Financial Action Task Force Research Articles

Little enthusiasm for enhanced CDD of the politically connected

PurposeThe purpose of this paper is to determine whether countries are implementing enhanced customer due diligence (CDD) for financial transactions with the politically connected.Design/methodology/approachPublic information in relation to ratification of the UN anti‐corruption resolution, mutual evaluations of anti‐money laundering systems and Transparency International's (TI's) corruption reports are used to determine governments' attitudes to corruption and enhanced CDD recommended as best practice by the financial action task force (FATF).FindingsIt was found that low levels of compliance with recommended best practice when handling transactions with politically exposed persons, amongst the countries examined, are leaving the global financial network open to abuse by those in public office.Research limitations/implicationsThe release of mutual evaluation reports by the FATF and regional anti‐money laundering bodies has been of immense importance in determining the level of compliance with FATF recommendations. However, until a similar exercise is conducted on a global scale the true situation facing the global financial network cannot be determined.Practical implicationsThe lack of scrutiny of financial transactions of the politically connected puts the global financial system at risk and allows corruption at the highest levels to flourish.Originality/valuePublication of the mutual evaluations of both FATF members and non‐member countries provides an opportunity, not previously available, to analyse the compliance with FATF recommendations across counties around the world. Given the TI findings, levels of corruption increasing and the involvement of public officials at the highest level, it is important to understand how transactions with the politically connected are being handled.

The measures on combating money laundering and terrorism financing in the PRC

PurposeThe purpose of this paper is to make objective comments on China's comprehensive measures on combating money laundering and terrorism financing, and to put forward some recommendations for improvement.Design/methodology/approachThis paper based on the financial action task force (FATF) evaluation report, describes the fight against money laundering and terrorism financing in China, analyses the gap still remaining between China and the international standards, and points out the future efforts to be made.FindingsChina has made significant progress in implementing anti‐money laundering and combating the financing of terrorism measures in the last decades, gaps however are still remained. The future efforts to be made are as follows: criminal legislation and administrative measures should be improved or supplemented; human resources and institutional resources should be supported and international cooperation should be further strengthened.Originality/valueThis paper presents a comprehensive description of, and comments on, the efforts on China's anti‐money laundering and combating the financing of terrorism, which would be beneficial to policy makers and relevant administrators.

Did Blacklisting Hurt the Tax Havens?

Purpose - This paper tests the widely-held assumption that blacklisting, such as that practiced by the OECD (Organization for Economic Cooperation and Development) and the FATF (Financial Action Task Force), affects the volume of financial activity associated with a tax haven.Design/Methodology/Approach - ARIMA (autoregressive integrated moving average) analysis is used to explore changes across eight measures of in banking-associated activity that occurred when a tax haven was placed on, or removed from, one FATF and two OECD blacklists.Findings - The results are highly varied. Most importantly, no substantial and consistent impact of blacklisting on banking investment in and out of the tax havens was found across 38 jurisdictions. Practical implications - The role of speech acts - unconnected with other developments in the havens or foreign policy measures beyond rhetoric - may not be as important for tax haven investment as previously thought. Originality/Value - No rigorous and comprehensive study has previously been done of this important question.

Russia's anti‐money laundering regime: law enforcement tool or instrument of domestic control?

PurposeThe purpose of this paper is to cut through the rhetoric that shrouds Russia's anti‐money laundering regime to uncover the reality that lies beneath.Design/methodology/approachThis paper relies on both primary and secondary sources in Russian and English that deal with the problems of money laundering in the Russian context. Relevant sections of the Russian Criminal Code as well as Russia's anti‐money laundering regulations have been consulted.FindingsOverall, the Russian anti‐money laundering regime has thus far proved ineffective in terms of meeting its stated purposes of combating organized crime and terrorism. Its limited success stems largely from structural weaknesses in the Russian banking system as well as that industry's lack of a culture of regulatory compliance. Moreover, Russian authorities have opportunistically seized on the current anti‐money laundering regime as a useful tool in the pursuit of ends unconnected to the fight against organized crime and terrorism. The Russian authorities have used the regime to attempt to reform the banking system and to extend their strategic control in the domestic political and business realms. The ineffectiveness of the anti‐money laundering regulations and their usage to achieve ulterior aims undermine the legitimacy of the regime as a whole.Originality/valueThe paper looks beyond the technical difficulties in applying the anti‐money laundering regulations and examines the misuses of the anti‐money laundering regime in the Russian context. However, the problems raised in the paper are not unique to Russia and have relevance to other jurisdictions, especially countries that are members of the Financial Action Task Force.

The other War on Terror revealed: global governmentality and the Financial Action Task Force’s campaign against terrorist financing

AbstractDespite initial fanfare surrounding its launch in the White House Rose Garden, the War on Terrorist Finances (WOTF) has thus far languished as a sideshow, in the shadows of military campaigns against terrorism in Afghanistan and Iraq. This neglect is unfortunate, for the WOTF reflects the other multilateral cooperative dimension of the US-led ‘war on terror’, quite contrary to conventional sweeping accusations of American unilateralism. Yet the existing academic literature has been confined mostly to niche specialist journals dedicated to technical, legalistic and financial regulatory aspects of the WOTF. Using the Financial Action Task Force (FATF) as a case study, this article seeks to steer discussions on the WOTF onto a broader theoretical IR perspective. Building upon emerging academic works that extend Foucauldian ideas of governmentality to the global level, we examine the interwoven overlapping national, regional and global regulatory practices emerging against terrorist financing, and the implications for notions of government, regulation and sovereignty.

Is the global financial system AML/CFT prepared?

PurposeTo gauge the extent to which the global financial system is anti‐money laundering (AML)/countering the financing of terrorism (CFT) prepared by analysing and comparing the AML/CFT systems of Financial Action Task Force (FATF) members with countries belonging to regional AML organisations.Design/methodology/approachMutual evaluation data of 16 FATF members and 21 non‐FATF countries is analysed and compared using Kruskal‐Wallis and paired‐t tests to determine similarities and differences across the two groups of countries.FindingsAML/CFT systems of FATF members and non‐FATF countries are poor. The lack of compliance with global AML/CFT standards leaves so many holes in these countries' regulatory, financial, and legal systems that money laundering with or without any relationship to the financing of terrorism, would be relatively easy to achieve.Research limitations/implicationsIn using an analytical approach it has been necessary to put numerical values on compliance levels used by the FATF. Given that these are very broad, substituting a single value for each compliance level will provide only a crude measure of compliance for comparisons to be made. The results should therefore be used as a guide to the ranking and compliance of countries rather than some exact measurement of compliance.Practical implicationsThere will need to be follow‐up visits to this round of mutual evaluations to evaluate country responses to their poor assessments.Originality/valuePublication of mutual evaluations by the FATF and a number of regional bodies has enabled a comparison of AML/CFT systems from countries around the world. Lack of data has not enabled this to be done before.

Third round FATF mutual evaluations indicate declining compliance

PurposeTo review the reported compliance levels of third round mutual evaluations with a view to determining any change or differences in compliance levels for Financial Action Task Force (FATF) member countries following the updating of FATF's Forty Recommendations in 2003 and the introduction of the Nine Special Recommendations relating to the financing of terrorism.Design/methodology/approachA comparison of pre‐ and post‐2003 compliance with the FATF's Forty Recommendations and Nine Special Recommendations is made using both self‐assessment and mutual assessment data.FindingsThere are significant differences in compliance levels pre and post 2003. Since, the FATF updated their Forty Recommendations in 2003 compliance with those Recommendations has declined. With regard to the Nine Special Recommendations which have not changed since their introduction there is a significant difference between self‐assessment compliance levels in 2003 and compliance determined using independent mutual evaluations, casting doubt on the value of self assessment.Research limitations/implicationsIn using an analytical approach it has been necessary to put numerical values on compliance levels used by the FATF. Given that these are very broad, substituting a single value for each compliance level will provide only a crude measure of compliance for comparisons to be made. The results should therefore be used as a guide to the ranking and compliance of countries rather than some exact measurement of compliance.Practical implicationsThe value of self assessment by FATF members should be re‐evaluated.Originality/valuePublication of the third round of FATF mutual evaluations provides an opportunity, not previously available, to analyse the compliance levels amongst FATF members.

Finland: Report on the Observance of Standards and Codes- FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

This report reviews observance of Standards and Codes for the Financial Action Task Force (FATF) 40+9 Recommendations and the Anti-money Laundering and Combating the Financing of Terrorism (AML/CFT) measures in place in Finland. The report describes the level of compliance with the FATF 40+9 Recommendations, and contains recommendations on how the AML/CFT system could be strengthened. The report reveals that Finland has a good legal structure to combat money laundering and terrorist financing.

Competing for criminal money

To compete for criminal money by means of high levels of bank secrecy has been a tempting strategy for countries to attract globally mobile funds. We show in a model that this 'Seychelles strategy' can increase national output, in particular, if a country takes first movement leadership in the competition game. If all countries try to do the same, there will be a race to the bottom and a supranational authority like the Financial Action Task Force (FATF) must intervene. However, there are also some intrinsic barriers to the Seychelles strategy. Among others, criminal capital might crowd out legal capital and money laundering might increase crime. Our findings suggest that countries have created niches for money laundering. Small countries can free ride for a while, but will eventually face external sanctions and internal crime problems.

People's Republic of China-Hong Kong Special Administrative Region: Report on the Observance of Standards and Codes--FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

This report on the Observance of Standards and Codes on the Financial Action Task Force (FATF) on money laundering (ML) recommendations discusses antimoney laundering and combating the financing of terrorism for the People’s Republic of China (PRC). Hong Kong has a good legal structure to combat ML and terrorist financing (TF). The laundering of drug proceeds has declined and is increasingly derived from trafficking for domestic use. Hong Kong has implemented the provisions of the Vienna and Palermo Conventions, but shortcomings exist in implementation of the Terrorist Financing Convention.

Mauritius: Report on the Observance of Standards and Codes: FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

This report discusses Mauritius’s Observance of Standards and Codes for the Financial Action Task Force Recommendations for Anti-Money Laundering and special recommendations on Combating the Financing of Terrorism. Mauritius is pursuing a national strategy to diversify its economy into the provision of global financial services by taking advantage of its linkages with both African and Asian economies. Additionally, Mauritius intends to offer new products in Islamic financial services and wealth management.

Re‐Regulating Offshore Finance?

AbstractThis article explores global efforts to regulate offshore finance in the wake of international concern about the effects of so‐called harmful tax competition, as well as money laundering and terrorist financing (the latter a relatively new category since September 11, 2001). In the mid‐1990s, a number of multilateral organizations, from the Organization for Economic Cooperation and Development (OECD) to the Financial Action Task Force, as well as non‐governmental organizations like Oxfam, attempted to curtail offshore finance and tax haven abuses by ‘naming and shaming’ small jurisdictions into compliance with an emerging set of international financial norms. These efforts left themselves open to charges of hypocrisy, however, because many OECD countries themselves failed – and indeed, still fail – to adhere to the standards required of offshore havens. Tax havens responded by calling for a ‘level playing field’. Nevertheless, this effort at global regulation of offshore finance has had tangible effects. This essay explores those effects and argues that the attention to offshore finance missed an opportunity by going after the jurisdictions that provided services rather than addressing the market for such services. Understanding that missed opportunity requires analytical attention to payments, as opposed to exchanges, in international finance and in the social study of finance.

Australia's New Anti-Money Laundering Strategy

In 2006 the Australian Government undertook major reform of the regulatory framework to detect, prevent and prosecute money laundering. These reforms were responses to the changing nature of money laundering as well as the limitations inherent in the existing compliance or rule-based regulatory approach. Originally intended to deal with the laundering of cash generated mainly by drug trafficking, contemporary anti-money laundering systems must now deal with a range of ‘public bads’, including organised fraud, the financing of terrorism, corruption and the theft of state assets, and the financial weaknesses of ‘failed states’. Existing regulatory systems have generated unwieldy volumes of defensive reports of suspicious transactions, but little in the way of tangible outcomes. Australia's money laundering regulatory deficiencies were highlighted by an evaluation review conducted in 2005 by the Financial Action Task Force. This article considers how the new Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) addresses these regulatory deficiencies. It examines the change from a compliance to a risk-based approach, increased customer due diligence requirements and their impact on bank privacy and related issues, and how the new regulatory framework is likely to impact on the role of the Australian Transaction Reporting and Analysis Centre (AUSTRAC) and its relationship with financial institutions and other reporting entities.

Fighting Terrorism the FATF Way

Abstract An effective counterterrorist strategy must reflect the adaptive and trans-national nature of terrorism. The challenge presented to lead organizations in the fight against terrorism is assessing threats and understanding terrorist group behavior with the goal to structure and implement an effective transnational response. The fight to capture and shut down terrorist financing requires coordination points, flexibility, and robust commitment by states. The importance of the structure of such a response is central to the question of state compliance. The success of the Financial Action Task Force makes it an ideal case study for effective measures in response to the particular challenges of funding of global terrorism. This article details how the FATF has become adaptive, facilitating transnational effectiveness in the fight to counterterrorist financing and compliance through globally recognized standards, peer review evaluations, and sanctions.

Money laundering and the risk of diminishing returns

Purpose – Concern about money laundering and the financing of terrorism has become one of the major preoccupations of governments and financial sector regulators around the world. This paper aims to discuss this issue in the context of regulatory standards now being introduced around the world following recommendations of the Financial Action Task Force, an inter‐governmental body based in Paris, set up in 1989 by the G7.Design/methodology/approach – This is an opinion piece based on current and recent developments in financial regulations.Findings – Businesses in the financial sector are having to comply with a substantial amount of new legal obligations which are designed to draw them into a comprehensive web of safeguards and controls that has the ultimate aim of detecting money laundering and terrorist financing activity.Originality/value – This paper will be of value to those involved in corporate governance and regulation.

The Caribbean Financial Action Task Force: its mission, operations and future prospects

PurposeTo outline the role of the Caribbean Financial Action Task Force (CFATF), which has the remit to spearhead the implementation of internationally recognized anti‐money laundering and combating the financing of terrorism (AML/CFT) benchmarks in the Caribbean Basin region.Design/methodology/approachThe first part of the paper sets out the mandate and structure of the CFATF, and describes the range of activities in which it has been engaged, together with some triumphs and challenges experienced over its history. The second part focuses on a critical component of the CFATF's remit, namely, the conduct of the mutual evaluation (MVE) programme, a peer review process by which member states within the CFATF family are assessed for compliance with AML/CFT requirements. The third part constitutes the conclusion and offers some observations on the way forward for the CFATF in its ongoing campaign against financial crime.FindingsThe Caribbean Basin region is ad idem with its international partners in the fight against money laundering and the financing of terrorism. Member governments of the CFATF have embraced this commitment because it is in the region's best interests to protect first and foremost the regional financial system from criminal activity and by extension the global financial system. In so doing we are able to position ourselves as well regulated, clean jurisdictions which are firmly committed to adherence to international best practices. The ongoing stance of the CFATF is one of constant vigilance with regard to international developments, their potential impact on members and the Caribbean Basin region and the way in which the region's interests could be best protected.Originality/valueThe task of the CFATF is to ensure that throughout the membership all the domestic stakeholders be it the National Anti Money Laundering Committee, the attorney general's department, the central bank, police, customs, immigration, defence departments, the financial intelligence units (FIUs), the judiciary and the magistracy all must take on the responsibility for ensuring that in the AML/CFT arena a culture of compliance is engendered throughout the national consciousness. The MEV reports on all CFATF members as the outcome of the monitoring for compliance process are now being published on the CFATF web site and will be of value to our international partners and in particular to the global investment community. The Caribbean Basin region through concerted action must strive for a positive and responsible international image and reputation and the publication of this paper is a step in that direction.

Combating Money Laundering in Nigeria: An Appraisal of the Money Laundering Prohibition Act 2004

One of the most pervasive economic crimes in Nigeria today is Money Laundering. Although relatively unknown in the country until the late 1980s, it is now a veritable companion of the corruption virus which has permeated every segment of the Nigerian society. By its very nature, money laundering is an offence that necessarily involves several persons and entities in its conception, planning, and execution.1 It has the capacity to distort and corrupt the economic system and inhibit the economic development efforts of states.2 It is in recognition of its adverse consequences on the national and international economy that a number of measures have been taken to combat the menace. At the international level, the OECD countries took the lead in engineering the establishment of Financial Action Task Force (FATF) which has been in the forefront of the measures against money laundering. The organization has not only succeeded in precipitating the taking of proactive measures to deal with this menace but also consistently made concrete suggestions on how national legislations dealing with this crime should be constructed. Indeed, it is in response to the prompting of such international institutions and agencies that several states have enacted laws specifically designed to deal with this offence. Nigeria first took positive action along this line in 1995 when she enacted the Money Laundering Act.3 However, it was soon realized that the decree had a number of loopholes and inadequacies which militated against its effectiveness. In the context of Nigeria, this is not surprising, because the usual pattern of legislation in the country hardly takes cognizance of all the circumstances before a law is passed. This problem was more apparent during the military regimes where decrees were rolled out after meetings of the military-dominated ruling councils without legislative debate.4 It was in recognition of these facts and the specific deficiencies identified that led to the enactment of the Money Laundering Prohibition Act 2004 by the present government. Although the Act makes a number of far-reaching provisions relating to money laundering in the country, it also raises a number of issues that require re-examination in the light of prevailing circumstances. It is intended in this paper to examine the provisions of this law to see how it has assisted in the fight against the menace in Nigeria. The inadequacies of the law will also be discussed and suggestions made in the concluding part of the paper on how to make the legislation more responsive to the quest for effective regulation of this crime.

FATF Special Recommendations and UN Resolutions on the financing of terrorism

PurposeThis paper seeks to examine the extent to which Financial Action Task Force (FATF) Special Recommendations and UN Security Council Resolutions on the financing of terrorism have been implemented by countries and the legal issues relating to the implementation of these requirements.Design/methodology/approachIt uses the findings from a review of the International Monetary Fund and the World Bank, which is based on a sample of 18 countries that were assessed on their compliance with the FATF 40 + 9 Recommendations (which include the FATF Special Recommendations and UN Security Council Resolutions 1267 and 1373) between March 2004 and August 2005.FindingsIt analyses the extent to which the FATF Special Recommendations and UN Security Council Resolutions 1267 and 1373 have been implemented, and in particular, the areas which countries have difficulties in complying fully with the requirements and related issues. It also discusses the difficulties with applying international law instruments such as UN Security Council Resolutions 1267 and 1373 where measures were aimed at non‐state actors and their assets, as well as the need for ensuring that persons affected by these measures have adequate legal recourses.Originality/valueIn countering the financing of terrorism, the paper discusses the design of a new international legal framework, which requires development of new concepts. It suggests that, by addressing the legal challenges created by these new concepts, the latter can be further refined, improved and strengthened.

Creating Demand for Global Governance: The Making of a Global Money-laundering Problem*

In most studies on global governance, problems are treated as exogenous factors. Even constructivist global governance approaches normally concentrate on persuasion about global norms and rules, but take the existence of global problems as given. This ignores the fact that it may be necessary to persuade rule addressees of the existence of a problem in the first place. States comply with global rules voluntarily only if they agree that there is a problem. Hence international rule makers have to “problematise” the issue they attempt to regulate, i.e. to construct the issue as a global problem that requires global rules in order to be solved. This article inquires into the why and how of “problematisation” by international regulators. To this end it reconstructs how the Financial Action Task Force (FATF) has turned the issue of money-laundering, which was not considered a problem until the late 1980s, into a global problem requiring a global solution. * The empirical part of this article is based on research for a larger project on “Globalisation and the Future of the Nation-state” (Sonderforschungsbereich 536, Deutsche Forschungsgemeinschaft), in which the author was involved. The author would like to thank Phillip Genschel, Edgar Grande, two anonymous reviewers and especially Dieter Kerwer for comments on earlier versions of this text.

Republic of Latvia: Report on the Observance of Standards and Codes on Anti-Money Laundering and Combating the Financing of Terrorism

This report reviews the Observance of Standards and Codes on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) for the Republic of Latvia. Latvia has taken strong measures in recent years, through legislative amendments and improvements in implementation, to address deficiencies in its AML/CFT framework and move closer to compliance with the Financial Action Task Force (FATF) Recommendations. Most of the necessary AML/CFT institutions and legal framework are now in place, although coverage of some designated nonfinancial businesses and professions (DNFBPs) is not yet complete.