentagon finally accepted Islamabad’s stance that there is no military solution to the Afghan imbroglio. Pakistani authorities, through Afghan authorities, are said to be taking over Pakistani Taliban purportedly operating from Afghanistan. After playing a key role in brokering the said peace deal, the challenge of FATF as a diplomatic tool to pile up pressure on Islamabad to mold its role in favour of the US and the Taliban talks.

The determinants of corporate disclosures of anti-money laundering initiatives by Kenyan commercial banks

PurposeThis study aims to examine the extent and drivers of anti-money laundering (AML) disclosures in the audited annual reports of regional listed banks in Kenya.Design/methodology/approachUsing the Financial Action Task Force recommendations and other guidelines, the authors develop an AML disclosure index that is used to score the extent of AML disclosures by banks. A sample of 15 listed regional banks in Kenya over the period of 2007-2017 is used. Using this sample, the authors performed fixed-effects regressions to identify the significant determinants of AML disclosures.FindingsThe study establishes a low level of AML disclosures in the audited annual reports of sampled banks. The extent to which the AML disclosures improved across three distinct regulatory regimes over the period of 2007-2017 is reported. The authors find that the AML disclosures are largely driven by corporate governance (board size and audit committee size) and the ratio of diaspora remittances to GDP.Practical implicationsOwing to the global nature of money laundering activities, the study suggests that the Central Bank of Kenya needs to internationalize AML regulations and follow internationally accepted best practices in AML to respond to emerging trends in money laundering and related crimes.Originality/valueTo the best knowledge of the researchers, this is perhaps the first study to examine the drivers of AML disclosures by banks in a developing economy in the East and Southern African region. Given the global nature of money laundering, the study makes an important and original contribution to the body of knowledge with potential for replication in other jurisdictions. The findings will also form a basis for developing an AML reporting or disclosure framework.

Challenges in customer due diligence for banks in the UAE

PurposeThe purpose of this paper is to unpack the customer due diligence (CDD) vulnerabilities and to examine and analyze the UAE specific dynamics that make the country exposed to these threats. This research also intends to put on the table suitable solutions and remedial action steps that the UAE government, regulators and financial institutions (FIs) can adopt.Design/methodology/approachThis study is qualitative in nature.FindingsDespite the impressive regulatory framework and the satisfactory practices by FIs, there still remains some UAE specific challenges that make it difficult to undertake CDD for certain customers. The challenges that were identified include difficulties in Arabic names, complications in identifying the beneficial owners, impediments in establishing the source of wealth/funds, concerns with politically exposed persons, the increasing cost of compliance that resulted in a pattern of de-risking within FIs.Research limitations/implicationsThe international bodies whose mandate is to formulate the necessary anti-money laundering and combating the financing of terrorism policies and regulations for global implementation together with Association of Certified Anti-Money Laundering Specialists (ACAMS) have published sufficient studies on CDD-related issues in the UAE. Yet on the other hand, very limited literature was found by independent scholars. This paper will, therefore, largely reference publications by Financial Action Task Force, the International Narcotics Control Strategy Report and ACAMS. It will also include works by respected law firms that have operations in the UAE, local publications, government documents, academic papers by the International Monetary Fund and the World Bank, legal journals and others.Originality/valueIllicit actors exploit the UAE’s relatively open business environment, a multitude of global banks and exchange houses and global transportation links to undertake illicit financial activity […] the UAE does not have any major anti-money laundering (AML) deficiencies. However, the monitoring of FIs for AML purposes, particularly in the area of CDD, could be improved. This paper unpacks the CDD vulnerabilities and analyzes the UAE specific dynamics that make the country exposed to these threats. This research also puts on the table suitable remedial action steps that the UAE government, regulators and FIs can adopt.

The Evolution of Legal Foundations of the European Union in the Field of Combating Legalization (Laundering) of Proceeds from Crime and Financing of Terrorism: Current Trends and Prospects

Currently, the European Union has a developed regime for counteracting the legalization (laundering) of proceeds from crime and the financing of terrorism. Over the nearly 30 years of its existence, this regime has proven to be effective in achieving its goals thanks to the comprehensive nature of regulation and compliance with international achievements in the field of combating money laundering and the financing of terrorism, primarily the recommendations of the Financial Action Task Force on Money Laundering (FATF). The AML / CFT regime developed by the European legislator has become an effective tool for combating money laundering in conditions when this problem turned to be acute due to the widespread tightening of counter-terrorism measures, including international ones. It is for this reason that the European AML / CFT regime has served as a guideline in the development of “anti-laundering” measures of many states that are not members of the European Union, including the Russian Federation. The paper discusses the content of current trends in the legal regulation of the European Union in the field of combating money laundering and the financing of terrorism, as well as an overview of the main development prospects and directions.

The FATF & Pakistan: A Timeline

The aim of this paper is to situate the engagement between Pakistan and the Financial Action Task Force in a chronologically-ordered fashion that depicts the major events between February 2019 and February 2020, with an equal effort to present the prelude of events since the FATF’s creation in 1989. This helps to address a gap in the policymaker effort to contextualize the long-horizon of international financial oversight and lack thereof as it pertains to Pakistan’s forced place in the FATF ‘grey list,’ as of 2020.

Combating the financing of proliferation: challenges and new tools

PurposeThis paper aims to examine why most governments appear to attach less importance to countering proliferation finance than they do to countering money laundering or terrorist financing.Design/methodology/approachThe paper examines this question from a number of perspectives including a definitional perspective, a national regulatory perspective and a private sector implementation perspective.FindingsIt is shown that there are presently significant gaps in counter proliferation finance implementation at the national level, with follow-on implications for private sector compliance.Research limitations/implicationsA key finding is that most governments do not address the issue of proliferation finance as distinct from other forms of financial crime such as terrorist financing or money laundering.Practical implicationsPractical opportunities for improved financial sector implementation of counter proliferation finance controls are identified, but it is argued that it is states that must do more to meet their obligations for improvements to be realised.Social implicationsThe risk of not doing so is that the financial system will continue to be misused to finance the proliferation of weapons of mass destruction.Originality/valueThe study seeks to fill a gap in existing academic literature on the question of why proliferation finance receives less attention than other forms of financial crime. The study builds on original research undertaken by the authors including the typologies of proliferation finance, which were later incorporated into an updated Financial Action Task Force report on this topic, as well as events organised by the authors to explore the topic of proliferation finance implementation with governments and the private sector.

Austria

This Technical Note (TN) sets out the findings and recommendations made in the context of the 2019 Financial Sector Assessment Program (FSAP) for Austria in the areas of AML/CFT. It provides a targeted review of Austria’s progress in addressing the ML/TF vulnerabilities in the banking sector, including AML/CFT supervision and cross-border activities, progress in enhancing the transparency of legal persons and arrangements, and risks related to virtual assets (VAs) and virtual assets service providers (VASPs). This review is not an assessment or evaluation of the country’s AML/CFT regime. In this regard, Austria’s AML/CFT system was assessed by the Financial Action Task Force (FATF) against the current FATF standard and the Mutual Evaluation Report (MER) was adopted in September 2016. The authorities are focused on improving the effectiveness of the legal, regulatory, and supervisory framework in mitigating ML/TF risks.

Criminalisation of terrorism financing in Iranian law

PurposeThe purpose of this study is to demonstrate that to what extent the Iranian criminalisation of terrorism financing meets the international standards of counter-terrorism financing regime, particularly the Financing Convention and the Financial Action Task Force (FATF) Recommendations, and what is the main impediment for Iran to integrate at the international level to combat terrorism financing. Also, it tries to rate the Iranian criminalisation of terrorism financing in accordance with the FATF technical compliance rating.Design/methodology/approachThis subject is analysed from an Iranian perspective by undertaking fieldwork through collecting documents in Iran and using the official documents, statements and laws, particularly the Iranian Law of Combating Financing of Terrorism (2018) from both Persian and English sources.FindingsIran’s terrorism financing offence is not completely in line with international counter-terrorism financing regime because of an exemption for the struggle of individuals, nations and national liberation movements with the aim of countering domination, foreign occupation, colonisation and racism. The Iranian support for national liberation movements is derived from the Constitutional Law that requires Iran supports the struggles of the oppressed for their rights against the oppressors anywhere in the world. As a result, the FATF Recommendation 5 (criminalisation of terrorism financing) would be rated partially compliant.Originality/valueNo article exists specifically on this research field. To the author’s knowledge, this paper, for the first time, examines the Iranian criminalisation of terrorism financing. It rates the criminalisation (Recommendation 5) based on the FATF technical compliance rating because no mutual evaluation has been conducted to date. The paper is useful for academicians, law enforcement, policymakers, legislators and researchers.

Financial action task force and the fight against money laundering and the financing of terrorism

PurposeThirty years after its creation, the Financial Action Task Force (FATF) has become a prime example of a norm-building process that transcends the traditional avenues of public international law, while compelling a high level of compliance and assuring quick adaptation to norms and practices that better address money laundering and the financing of terrorism in their evolving form. On the occasion of FATF’s 30th anniversary, this paper aims to revisit the unique characteristics of FATF and the factors behind FATF’s success as standard-setter and as implementation-reviewer in the anti-money laundering (AML)/CFT context.Design/methodology/approachThis paper draws on primary sources of law, legal scholarship, reports and other open source data to analyse the FATF norm-building process and the factors behind its success.FindingsThirty years after its creation, the FATF has established itself as the key standard-setter, implementation-reviewer and force for reform in the AML/CFT context. Though the FATF norm-building process has been very successful, owing to its flexibility, adaptability and expansiveness, significant challenges lay ahead due to the evolving nature of money laundering and financing of terrorism.Originality/valueThis is a comprehensive study examining the achievements, impact, strengths and weaknesses of the FATF norm-building process on the occasion of the organisation’s 30th anniversary.

Using Anti-Money Laundering Measures to Curb Pension Fraud in Nigeria

PURPOSE – This paper proposes a new approach to curbing pension fraud in Nigeria. The approach involves the use of anti-money laundering tools, procedures and expertise to advance the fight against pension fraud in Nigeria. The guidance is non-binding and does not override the purview of the National Pension Commission. The intention is to build on the revised procedures on the processing of Death Benefits and to complement existing circulars and guidelines issued by the National Pension Commission, including in particular the guidelines for Compliance Officers. DESIGN/METHODOLOGY/APPROACH – The analysis took the form of a desk study, which analyzed various documents and reports such as the Financial Action Task Force (2012-2018), International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (the FATF Recommendations); the Financial Action Task Force Guidance on the Risk-Based Approach to Combating Money Laundering and Terrorist Financing: High Level Principles and Procedures; National Pension Commission Regulations for Compliance Officers; the Joint Money Laundering Steering Group Guidance for the United Kingdom Financial Sector Part I, June 2017 [Amended December 2017] and the Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act/Anti-Money Laundering Examination Manual 2014. FINDINGS – This paper determined that a strong due diligence process where the owner of the pension account and the Next-of-Kin/legal beneficiary are duly identified before the establishment of a business relationship is capable of reducing the risks associated with pension fraud to the barest minimum. This paper also determined that anti-money laundering measures like record keeping, suspicious transactions reporting, training for anti-fraud/money laundering compliance and an independent audit of systems and controls can help curb pension fraud. RESEARCH LIMITATIONS – Pension fraud involves the use of deceit or misrepresentation in connection with a pension claim. There are many different kinds of pension fraud, but the type where the Fraud is aimed at stealing a person’s pension funds is what this paper is concerned with. ORIGINALITY/VALUE – While most publications on pension fraud are focused on anti-fraud measures, this paper focuses on the anti-money laundering measures which can be used by Pension Fund Administrators to curb pension fraud.

State and institutional capacity in combating money laundering and terrorism financing in armed conflict

PurposeThe purpose of this paper is to explore the relationship and implications of institutional autonomy and capacity through the Central Bank of Syria in its ability to implement an effective anti-money laundering (AML) and counter-terrorism financing (CTF) framework during a period of intense armed conflict.Design/methodology/approachDue to the lack of reliable data currently available on Syria, this paper focuses on Syria’s AML/CTF legislation through passed laws and regulations; annual reports on the Central Bank of Syria and the AML and terrorism financing authority; the academic literature on money laundering, terrorist financing and institutional capacity. This paper will address the theoretical framework of Coleman and Skogstad’s characteristics that define the degree of autonomy and capacity of an institution. Though their characteristics are applied toward the Canadian state, for the purpose of this paper, they have been adopted in the absence of their use verbatim in the case of the Central Bank of Syria.FindingsThe Central Bank of Syria has experienced diminishing independence due to conflict-induced stress in Syria’s financial sector. This loss of autonomy is attributed to the prioritization of government-led emergency policies to secure and stabilize Syria's economy. Despite this loss, the Central Bank of Syria has maintained considerable and effective improvements in Syria’s AML/CTF framework, aligning it closer to that of international standards promoted by the Financial Action Task Force (FATF). Institutional gaps, however, still exist. These gaps imply that the Central Bank of Syria still lags in a number of areas that affect its capability in implementing a more effective AML/CTF framework.Research limitations/implicationsThe conflict in Syria is still a very new topic that lacks a considerable amount of reliable data. As such, many research limitations were encountered despite the volume of information reviewed for this paper in both Arabic and English. Nevertheless, this paper provides a clearer understanding of how state capacity is reflected in its institutions through certain policies and approaches taken by a central monetary authority with implications and results in a country rattled by years of intense conflict.Practical implicationsDespite the research limitations and implications, this paper provides a clearer understanding of how state capacity is reflected in its institutions through certain policies and approaches taken by a central monetary authority with implications and results in a country rattled by years of intense conflict. This can be useful for institutional policymakers, as well as academics exploring the relationship between the state and its institutions in times of hardship.Originality/valueThough there is AML/CTF literature on Middle Eastern countries such as Egypt, Jordan and Saudi Arabia, very little is written on Syria. There is also very little written on the broader subject of state and institutional capacity through the lens of an effective AML and CTF framework during a period of intense armed conflict. By looking at an ongoing conflict, this paper explores a subject with as much detail as needed to provide an illustration of the relationship and implications of institutional autonomy and capacity in relation to the state through an effective AML/CTF framework in a country with a struggling financial system.

Detecting Mobile Money Laundering Using Genetic Algorithm as Feature Selection Method with Classification Method

In recent years, mobile phone payment systems have been extensively used in developed countries. Frauds are affecting the economy of the whole world. Different kinds of mobile money frauds are credit card, bank fraud, insurance fraud and financial fraud. In this paper we discussed financial fraud and proposed an effectiveness method for money laundering. Payment system in fraud divided into four parts, point of sale, mobile payment platform, mobile payment independent and bill payment through mobile. Mobile phones are great source of service for financial transactions. Our objective is to identify the misuse of mobile money transaction and to prevent fraud from financial transaction to save the money. Financial Action Task Force (FATF) is an organization that views internationally money laundering. Financial Action Task Force continuously strengthens its standards for dealing with new risks.The Financial Action Task Force monitors countries to ensure the implementation the Financial Action Task Force Standards and holds countries to account that do not comply. This paper proposes hybrid Genetic algorithm based on feature selection method and investigates the performance of Decision Tree and Boost classification machine learning method. We applied Area under the ROC curve (AUC) and confusion matrix after using the feature selection method. We found the resultsof Decision Tree validation, testing and Boost with different Sampling of both datasets and Boost has better performance than Decision Tree.

Deploying Opportunistic Data to Improve Anti-Money Laundering National Risk Assessments

This paper outlines methods for anti-money laundering authorities to identify and deploy already extant or easily created databases to improve their National Risk Assessments (NRAs). NRAs are commonly used as an essential element in mutual evaluation reports prepared by the Financial Action Task Force