NEW AML/CFT STANDARDS

Transcription

1 NEW AML/CFT STANDARDS

2 FATF Recommendations The Risk-based approach: Countries need to clearly understand the ML/TF risks which affect them; To adapt their AML/CFT system to the nature of these risks by applying enhanced measures where the risks are higher with the option of simplified measures where the risks are lower. The risk-based approach which will enable countries and financial intermediaries to target their resources more effectively. A well-implemented risk-based approach means that the AML/CFT system will be more effective, and will help countries implement measures to encourage financial inclusion, as called for by the G20.

3 FATF Recommendations Transparency: Lack of transparency about the ownership and control, or about the parties to wire transfers, makes those instruments vulnerable to misuse by criminals and terrorists. Transparency requirements means that there is reliable information available about the beneficial ownership and control of companies, trusts, and other legal persons or legal arrangements. It also means more 2 rigorous requirements on the information which must accompany wire transfers. Measures to improve transparency, implemented on a global basis, will make it harder for criminals and terrorists to conceal their activities.

4 FATF Recommendations International Cooperation: The scope and application of international cooperation between authorities should be enhanced. The revised Recommendations will mean more effective exchanges of information for investigative, supervisory and prosecutorial purposes. This will also assist countries in tracing, freezing, and confiscating illegal assets.

5 FATF Recommendations Operational Standards: The FATF Recommendations concerned with law enforcement and Financial Intelligence Units have been expanded significantly. The revisions clarify the role and functions of the operational agencies responsible for combating money laundering and terrorist financing. The revisions set out the range of investigative techniques and powers which should be available to law enforcement, e.g., to obtain and analyse financial information about a suspected criminal s accounts and transactions.

6 FATF Recommendations New Threats & New Priorities: the key issues addressed are: Financing of Proliferation - The proliferation of weapons of mass destruction is a significant security concern, and financial measures can be an effective way to combat this threat. The new Recommendation aimed at ensuring consistent and effective implementation of targeted financial sanctions when these are called for by the UN Security Council. Corruption & Politically Exposed Persons - strengthen the requirements on financial institutions to identify PEPs who may represent a higher risk of corruption by virtue of the positions they hold. The existing requirement to apply enhanced due diligence to PEPs, with new risk-based requirements applied to domestic PEPs and PEPs from international organisations.

7 FATF Recommendations Tax Crimes - The list of predicate offences for money laundering has been expanded to include serious tax crimes. This will bring the proceeds of tax crimes within the scope of the powers and authorities used to investigate ML. The smuggling offence has also been clarified to include offences relating to customs and excise duties and taxes. This will contribute to better coordination between law enforcement, border and tax authorities, and remove potential obstacles to international cooperation regarding tax crimes. Terrorist Financing The TF remains a serious concern. The FATF s nine Special Recommendations on TF have been integrated fully within the new 40 Recommendations, reflecting both the fact that terrorist financing is a long-standing concern, and the close connections between AML and CFT.

8 FATF Recommendations Clarifying obligations: The FATF has updated its Recommendations to reflect practices in the financial sector (e.g., to set out clearer requirements for financial groups) and to apply the experience gained from the implementation of the FATF Recommendations by countries (e.g., by clarifying customer due-diligence requirements where countries have had practical difficulties with implementation).

9 Intermediate Outcomes: Policy, coordination and cooperation mitigate the money laundering and financing of terrorism risks. Immediate Outcomes: 1. ML/TF risks are understood and, where appropriate, actions coordinated domestically to combat ML/TF and proliferation. 2. International cooperation delivers appropriate information, financial intelligence, and evidence, and facilitates action against criminals and their assets Proceeds of crime and funds in support of terrorism are prevented from entering the financial and other sectors or are detected and reported by these sectors. 3. Supervisors appropriately supervise, monitor and regulate financial institutions and DNFBPs for compliance with AML/CFT requirements commensurate with their risks. 4. Financial institutions and DNFBPs adequately apply AML/CFT preventive measures commensurate with their risks, and report suspicious transactions. 5. Legal persons and arrangements are prevented from misuse for money laundering or terrorist financing, and information on their beneficial ownership is available to competent authorities without impediments.

10 Money laundering threats are detected and disrupted, and criminals are sanctioned and deprived of illicit proceeds. Terrorist financing threats are detected and disrupted, terrorists are deprived of resources, and those who finance terrorism are sanctioned, thereby contributing to the prevention of terrorist acts. 6. Financial intelligence and all other relevant information are appropriately used by competent authorities for money laundering and terrorist financing investigations. 7. Money laundering offences and activities are investigated and offenders are prosecuted and subject to effective, proportionate and dissuasive sanctions. 8. Proceeds and instrumentalities of crime are confiscated. 9. Terrorist financing offences and activities are investigated and persons who finance terrorism are prosecuted and subject to effective, proportionate and dissuasive sanctions. 10. Terrorists, terrorist organisations and terrorist financiers are prevented from raising, moving and using funds, and from abusing the NPO sector. 11. Persons and entities involved in the proliferation of weapons of mass destruction are prevented from raising, moving and using funds, consistent with the relevant UNSCRs.

11 EU AML/CFT DIRECTIVE Ongoing Monitoring: The Fourth EU AMLD is more prescriptive with respect to the on-going monitoring of customers, and is more specific in outlining factors for consideration/evidencing in conducting risk assessments for each customer, and how these risk assessments must be kept up-to-date. This reinforces the requirement to undertake a risk based approach, and from a practical perspective, will mean that obliged entities must be able to evidence the rationale behind the risk rating applied to each customer. Beneficial Ownership: The AMLD introduces an explicit requirement for legal persons, including companies, to hold adequate, accurate, and current information on their own beneficial ownership. This information will be required to be made readily available to both competent authorities and obliged entities on request. Similarly, this requirement also apply to trustees, who are required to disclose their status to obliged entities.

12 EU AML/CFT DIRECTIVE Customer Due Diligence (CDD): Organizations now need to provide full justification to the regulators for applying SDD to particular customers. Institutions should evaluate their risk assessment methodologies currently in place from a qualitative and quantitative perspective, as further narrative rationale may be required in order to justify the risk associated with specific customers, products and jurisdictions within the organization. Organizations should use the results of risk assessments to determine clear distinctions among the different levels of due diligence applicable to particular customers and the varying risk levels associated to ultimately identify lower risk customers to which SDD could be applied. Institutions should also perform impact assessments to see how this may affect CDD and transaction monitoring.

13 EU AML/CFT DIRECTIVE Policies and procedures: The Fourth Directive more clearly defines the need for policies and procedures to ultimately mitigate AML/CTF risks at the EU, national and business level. The Fourth Directive introduces new requirements for entities to include data protection policies within AML/CTF policies and procedures for customer information sharing, with the primary objective to strengthen controls while maintaining the protection of data. Fourth Directive require Obliged Entities with branches or majority owned subsidiaries outside the EU where AML/CTF legislation may be deemed deficient to implement AML requirements of the regulated entity s home Member State, in order to implement more consistent adherence to policies and procedures both within and outside the EU.

14 EU AML/CFT DIRECTIVE Sanctions: Minimum penalties are set out in the AMLD that apply to breaches by Obliged Entities, which are serious, repeated, and/or systematic in the areas of customer due diligence, suspicious transactions reporting, record keeping and internal controls. Administrative penalties for breaches by natural or legal persons include public reprimand, cease and desist from conduct, suspension of authorization, temporary ban from managerial functions and maximum pecuniary sanctions of at least twice the amount of the benefit derived from the breach, or at least EUR 1 million. For breaches concerning a credit institution or financial institution, the maximum pecuniary penalties for a legal person are at least EUR 5 million or 10 percent of the total annual turnover, and at least EUR 5 million for a natural person.

15 Assessing risks and applying a riskbased approach Recommendation 1 and EU Directive (art. 7): Identify, assess and understand the ML and TF risks for the country Designate an authority or mechanism to coordinate actions to assess risks This assessment should be the foundation to efficient allocation of resources across the anti-money laundering and countering the financing of terrorism regime Apply a risk based approach to ensure that measures to prevent or mitigate ML and TF are commensurate with risks identified.

16 Assessing risks and applying a riskbased approach Identify higher risks situations and ensure the AML/CFT regime adequately addresses such risks. Where countries identify lower risks, they may decide to allow simplified AML/CFT measures for some of the FATF Recommendations. Countries should require FIs and DNPBPs to identify, assess and take effective action to mitigate their ML and TF risks.

17 Who shall do it?! Each reporting ( obliged ) entity itself; The sectors subjected to ML/TF risks = sectorial ML/TF risk assessments; The country itself = National ML/TF risk assessment; The European Union = Supranational ML/TF Risk assessment; FATF = Global ML/TF risk assessment;

18 Specific & Sectorial Risk Assessments National Risk Assessment Supranational Assessment (EU)

19 RISK FACTORS EXTERNAL FACTORS Identification of risk aims to determine how the organization could be vulnerable to uncertainty. FINANCIAL RISKS STRATEGIC RISKS The identification should: - Covers all activities; - To match the achievement of strategic and operational objectives; - To be carried out continuously and consistently. OPERATIONAL RISKS Insufficient budget; Insufficient expertize. INTERNAL FACTORS HR strategies, IT systems. Trainings, Administrative structure, motivation Products/services, Management. SECURITY RISKS EXTERNAL FAVTORS 19

20 How it should be done?! Methodologies: Function of three factors: threat, vulnerability and consequence ( ) Function of mainly two factors: threat and vulnerability (consequences are not treated as separate independent factor and are seen as a derivative of threats and vulnerabilities) ( ) Function of the likelihood of occurrence and the consequence of risk events, where likelihood of occurrence is a function of the coexistence of threat and vulnerability ( )

21 Threats and vulnerabilities (FATF definition) Threats: Person or group of people, object or activity with the potential to cause harm to, for example, the state, the society, the economy, etc. Vulnerabilities: Factors that represent weaknesses in AML/CFT systems or controls or certain features of a country, a particular sector, a financial product or type of service, that can be exploited by the threat or that may support or facilitate its activities.

22 Consequences (FATF definition) Consequence: Refers to the impact or harm that ML or TF may cause and includes the effect of the underlying criminal and terrorist activity on financial systems and institutions, as well as the economy and society more generally. The consequences of ML or TF may be short or long term in nature and also relate to populations, specific communities, the business environment, or national or international interests, as well as the reputation and attractiveness of a country s financial sector. The key is that the risk assessment adopts an approach that attempts to distinguish the extent of different risks to assist with prioritising mitigation efforts.

23 Stage I Identification Threats Vulnerabilities National crime threat assessment, Typologies reports, Collective knowledge of LEAs, etc. Mutual evaluation reports, Supervisors report on regulated sector, Regulated entities risk assessment, etc. Stage II Analysis Nature Sources Likelihood Consequences Stage III Evaluation Priorities/strategy Prevention or avoidance Mitigation or reduction Acceptance/contingency (for lower ML/TF risks)

24 High probability of occurrence Gold traders Threat = high + Vulnerability = high Medium risk High risk Higher ML/TF risk Medium probability of occurrence Low risk Medium risk High risk Low probability of occurrence Low risk Low risk Medium risk Threats + vulnerabilities = Probability of occurrence Consequences and damages Low consequences or damages Medium consequences or damages Gold Traders Consequences or damages = High Important consequences or damages

25 RISK-BASED SUPERVISION There are many different supervisory approaches; The FATF does not prescribe a particular supervisory model; Whichever supervisory system is chosen, it should effectively address and mitigate the money laundering and terrorist financing risks in the financial sector; Effective communication and coordination between AML/CFT supervisors and other supervisory agencies, central banks, finance ministries and any other relevant authorities is crucial; AML/CFT supervision can form part of the broader supervision or it can be entirely separate.

26 RISK-BASED SUPERVISION The AML/CFT supervisory model is a national decision that should be adopted taking into consideration the structure and risk of the financial sector in each country. The FATF acknowledges that different institutional arrangements are capable of meeting the FATF Standards. The integration of AML/CFT supervision into the broader framework of prudential and/or business conduct supervision can leverage synergies, expertise, and resources to enhance the effectiveness of both overall supervision of financial institutions and AML/CFT supervision.

27 FATF - Examples of financial supervision models Integrated Approach Twin Peaks Approach Functional Approach Institutional Approach Single universal supervisor performs both safety and soundness supervision function and conduct-ofbusiness regulation for all the sectors of financial services business. Separation of regulatory functions between two or more supervisors: for example, one that performs the safety and soundness supervision function and the other that focuses on conduct-of-business regulation. Supervisory oversight is determined by the business that is being transacted by the financial institution, without regard to legal status. Each type of business may have its own functional supervisor. Financial institution s legal status determines which supervisor is tasked with overseeing its activity.

28 In order to apply a risk-based manner to AML/CFT supervision, supervisors should first understand the ML/TF risks present in their country by identifying possible risks and by assessing their potential impact on the supervised entities

29 Supervisory examinations Supervisory examination processes should include: Clear and adequate methodologies and procedures for off-site supervision and on-site inspections; Off-site monitoring tools could include (self assessment) questionnaires on the policies, procedures and controls in place in financial institutions; On-site assessment tools could include assessing the adequacy of AML/CFT controls, such as management reporting and oversight. A review of the financial institution s internal or external audits.

30 Supervisory examinations Supervisors should consider interviewing members of the Board of Directors, staff of various levels of seniority and with different functions (e.g. senior management; compliance; internal audit/control functions; and customer-facing staff); Supervisors should assess procedures and policies in place and/or conduct testing (e.g., review of customer files, testing effectiveness of a transaction monitoring system, suspicious activity reporting, training and integrity of staff)

31 Supervisory examinations Supervisors should assess effective implementation of the financial institution s policies and controls. Sample testing is a particularly important tool when examining for compliance, both for risk- based and rules-based requirements.(e.g., the implementation of targeted financial sanctions); The supervisor should ensure that officers carrying out AML/CFT inspections are adequately trained and have up-to-date knowledge of AML/CFT issues. At individual financial institutions, the supervisor should, conduct risk-based assessments across all or part of a financial sector where the supervisor considers the risks warrant this approach;

32 Supervisory examinations The supervisor should conduct consolidated AML/CFT supervision of the overseas branches and subsidiaries of financial institutions headquartered in its country via off-site supervision and on-site inspections; The supervisor should also consider taking risk-sensitive measures to inspect or review financial institution s governance and controls over third party service providers where AML/CFT measures are outsourced to others as agents of the financial institution.

33 Supervisory findings Optimal usage of findings: The supervisor should facilitate sharing of the findings of AML/CFT inspections among its officers to ensure consistency of supervisory actions/measures. Where the AML/CFT supervision is carried out by different authorities, they should discuss and share information to ensure consistency in applying standards. Periodic review: The supervisor should also take the results of follow-up actions into account when reviewing a sector or particular entity s risk profile, and use this information for the purposes of fine tuning and recalibrating its inspection plans and supervisory approach.

34 How to pick up? Supervisors should understand the risk present in a supervised entity. Supervisors should establish a risk profile of the entities under their supervision based on a risk rating methodology: For larger entities an individual risk profile. For smaller entities a risk profile that applies to a group of similar entities; The nature and extent of the risks associated with countries, customers, transactions, products and services should be taken into account.

35 How to pick up? (CoE perspective) Countries: A list of high-risk countries should be developed. This list should take account of the countries identified by the FATF as high-risk and non-cooperative or jurisdictions and the countries against which the UN, the EU or other regional or international organisations have imposed sanctions or restrictive measures. The supervisor can collect information on where the supervised entities undertake their activities. The more high-risk countries where an entity has activities, the higher the ML/TF risks that an entity is potentially exposed to.

36 How to pick up? (CoE perspective) Customers: The customer-base of an entity shall be assessed. Depending on the number and types of customers that an entity serves, the inherent ML/FT risk will differ. Certain types of customers can increase the ML/TF risk, especially when there are large numbers of these customers. High-risk: corporations with complex structures, private banking customers, non-resident customers, or customers from high-risk countries, etc.; Low-risk: domestic retail customers or small enterprises can be considered as low-risky one.

37 How to pick up? (CoE perspective) Transactions, products and services: The types of products that an entity offers can be numerous and diverse. Certain products have a higher risk of being used for ML/TF, such as cash intensive products and services, international transactions, and products that facilitate (near) anonymous transactions. Non face-to-face delivery channels are high-risky. Level of compliance: The supervisor can also take into account the level of compliance. Are the policies, internal controls and procedures are adequate and implemented. Risk appetite of the entity, the tone at the top, and the awareness of staff can be factored.

38 Questions?

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