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.
The G8's actions on 'beneficial ownership' are a breakthrough in the fight against financial crimes (Credit: James Lauritiz,Digital Vision Collection, Getty Images)
The move was momentous and, until a few weeks ago, quite unexpected. In a push to tear down the walls of corporate secrecy, the G8 has just committed to ensuring that each of its members will have immediate access to the identity of the so-called “beneficial owner” - the individual who ultimately pulls the strings behind companies- in their jurisdiction. Not very long ago talk of “beneficial ownership” was the domain of a handful of policy wonks and the odd NGO; now it’s taken center stage.
The G8’s statement represents a major breakthrough in fighting financial crime, corruption and tax evasion. Law enforcement and regulatory action have been hampered for far too long by the lack of access to information on the individuals who, ultimately, benefit from the ill-gotten gains stashed away in a variety of exotic sounding entities around the world. The seemingly impenetrable barriers of corporate secrecy have been lifted and the walls are coming down.
Liberia's new AML/CFT law is a step towards good governance in a country looking to the future (Credit: Kenneth Harper, Flickr Creative Commons)
On May 2nd, the President of Liberia signed into law a long anticipated bill to counter money laundering and terrorism financing (AML/CFT). The new Act, which included amendments to various other laws, will provide more effective legislative tools with which to fight corruption, money laundering and other financial crimes. The new Act will provide the legal basis to establish a Financial Intelligence Unit as the central coordinating agency in these efforts, provide better tools for authorities to seize and freeze the proceeds of crime, and improve cooperation in information- sharing and investigations. It will also require financial institutions and other entities often used to launder proceeds of crime, to identify and report suspicious transactions to authorities.
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.
When a modestly paid public official is suddenly able to take lavish holidays, buy a new sports car, or purchase expensive jewelry it raises eyebrows - and suspicion. Corruption may be suspected but it is often frustratingly difficult to prove – so what is the best way to deal with the sources of unknown wealth?
‘Illicit enrichment’ poses a legal and practical challenge for authorities around the world. One option is to criminalize the offence, meaning in practice that the prosecution does not have to prove that the assets come from corrupt behavior, but simply cannot be justified from legitimate sources of income. The public official then has to provide evidence of the legitimate source of the mysterious new found wealth, and if it cannot be adequately explained then suffer the legal consequences.