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New international standards on countering money laundering and terrorist financing released

On 16 February, the Financial Action Taskforce released its revised Recommendations for combating money laundering and terrorist financing, which now also cover financing of the proliferation of weapons of mass destruction. The FATF is an intergovernmental body established to develop and promote national and international policies to combat money laundering and terrorist financing. It was established in 1989 by the G7 and Australia is a founding member. With the cost of money laundering and underlying serious crime estimated to be between two and five percent of global GDP, it is important that the standards used by over 180 countries as the basis of their responses remain up to date and reflect emerging threats.

As outlined in a previous FlagPost, money laundering is the processing of proceeds of crime to conceal their illegal origin, turning "dirty" cash into "clean" money. Terrorist financing includes the financing (whether using legitimate or laundered funds) of terrorist acts and of terrorists and terrorist organisations.

The FATF Recommendations set the international benchmark for money laundering and terrorist financing counter measures. While not binding under international law, they are supported by leading intergovernmental institutions such as the G20, United Nations, World Bank and the International Monetary Fund. Monitoring of member jurisdictions through a system of mutual evaluation and formalised processes for identifying high-risk or non-cooperative countries both provide incentives for countries to fully implement the FATF Recommendations.The FATF Recommendations set out a comprehensive suite of measures that countries should have in place to counter money laundering and terrorist financing. Some of the key requirements are for countries to:
  • criminalise money laundering and terrorist financing and enable the freezing, restraint and recovery of associated funds or assets
  • establish a financial intelligence unit (FIU) that serves as a national centre for the collection, analysis and dissemination of information about potential money laundering or terrorist financing (the Australian Transaction Reports and Analysis Centre, or AUSTRAC, is Australia’s FIU)
  • require financial institutions and other “designated non‑financial businesses and professions” (DNFBPs, such as casinos, real estate agents, legal professionals and accountants) to undertake thorough customer due diligence (CDD) and maintain proper records
  • require financial institutions and DNFBPs to report suspicious transactions to the FIU
  • require financial institutions and DNFBPs to develop programs against money laundering and terrorist financing
  • ensure financial institutions are subject to adequate regulation and supervision and that appropriate sanctions are available to deal with non-compliance 
  • establish measures to prevent the misuse of legal persons and legal arrangements by money launderers, and
  • afford each other the widest measure of international cooperation, including through mutual legal assistance, extradition, freezing, restraint and confiscation of funds and assets, and timely and constructive exchanges of information.
The revised standards are the result of a review that began in June 2009 and considered over 140 written submissions as well as the outcomes of two private sector consultative forums. Prior to this, the Standards had been most recently reviewed in 2003. The main changes to the FATF Recommendations are:
  • the introduction of an enhanced and overarching risk-based approach aimed at better enabling countries and the private sector to target resources to higher risks and apply simplified measures to lower risks across the anti-money laundering and counter terrorism regime (Recommendation 1)
  • the requirement for countries to implement targeted financial sanctions to comply with United Nations Security Council resolutions relating to the proliferation of weapons of mass destruction (Recommendation 7)
  • a risk-based requirement for financial institutions to perform enhanced CDD on domestic politically exposed persons (PEPs)( individuals entrusted with prominent public functions, such as senior politicians and senior government, judicial or military officials) and those entrusted with a prominent function by an international organisation, in addition to foreign PEPs, and for measures applied to all PEPs to apply equally to family members and close associates of PEPs (Recommendation 12)
  • the addition of serious tax offences to a list of offence types that must be included as predicate offences for the offence of money laundering (Interpretive Note to Recommendation 3), and
  • more comprehensive requirements aimed at preventing the misuse of legal persons and legal arrangements, including information that must be available to assist in determining beneficial ownership (Interpretive Notes to Recommendations 10, 24 and 25). 
While improvements have been made to the Recommendations to facilitate identification of the beneficial owners of legal persons and legal arrangements, the Task Force on Financial Integrity and Economic Development, a consortium of governments and non‑government organisations, has issued a statement criticising FATF for not going further. The Task Force has called for FATF to require countries to have a public register of beneficial owners (those with ultimate control over companies). It argues that without additional measures such as this, a significant loophole remains that will undermine progress made in other areas by enabling company owners to hide their identities and money behind anonymous shell companies.

Despite this criticism, the revised Recommendations and accompanying Interpretive Notes, which together with a glossary comprise the Standards, do represent a stronger framework than the previous version. It is evident from FATF’s response to the public consultation that while it has made some concessions based on the views of the private sector, it has held firm on other issues. For example, it has maintained the existing requirements for CDD on foreign PEPs (instead of moving to a risk‑based approach) and the requirement that the organisation taking on business retains ultimate responsibility for CDD (instead of a third party engaged to undertake the CDD on its behalf).

The FATF monitors implementation of the Standards and assesses the effectiveness of the frameworks in FATF member jurisdictions through a system of mutual evaluation. Australia was most recently evaluated in 2005, and found to be compliant or largely compliant with 26 of the then 49 recommendations, partially compliant with a further 13 and non-compliant with the remaining ten, which related to customer due diligence, requirements for DNFBPs, programs against money laundering and terrorist financing, foreign branches and subsidiaries and information provided for wire transfers.

The latest Australian evaluation was conducted prior to the enactment of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML‑CTF Act), which brought Australia into closer alignment with the FATF Recommendations. The Australian Government provided a report to FATF in 2008 which it claims shows Australia has a strong level of compliance with 45 of the 49 Recommendations (the report itself is not publicly available).

Recent amendments to the AML‑CTF Act and the Anti-Money Laundering and Counter‑Terrorism Financing Rules Instrument 2007 (No.1) have strengthened regulation of the alternative remittance sector and brought Australia into closer conformity with the FATF Standards relating to beneficial ownership. However, some shortcomings remain in Australia’s counter money laundering and terrorist financing regime. The AML‑CTF Act was part of the first of two tranches of legislation to bring Australia into line with international best practice. At the time it was introduced, it was anticipated that the second tranche would soon follow. While draft legislation was released for public consultation in 2007, the process was put on hold to allow time for recovery from the Global Financial Crisis. The Australian Government is recently reported as saying (in the December 2011 issue of AML anti-money laundering magazine) that it is committed to expanding the regime and is working with industry groups to agree to a timetable for doing so. The Government will now need to determine whether additional amendments are required in order to comply with the revised Standards.

An assessment methodology for the revised Standards will be developed over the following 12 months, with the first on-site visits for the next round of mutual evaluations expected to take place in late 2013.