How good are the experts at evaluating countries’ anti-money-laundering and combating the financing of terrorism (AML/CFT) systems? That was the central question in a new report released last week by the Center on Law and Globalization. The report takes a critical look at the IMF’s evaluations of the AML/CFT systems of 150 countries from 2004 to 2013. Although we may differ on some of the analysis and recommendations, the report provides ample food for thought and raises issues that need to be addressed and, in certain instances, corrected.
It isn’t possible here to provide a full overview of all the points raised in the report, but a few key messages stand out:
The report finds that assessors were too focused on formal compliance (“rules on the books”) and did not, in any systematic fashion, try to ascertain the real impact of a country’s entire AML/CFT regime in practice. In the words of the report, “Reliance (by assessors) was placed on the prima facie plausibility of the claim that adherence to the [international AML] standards would help reduce money laundering and the financing of terrorism.” This criticism goes to a wider point: that evaluations were conducted without a clear articulation of the objectives to be achieved by AML/CFT measures. If you don’t know what a system is meant to accomplish, how can you evaluate it?
These are valid points and they hold true, not just for IMF evaluations, but also for others (including the World Bank) who carried out assessments using the same internationally agreed methodology. However, the report fails to take due account of the considerable work that has been undertaken in recent years to address and correct those shortcomings.
Since 2010, an intensive process of revision has been underway to improve the AML/CFT standards and the assessment methodology. There has been a long and vigorous debate within the Financial Action Task Force (FATF), the global standard-setter on these issues, and between the FATF and other bodies, about the best way to remedy the system’s deficiencies to make assessment reports more useful. Both the Bank and the Fund have played a very active role in this discussion.
As a result of this process, the new standards approved in 2012, along with a new methodology approved in 2013, provide a framework to address those concerns: Countries’ AML/CFT systems are to be judged based upon an assessment of their effectiveness in addressing a country’s ML/FT risks. Are government interventions commensurate to the risks faced? For example, a country with a negligible financial sector and a high use of cash should probably not spend too much money and manpower on policing its securities sector. Conversely, a sophisticated financial center providing easily usable incorporation services should probably keep a close eye on company registration. As a participant in this process, the World Bank has been a strong proponent of this pivot toward risk and effectiveness. In our view, only such an approach can help countries make meaningful decisions regarding their priorities and their strategies.
Sitting in a safe house, an ocean away, three former pirates reflect on their past lives as ”footsoldiers” aboard skiffs preparing to attack unsuspecting cargo vessels off the Horn of Africa. Our research team is transfixed by their stories.
We listen as they describe to us how they got involved in the piracy business, how much they earned, how they spent their money and, perhaps most interesting, what they know about their ”masters” – the pirate financiers, investors and negotiators.
These footsoldiers were merely small fish in a big sea. They would be sent out to hijack shipping vessels, which would only be returned to the ships’ owners for a hefty ransom.
Following research for our report “Pirate Trails,” studying acts of piracy off the Horn of Africa, we estimate that between US$339 million and US$413 million was handed over in ransom payments between April 2005 and December 2012. The exact amount is very hard to pin down, given the reluctance of the shipping companies and pirates to reveal the cost and rewards of piracy.
Financial Inclusion advocate Queen Maxima pushed the FATF to consider financial inclusion (Credit: Haags Uitburo)
Monarchs seem mostly untroubled by financial concerns, but Queen Maxima of the Netherlands has made the workings and regulations of those excluded from the formal banking sector a personal issue. Queen Maxima recently attended a plenary meeting of the Financial Action Task Force (FATF) - the first reigning Queen to be present at such a gathering, in order to raise concerns and bring change on a subject that has become a passion for her – and the World Bank Group: financial inclusion. Queen Maxima is the UN Secretary-General’s Special Advocate for Inclusive Finance for Development. In this role, she had already called on the FATF to pay more attention to financial inclusion, and how it relates to financial integrity. In June 2010, at the initiative of the then Dutch Presidency of the FATF, the then Princess Maxima pressed a reluctant FATF plenary in Amsterdam to recognize how ill-designed financial integrity requirements affect financial inclusion by keeping people outside the formal banking sector, and how this can raise the risk of money laundering and terrorist financing.
It began as a trickle but has turned into a flood. HSBC, Barclays, Wachovia, JP Morgan, and UBS have all been engulfed by waves of scandal involving, money laundering, fixing interest rates, risky trades, and rigging the money markets. The question now is – have the banks gone bad? The claim by senior bank executives they ‘we did not know’ rings hollow, and must not be allowed to stand if they are to regain their integrity.
The banks have long resisted greater hands-on supervision of their activities, but the recent rash of publicity surrounding their bad conduct proves that left to their own devices market discipline is not enough. Their involvement in dubious transactions, including in greasing the wheels of corruption through money laundering requires the full implementation of existing rules and regulation, and empowered supervision. The World Bank’s Stolen Asset Recovery Initiative (StAR) along with Financial Market Integrity (FMI) have long pressed for the banks to do more to prevent money laundering and to fight corruption. As a rough estimate, it is believed that $20 – $40 billion is stolen from the coffers of developing countries every year. Much of it ends up being laundered through the banks, passing through financial capitals around the world en route to the beneficiaries. Mechanisms to detect illicit cash flows have long been in place, but the existing system is not working, and corruption is eating away at the foundations of the banking system.
Financial disclosure systems are attracting increasing attention. Can these systems credibly help to prevent corruption in public office? Can they play a useful role in detecting officials who engage in corrupt behaviors? Could they even assist in the complex global work of tracking and investigating illicit flows?
The recently released Public Office, Private Interests from the Stolen Asset Recovery (StAR) Initiative with data by the Public Accountability Mechanisms Initiative of the World Bank provides a practical approach to addressing the challenges and requirements of effective disclosure administration. The overarching message is that effective disclosure is a balancing act. Yes, a disclosure system can make a meaningful contribution to corruption prevention and enforcement. But cannot do so if expected to tackle and apply sanctions for all forms of graft and corruption in public administration.
Requiring that public officials submit a signed declaration of their income, assets and business interests is on the face of it an intuitively simple way of ensuring that they think twice about seeking to profit illicitly from their public duties, or of allowing private interests to influence, appear to influence, or otherwise conflict with their official responsibilities. Fear of detection is the motivating force; a reminder of ethical obligations, and assistance in fulfilling them, the encouragement. In practice, however, this deceptively straightforward idea is very challenging to implement.