FATF targets corruption, tax evasion as part of AML efforts
October 3, 2011
Trust Law.- The Financial Action Task Force's review of its recommendations could mean that corruption, tax evasion and issues on tax havens become more closely related to anti-money laundering, an APG official told a conference held in Kuala Lumpur yesterday. The FATF's 40+9 recommendations, which are endorsed by more than 180 countries and jurisdictions, underwent a review in October 2010 following calls from international financial institutions for FATF's recommendations to reflect the reality of anti-money laundering in the global financial services sector more accurately.
Speaking at the International Conference on Financial Crime and Terrorism Financing, David Shannon, principal executive officer of the Asia/Pacific Group on Money Laundering (APG) said, by undertaking a review of its standards, the FATF sought not to throw away old standards but instead to focus on those standards which required revision. The FATF undertakes a review of its standards every seven years. "The aim is to harmonise [FATF's standards] with the other global standards to give better focus to tools which better combat terrorist financing. Compared with its experience in 2002 and 2003, the FATF [now] takes a more transparent approach," Shannon told the conference.
One of the outcomes of the FATF's recent review could be a new requirement for countries to shift to a risk-based approach to enhance compliance and enforcement, Shannon said. The FATF's consultation paper stated what it meant by a risk-based approach: "It requires application of risk assessment procedures and due diligence that is reflective of the level of risk assessed. This calls for a greater degree of judgement, and will require additional resources to be applied. This approach is therefore likely to involve more senior management and additional resources, with consequential cost."
Tax offence and corruption
Among the standards under review, the FATF is looking to formalise tax-related offences as part of money laundering. Shannon said the proposed revision, if it were to take effect, would be a significant change for many countries and might mean information would need to be shared among the tax authorities in various jurisdictions. "There is a need to be able to follow money flow and not allow that to be impeded by tax haven or tax evasion," Shannon said. The proposed revision has been made in response to a Swiss court's decision which blocked Swiss bank UBS from handing over the data of 4,450 U.S. citizens to the U.S. government. Another significant aspect of the FATF's review of its standards is the possibility for it to tackle corruption. Shannon said the main driver for change was that the United Nations Convention Against Corruption (UNCAC) has a wider definition for politically exposed persons (PEPs) than the FATF.
Shannon told Thomson Reuters that the FATF's decision to review its standards to allow the addition of tax offences and corruption was very much in response to calls by the G20: "The G20 had called upon the Organisation for Economic Cooperation and Development (OECD) to do more in relation to tax and anti-corruption, particularly to crack down on tax havens, large-scale corruption and the laundering of proceeds from corruption." In a paper presented by the FATF on the review of its standards, it said: "At the highest levels of international community, it is recognised that anti-money laundering/counter terrorist financing (AML/CFT) measures are powerful tools that should be deployed in the fight against corruption and the laundering of corruption proceeds. The G20 leaders have asked the FATF to help deter and detect corruption by strengthening the FATF Recommendations, and in that context, the FATF proposes to include UNCAC — the Merida Convention — in Recommendations 35." The FATF noted that including the UNCAC in the FATF standards would also affect Recommendation 6, which deals with PEPs. According to FATF, article 52 of UNCAC relates to the prevention and detection of transfers of proceeds of crime, including by PEPs.
Identifying beneficial ownership for overall governance
Another salient aspect of the FATF's review is the focus on know your customer (KYC), specifically on beneficial ownership and control of companies and trust which, Shannon said, was often hard to establish. "FATF has an obligation to require financial institutions to identify the ultimate beneficial owner of companies," he told Thomson Reuters. Shannon pointed out that governments needed first to be clear on this before regulators could send out guidelines and details for financial institutions to follow. "What details do financial institutions have to go through to establish the ownership and control of companies? What is the control they must have in place? Who are the mind and management of companies? What are the obligations for financial institutions to get to the bottom, are some the details that financial institutions would need to follow," he said.
FATF Recommendations 33 and 34 give governments access to a company through company laws. Shannon said market players as well as governments should be able to use company laws to get access to companies. "It pays huge dividends for governance overall. While driven by AML, being able to identify ultimate beneficial ownership of companies will help in terms of tax issues, securities regulations and a whole lot of other areas. Who are the players behind the companies? Who are actually in the market? Whether it is listed or unlisted companies, government and market players should be able to find out who are the ultimate owners of companies. It's all about transparency of economy. We are looking at the granular details on requirements much more clearly," he said.
The FATF's proposed changes are expected to call for legislative and regulatory changes. To this end, the FATF has been studying various issues that regulators in many jurisdictions are expected to encounter. Shannon said the FATF was ready to take a flexible approach and would be focusing more on the effectiveness of enforcement. "The FATF provides public statement at the highest level. Compliance standards would come in nuance language to give indications to financial institutions on how they should treat customers in the various jurisdictions," he added. The FATF aims to finish its review by February 2012.