Tom Miller
SPECIAL EDITION WITH GUEST STUDENT AUTHORS FROM THE SCHAR SCHOOL OF POLICY AND GOVERNMENT AT GEORGE MASON UNIVERSITY
I have been honored to be an Adjunct Professor at GMU’s TraCCC (The Terrorism, Transnational Crime and Corruption Center) for several years. Many AML/Sanctions experts have joined me as guest lecturers as we work with graduate students either in or contemplating a career in our community. This past summer, in my International Money Laundering, Corruption and Terrorism class the challenge was to educate and stay current with the plethora of changes occurring in the US and internationally.
The students were required to submit a final paper on a topic related to the vast areas covered in class and I have selected three papers that I know will be of interest to many.
John Byrne
Chair, AML RightSource Advisory Board
Introduction: The Financial Action Task Force and FATF-Style Regional Bodies [1]
Originating in 1989 from a Group of Seven (G-7) Summit held in Paris, the Financial Action Task Force (FATF) was established to combat international money laundering. The FATF is headquartered with the Organization for Economic Co-operation and Development (OECD) in Paris, France. The FATF’s original mandate was expanded in 2001 to include countering terrorist financing, and further expanded in 2012 to include countering the proliferation of weapons of mass destruction. In 2019 the FATF was granted an open-ended mandate.
The FATF’s formal objectives “… are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.”[2] Accordingly, the FATF monitors the implementation of its standards, known as FATF Recommendations, and otherwise promotes global adoption of its Recommendations. The Recommendations leverage United Nations (UN) Conventions and Resolutions of the UN Security Council and are widely endorsed by both the World Bank and the International Monetary Fund (IMF)[3]. There are 39 Member countries and regional organizations within FATF while over 200 countries and jurisdictions, referred to as FATF’s Global Network, have committed to implementing FATF Recommendations. Along with its Member countries, FATF comprises one Observer country, a host of Observer Organizations, and nine Associate Member organizations.
Associate Member organizations are of particular interest as these organizations, along with FATF Member countries and other international organizations, offer assistance to countries within their regions to implement FATF Recommendations. The Associate Member Organizations are commonly referred to as FATF-Style Regional Bodies (FSRBs) and include the following:
- Asia/Pacific Group on Money Laundering (APG)
- Caribbean Financial Action Task Force (CFATF)
- Eurasian Group (EAG)
- Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)
- Task Force on Money Laundering in Central Africa (Groupe d’Action contre le blanchiment d’Argent en Afrique Centrale(GABAC))
- Financial Action Task Force of Latin America (GAFILAT)
- Inter Governmental Action Group against Money Laundering in West Africa (GIABA)
- Middle East and North Africa Financial Action Task Force (MENAFATF)
- Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL)
As suggested by many of their titles, the FSRBs form regional groups designed to specifically address respective geographic challenges to FATF Recommendation implementation and other financial issues. The FSRBs provide technical assistance in the form of workshops and other targeted training opportunities for their member countries and jurisdictions. Technical assistance funding is often provided by FATF Members and other international organizations such as the UN, the World Bank, the OECD, INTERPOL, or the Egmont Group of Financial Intelligence Units.
Adoption and adherence to FATF Recommendations are beneficial to any country desiring to engage in international commerce and/or international trade. The FATF maintains a detailed mutual evaluation regime for countries[4] and failure to appropriately maintain standards (partial or noncompliance to Recommendations) can have detrimental effects on respective countries. Mutual evaluation includes both the technical compliance to the FATF Recommendations and the effectiveness of Recommendation implementation[5]. Merely having laws and regulations in place is not enough, countries must demonstrate that these provisions are followed and enforced. The FATF and its Members along with international financial community affiliates of the FATF can take action against non-compliant countries to hinder those countries’ participation in the international marketplace; this can include the implementation of sanctions against non-compliant countries or “blacklisting” that inevitably leads to higher risk categorization within the international financial community, often resulting in capital flight and higher borrowing costs[6]. To help countries understand and implement Recommendations, FATF maintains mentorships, online classes via the FATF Academy, or in-person classes at the FATF Training Center in Busan, Republic of South Korea. The FATF also provides best practice papers and Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) guidance documents. Training by the FATF may be conducted in conjunction with FSRBs or other international organizations.
FATF RECOMMENDATIONS - AN UNFUNDED MANDATE TO DISADVANTAGED STATES?
In the environment of AML/CFT standards, as in other international standards such as those around civil aviation[7], countries with limited resources may find it difficult to meet the documented standards; as with many other socio-economic issues, countries facing the greatest challenges are often those having the least resources to manage respective challenges.
Countries currently listed by the FATF as Jurisdictions Under Increased Monitoring (the “grey list”) as of June 2022[8] include the following (countries highlighted in bold were also found on the grey list in February 2020): Albania, Barbados, Burkina Faso, Cambodia, Cayman Islands, Gibraltar, Haiti, Jamaica, Jordan, Mali, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Philippines, Senegal, South Sudan, Syria, Türkiye, Uganda, United Arab Emirates, and Yemen. The FATF recognized that the worldwide COVID-19 pandemic adversely impacted countries’ ability from 2020 to 2022 to improve their implementation objectives. In addition to the grey list, two countries remain on FATF’s High-Risk Jurisdictions Subject to Call for Action list (the “blacklist”), those being Iran and the Democratic People’s Republic of Korea (DPRK). While these lists change from time to time as countries improve their compliance regime (particularly the Jurisdictions Under Increased Monitoring grey list), some countries seem to continue to struggle, and a review of the bolded countries shows that they typically comprise countries facing many socio-economic challenges with endemic constraints.
The FATF, FATF Members, and the FSRBs recognize, and respect challenges faced by some countries/jurisdictions. As shown on APG’s website, there are a number of issues related to deficient Recommendation implementation[9]. These include political will, nature of the economy and level of development, overall governance and institutional development, and level of corruption in government and institutions. For those facing resource constraints, often in terms of both numbers and expertise of human resources and financial support, prioritization of national objectives and the respective allocation of available resources is critical[10]. The lack of well-trained public employees in AML/CFT disciplines is especially detrimental when it comes to implementing complex concepts such as risk-based approaches (RBA) recommended by the FATF; subsequent delegation of RBA to the private sector is rarely effective[11]. These issues are fundamental and difficult to address and correct with offered workshops and other technical assistance programs; the effectiveness of FATF technical assistance may be nullified if these issues are not resolved.
Concerning fundamental issues one school of thought, expressed by North et al. in Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History[12], suggests that contemporary countries fall into one of two categories, open access and natural state. Those comprising natural state, which includes most of the world’s countries and all of those disadvantaged, maintain values and standards of behavior typically separate from open access societies. Natural state order citizens’ motivations and respective actions are driven by these values, which inherently do not match open access societies where citizens are welcomed to express their ideas and participate in political/social/economic dialogue. Violence and Social Orders does not suggest that one category or the other of countries is right, it merely identifies the reality of how different countries function – the main emphasis of the book is how societies deal with managing violence. So, while we endeavor to manage the behavior of countries, we should also take into account their base values along with their unique operational environments.
One common deficiency found in seven of the ten countries on FATF’s June 2022 “grey list” concerns laws and procedures around the seizure/confiscation of proceeds and assets in money laundering cases[13]. Deficiency comments in this area were found in descriptions for Albania, Barbados, Cambodia, Myanmar, Panama, Uganda, and Yemen. Interestingly these countries come from multiple regions, demonstrating that the deficiency is not restricted to a particular geographic area. In all cases, however, the deficiency can be traced to a lack of underlying issues as suggested by APG’s Implementation Issues webpage. Also of note, in his list of priorities under his leadership term, Singapore’s new FATF President, identified “strengthening asset recovery” at the top of his list[14]. The concept of proceeds/asset seizure and forfeiture in these countries may face political, social, and perhaps even religious resistance (as might be suggested by Violence and Social Orders). Such issues are difficult to resolve through mere technical assistance, they require a more comprehensive approach beyond the means of organizations focusing on technical parameters.
The FATF Recommendations are drafted predominantly by wealthy countries with formal economies, robust institutions, and extensive financial resources with which to implement the Recommendations. However well-crafted and disseminated, disadvantaged countries may encounter considerable difficulty in understanding and implementing the Recommendations. Despite efforts to assist these disadvantaged countries, deficiencies may still be apparent and lead to adverse repercussions. Actions taken against non-compliant countries may further exacerbate their situation.
The perception of Recommendations formulated by rich countries and jurisdictions, predominantly the 39 FATF Members, may serve to further the north–south divide and be seen as little more than unfunded mandates, designed to benefit FATF Members at the expense of less advantaged countries. The Recommendations in their scope and complexity may encourage some countries with limited implementation infrastructure and resources to maintain informal economies and/or increase financial exclusion[15]. Existing FATF, FATF Member country, FSRB and other international organization support may be of little help as disadvantaged countries face severe challenges to implement and sustain Recommendation provisions.
OPTIONS FOR DISADVANTAGED COUNTRIES
Faced with identified deficiencies through the FATF evaluation process a respective country has a few options to consider. First, they can “go it alone” and attempt to correct the deficiencies using organic resources without external help. Or they may choose to hire subject matter expert consultants, for guidance. Finally, they may choose to turn to organizational assistance, whether via a unilateral source, such as the FATF or a FATF Member, or through a multilateral approach, perhaps turning to an FSRB for technical assistance.
ADVANTAGES/DISADVANTAGES AND CHOOSING A COURSE OF ACTION
Each of these options comes with advantages and disadvantages. In the case of “go it alone” the country may reduce costs, but find it difficult to implement change – efficiency may be optimal, but effectiveness may suffer. Consultants may be costly, and a country must choose wisely or potentially waste its funds. The best consultant may be engaged elsewhere, timing may be an issue. Likewise, in looking for organizational help, timing, cost, and willingness to work on specific needs may be issues. Must country responsible individuals travel to the organization’s training site, do facilities and capabilities exist for remote training (reliable internet connection, etc.), do assistance offerings take into account the specific conditions existing in the deficient country – all these and many more issues must be considered.
Each country must conduct a cost/benefit analysis to determine its best course of action. This may be an exercise of political will and the outcome’s quality may be limited by the same resource constraints inherent in implementing the Recommendations. A country must be prepared to not only implement Recommendations, but also to sustain Recommendation requirements, which may require considerable assets beyond the country’s existing capability. Just as critical, commensurate enforcement provisions must be in place to make the Recommendations effective. This is a long-term commitment that may incur a long-term contract and commitment from a single or multiple donor(s) or technical assistance organization(s).
Technical assistance may be of limited utility in resolving Recommendation deficiencies. This is especially true in the area of sustainment. As found in the civil aviation environment, publishing a regulation or even a law may not achieve the desired results if requisite understanding, implementation, and enforcement are missing. Constant vigilance is required to ensure international standards are both in place and, more importantly, maintained and enforced over time.
CONCLUSION
Many of the challenges disadvantaged countries face are not merely technical in nature. As cited in this paper and listed on APG’s website, these challenges may include fundamental elements of governance and political/economic status. These issues require help beyond that which the FATF and FSRBs can provide alone. They require the concerted effort of donors and international organizations to build requisite capacity. In his objective to address the topic of Strengthening Asset Recovery for 2022 – 2024, FATF President T. Raja Kumar provided this approach:
… The FATF will do this in cooperation with members, the Global Network and strategic partners, such as the UN and IMF, and convene a Global Roundtable on Financial Crime with INTERPOL. This will bring together a range of stakeholders, including law enforcement agencies, financial investigators and regulators, and focus on actionable changes, such as through the use of data analytics and public-private partnerships, to aid the work of law enforcement and other agencies.[16]
The advantaged countries of the global community must be willing to fund initiatives to address these underlying issues if the technical deficiencies are to be eliminated in the long run. In the case of the United States (U.S.) as a FATF Member, the U.S. has at least on paper committed to, “Continue to support training by the FATF and FSRBs on the FATF Standards and peer review process.”[17] At the same time and since 2013, the U.S. Department of Justice has, “… based upon international standards set by the FATF, […] assisted other countries in the drafting and enactment of forfeiture, money laundering, and mutual legal assistance laws.”[18] This type of support must be sustained to meet AML/CFT challenges faced by disadvantaged countries in the future.
Concerning international standards in general does “one size really fit all”, especially when those standards are achieved through consensus predominantly driven by advantaged countries? As pointed out in Violence and Social Orders, the foundational aspects of countries’ values may differ and therefore misguided attempts to alter behavior may result in failed objectives and/or unintended outcomes. Global realization of the tenets of AML/CFT through FATF Recommendations cannot be achieved solely through the efforts of the financial community. A more holistic approach is required, leveraging FATF’s concept of the Global Network, but also including the political and wider economic and social factors at work that limit disadvantaged countries’ desire and ability to enact and more importantly sustain the elements of FATF’s Recommendations. Regional bias and cultural values may also be contested by FATF’s Recommendations – rational decision-making is important and respect for regional differences must be maintained. Actual global equality may be a myth, but wisely devised and conscientiously implemented global standards at least establish a foundation upon which all countries can build stability and seek higher standards of living for their citizens.
[1] Description from FATF (2022)
[2] FATF (2022)
[3] Jensen (2011)
[4] FATF (2021)
[5] Ginting (2021)
[6] Hameiri (2015)
[7] ICAO (2022); the UN’s International Civil Aviation Organization promulgates international standards for civil aviation, referred to as Standards and Recommended Practices (SARPs). Various organizations, such as regional Cooperative Development of Operational Safety and Continuing Airworthiness Programs (COSCAPs) help with effective SARP implementation.
[8] FATF (2022)
[9] APG (2022)
[10] Jensen (2011)
[11] Celik (2021)
[12] North, et al. (2009)
[13] Reference to FATF Recommendations 4 “Confiscation and provisional measures” and Recommendation 38 “Mutual Legal Assistance: freezing and confiscation”
[14] FATF (2022) see https://www.fatf-gafi.org/media/fatf/documents/Singapore-Presidency-Priorities.pdf
[15] Celik (2021)
[16] FATF (2022) see https://www.fatf-gafi.org/media/fatf/documents/Singapore-Presidency-Priorities.pdf
[17] Page 22 of U.S. Department of the Treasury (2022)
[18] Page 36 of de Kluiver (2013)