Financial Transparency Coalition

The Financial Action Task Force (FATF) is a global, instrumental inter-governmental group that develops and promotes policies battle money laundering and terrorist financing. The FATF issues a set of recommendations to outline criminal justice and regulatory measures that countries should implement to effectively fight these problems.

This set includes the FATF’s 40 Recommendations, which are a detailed list of anti-money laundering (AML) measures and span the criminal justice system, law enforcement, the financial system, financial regulation, and international co-operation. Additionally, the FATF has promulgated 9 Special Recommendations, which specifically address terrorist financing. Together the 40+9 Recommendations form the international standard for combating money laundering and terrorist financing. There are currently 36 members of the FATF, which includes 34 jurisdictions and 2 regional organizations, and over 180 countries and jurisdictions have endorsed the FATF’s 40+9 Recommendations.

The FATF is currently conducting a review of these Recommendations in three separate stages to ensure they are up to date and relevant. They also want to ensure that Recommendations reflect the most current global conditions and benefit from lessons many countries have learned in the process of implementing and evaluating them. While the FATF provides a global standard on these issues, it recognizes there is always room for improvement, particularly through discussion with organizations, governments, and individuals who understand these complex, dynamic issues and have thought out coherent and effective solutions. It is pleasing the FATF has encouraged a public debate and has welcomed members of civil society to participate.

The Task Force on Financial Integrity and Economic Development (in other words, the organization whose blog you are now reading) has responded to the first two stages of this review with submissions of its own suggestions for improvement of the Recommendations. In this post, I’ll review highlights of the Task Force’s second submission in layman’s terms. If you are interested in reading the full, technical submission, follow this link. The Task Force recommends that FATF:

• Extend Recommendation 33, which covers transparency of legal persons and arrangements, to require countries to maintain national registration agencies for companies, which would be subject to verification of beneficial ownership. Under current laws and guidance individuals are able to create corporate entities without fully disclosing their identities and then using those corporations to conduct transactions, including money laundering activities. This is a significant loophole in the framework. With this recommendation, people associated with incorporating companies (directors, shareholders, agents, etc.) would be subject to identification procedures, which would limit their abilities to use this tactic to hide their identities.

• Create a new general requirement for trusts to be registered with the relevant authorities. The World Bank, the OECD, and the FATF have all observed that money launderers often use trusts to their identities and distance themselves from the proceeds of their crimes. There is no requirement for legal structures like trusts to register with government agencies and as a result there is little information about them, which makes them vulnerable to money laundering. Should the FATF implement this recommendation, trusts would have to provide the same information that other covered institutions collect on their customers. This would aid financial institutions in performing their due diligence.

• The FATF members should conduct a regulatory review of banks in their jurisdiction as part of a broader assessment by the FATF into the effectiveness of the implementation of its standards. While the FATF and the international community have been incredibly effective at ensuring that the majority of the world’s jurisdictions have AML laws in place, there has not been an equally forceful corresponding effort to ensure that those laws are effectively implemented and enforced. In fact, a recent report by the UK’s Financial Services Authority found that although the UK has strong AML laws, the implementation of those laws by banks and other financial institutions has been deeply problematic. Following the report, the UK government placed five banks into enforcement—the formal process of investigation for compliance failures. There are good reasons to assume the situation would be the same in financial centers among other FATF member jurisdictions.

There’s much more to this document. What I’ve described above is just a selection of the many common sense and important recommendations that the Task Force has suggested to the FATF. Moreover, the document goes into significantly more detail on each of these recommendations; a level of detail I do not have the space to pursue in this forum. If you are at all interested in this topic, I encourage you to read the Task Force’s submission. And, of course, I hope the FATF pays close attention.