Combating money laundering & other terror financing: Financial Action Task Force

Reserve Bank of India in its press release in various newspapers and in its website has informed us that the Financial Action Task Force (FATF), vide public document ‘High-Risk Jurisdictions subject to a Call for Action’ dated February 25, 2021, has called on its members and other jurisdictions to refer to the statement on these jurisdictions adopted in February 2020. Basically, dealing extensively with combating money laundering and terror financing, the referred document during COVID 19 deserves serious considerations and let us understand them. RBI communication is referred below:

https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=51203

Let us understand FATF and its activities and what it does which attracts the whole world and why the so- called terror striking countries are scared of its directions. For a news reader, the questions and answers dissolve the doubts.

What is FATF and why does it affect 205 countries which are its members?

Let me introduce you to RBI explanations.

“The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the Ministers of its Member jurisdictions. The objectives of the FATF 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. The FATF monitors the progress of its members in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally. The FATF’s decision making body, the FATF Plenary, meets three times a year and updates these statements, which may be noted”.

Yes, its recent meet on virtual mode due to COVID 19 was attended by delegates representing the 205 members of the Global Network and observer organizations, such as the IMF, the United Nations and the World Bank, worked through a full agenda to strengthen global safeguards to detect, prevent and disrupt the financial flows that fuel crime and terrorism. The deliberations went through February 22, 24 and 25.

What did they do during discussions?

Let me amplify the deliberations in a lay man’s language.

• Issued guidance to member countries to take an effective and risk-based approach to supervision, guidance on investigating and prosecute terrorist financing by competent authorities legally permitted to do so.
• To issue for public consultation a draft guidance to help countries, financial institutions and others in identifying, assessing, and mitigating the risks of the financing of proliferation of weapons of mass destruction, and updated guidance on virtual assets and virtual asset service providers.
• It also advanced its work on ongoing key issues like digitalization which would help immensely to fight money laundering and counter-terrorist financing (AML/CFT).
• It also deliberated the preliminary findings in its ongoing work to overcoming the challenges linked to the effective recovery of criminals’ assets, tackle money laundering from environmental crimes and the financing of ethnically and racially motivated terrorism.

Let us understand the strategic initiatives and country-specific processes. Let us remember them for deeper understanding. One often hears Iran or Pakistan names in FATF communications.

Strategic initiatives

• Improving risk-based supervision
• Mitigating the money laundering and terrorist financing risks of virtual assets
• Strengthening measures to prevent the financing of proliferation of weapons of mass destruction
• Improving terrorist financing investigations and prosecutions
• Tackling illicit arms trafficking and terrorist financing

To the relevant question, what are the country-specific processes, the answer follows.

• Mutual Evaluation of New Zealand
• Impact of COVID-19 on Mutual Evaluation processes
• Jurisdictions under Increased Monitoring
• Strengthening the Global Network.

One needs to keep in mind 193 pages document published by FATF in February 2013, and updated in 2020 which is reproduced from its website as under:

http://www.fatf-gafi.org/media/fatf/documents/methodology/FATF%20Methodology%2022%20Feb%202013.pdf

The above document deals with its methodology for assessing technical compliance with the FATF recommendations and the effectiveness of AML/CFT Systems.

I am tempted to reproduce below the two components from page 6 and para 2. Being treated as sacrosanct, I did not comprise and reduce their essence.

“The technical compliance assessment addresses the specific requirements of the FATF Recommendations, principally as they relate to the relevant legal and institutional framework of the country, and the powers and procedures of the competent authorities. These represent the fundamental building blocks of an AML/CFT system.

The effectiveness assessment differs fundamentally from the assessment of technical compliance. It seeks to assess the adequacy of the implementation of the FATF Recommendations, and identifies the extent to which a country achieves a defined set of outcomes that are central to a robust AML/CFT system. The focus of the effectiveness assessment is therefore on the extent to which the legal and institutional framework is producing the expected results.”

Or, together, the assessments of both technical compliance and effectiveness will present an integrated analysis of the extent to which the country is compliant with the FATF Standards and how successful it is in maintaining a strong AML/CFT system, as required by the FATF Recommendations.

Presuming the adage that the countries adopted the technical compliance and the same is assessed, one may ask what are the technical compliance ratings. This rating you often come across in newspapers whenever one discusses the potential range in which Pakistan reacts in relation to its terror networks working there and the steps taken as its supervision by regulatory authorities.

Let me reproduce the internationally accepted ratings.

Technical compliance ratings

Compliant	C	There are no shortcomings.
Largely compliant	LC	There are only minor shortcomings.
Partially compliant	PC	There are moderate shortcomings.
Non compliant	NC	There are major shortcomings.
Not applicable	NA	A requirement does not apply, due to the structural, legal or institutional features of a country.

Now, the really interesting facts about various countries emerge.

Now, let us look at the effectiveness ratings also. (page 22).

Effectiveness ratings

• High level of effectiveness The Immediate Outcome is achieved to a very large extent. Minor improvements needed.
• Substantial level of effectiveness The Immediate Outcome is achieved to a large extent. Moderate improvements needed.
• Moderate level of effectiveness The Immediate Outcome is achieved to some extent. Major improvements needed.
• Low level of effectiveness The Immediate Outcome is not achieved or achieved to a negligible extent. Fundamental improvements needed.

FATF has given 40 recommendations whose headings do spell the broad contours of its action areas suggested.

Pages 24-92 contain these recommendations. These recommendations deal with the following.

Assessing the risks and the risk-based approach, national cooperation and coordination, money laundering offence, confiscation and provisional measures, terrorist financing offence, targeted financial sanctions related to terrorism and terrorist financing, , targeted financial sanctions related to proliferation, non-profit organizations, financial institutions secrecy laws, customer due diligence, record keeping, politically exposed persons, money or value transfer services.

The list goes on to 40 recommendations.

However, those pertaining to money laundering offence is of essential value to my discussions.

Money laundering offence (ML)

May I narrate some of them though it is conceptualized on page 28?

“ML should be criminalized on the basis of the Vienna Convention and the Palermo Convention (see Article 3(1)(b) &(c) Vienna Convention and Article 6(1) Palermo Convention).

The predicate offences for ML should cover all serious offences, with a view to including the widest range of predicate offences. At a minimum, predicate offences should include a range of offences in each of the designated categories of offences.

Where countries apply a threshold approach or a combined approach that includes a threshold approach, predicate offences should, at a minimum, comprise all offences that: (a) fall within the category of serious offences under their national law; or (b) are punishable by a maximum penalty of more than one year’s imprisonment; or (c) are punished by a minimum penalty of more than six months’ imprisonment (for countries that have a minimum threshold for offences in their legal system).

The ML offence should extend to any type of property, regardless of its value, that directly or indirectly represents the proceeds of crime.

When proving that property is the proceeds of crime, it should not be necessary that a person be convicted of a predicate offence.

Predicate offences for money laundering should extend to conduct that occurred in another country, which constitutes an offence in that country, and which would have constituted a predicate offence had it occurred domestically.

The ML offence should apply to persons who commit the predicate offence, unless this is contrary to fundamental principles of domestic law.

It should be possible for the intent and knowledge required to prove the ML offence to be inferred from objective factual circumstances.”

What are terrorist financing activities, the most notorious crimes being singular ones around the world?

Terrorist financing activities (recommendation number 5) (full of internationally approved legal jargons) (page 31)

We hear the above activities frequently in financial transactions. Page 31 contains the full list though some of them, I have reproduced to have the most authentic value and complete perception.

5.1 Countries should criminalize TF on the basis of the Terrorist Financing Convention.

5.2 TF offences should extend to any person who willfully provides or collects funds or other assets by any means, directly or indirectly, with the unlawful intention that they should be used, or in the knowledge that they are to be used, in full or in part: (a) to carry out a terrorist act(s); or (b) by a terrorist organization or by an individual terrorist (even in the absence of a link to a specific terrorist act or acts).

5.2 bis TF offences should include financing the travel of individuals who travel to a State other than their States of residence or nationality for the purpose of the perpetration, planning, or preparation of, or participation in, terrorist acts or the providing or receiving of terrorist training.

5.3 TF offences should extend to any funds or other assets whether from a legitimate or illegitimate source.

5.4 TF offences should not require that the funds or other assets: (a) were actually used to carry out or attempt a terrorist act(s); or (b) be linked to a specific terrorist act(s).

5.5 It should be possible for the intent and knowledge required to prove the offence to be inferred from objective factual circumstances.

5.6 Proportionate and dissuasive criminal sanctions should apply to natural persons convicted of TF.

5.7 Criminal liability and sanctions, and, where that is not possible (due to fundamental principles of domestic law), civil or administrative liability and sanctions, should apply to legal persons. This should not preclude parallel criminal, civil or administrative proceedings with respect to legal persons in countries in which more than one form of liability is available. Such measures should be without prejudice to the criminal liability of natural persons. All sanctions should be proportionate and dissuasive.

 5.8 It should also be an offence to: (a) attempt to commit the TF offence; (b) participate as an accomplice in a TF offence or attempted offence; (c) organize or direct others to commit a TF offence or attempted offence.

Now it is time to proceed with our main agenda, the decisions taken on February 22-25, 2021.

Jurisdictions under increased monitoring are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing.

When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. This list is often externally referred to as the “grey list”

Can I have the grey list?

• Barbados
• Botswana
• Burkina Faso
• Cambodia
• Cayman Islands
• Ghana
• Jamaica
• Mauritius
• Morocco
• Myanmar
• Nicaragua
• Pakistan
• Panama
• Senegal
• Syria
• Uganda
• Yemen.
• Zimbabwe

Let us also learn about the high- risk jurisdictions subject to call for action – February 2021.

High-risk jurisdictions have significant strategic deficiencies in their regimes to counter money laundering, terrorist financing, and financing of proliferation. For all countries identified as high-risk, the FATF calls on all members and urges all jurisdictions to apply enhanced due diligence, and in the most serious cases, countries are called upon to apply counter-measures to protect the international financial system from the ongoing money laundering, terrorist financing, and proliferation financing (ML/TF/PF) risks emanating from the country. This list is often externally referred to as the “black list”

The black list contains two countries, namely, Democratic People’s Republic of Korea (DPRK) and Iran.

Two statements issued by FATF summarizes the action plan.

1. The FATF remains concerned by the DPRK’s failure to address the significant deficiencies in its anti-money laundering and combating the financing of terrorism (AML/CFT) regime and the serious threats they pose to the integrity of the international financial system. The FATF urges the DPRK to immediately and meaningfully address its AML/CFT deficiencies. Further, the FATF has serious concerns with the threat posed by the DPRK’s illicit activities related to the proliferation of weapons of mass destruction (WMDs) and its financing.

2. In February 2020, the FATF noted that there are still items not completed and Iran should fully address: (1) adequately criminalizing terrorist financing, including by removing the exemption for designated groups “attempting to end foreign occupation, colonialism and racism”; (2) identifying and freezing terrorist assets in line with the relevant United Nations Security Council resolutions; (3) ensuring an adequate and enforceable customer due diligence regime; (4) demonstrating how authorities are identifying and sanctioning unlicensed money/value transfer service providers; (5) ratifying and implementing the Palermo and TF Conventions and clarifying the capability to provide mutual legal assistance; and (6) ensuring that financial institutions verify that wire transfers contain complete originator and beneficiary information.

Conclusion

The survival of our mother earth and its continued existence as civilization which is rule based and based on mutual respect for existence of all nations has been challenged by terror activities and the support of the same by financing the same by black listed or grey listed nations, if one categorizes. With adequate emphasis placed by RBI and other regulatory agencies, India with one of the largest networks of financial institutions and other advanced technology firms dealing with finance and related fields,is on its way to emerge under “Compliant C”. Vast information quoted extensively by me is intended to show the complexities of the issues involved. All including a common man need to contribute to keep the evils away, if I am allowed to call. Frequent quotations from original documents were intentional and a way to understand the real picture.

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Being purely based on information from RBI/FATF websites, the above article just gives information as myself as a writer perceive them. Neither taxguru.in or myself give any legal advice. Just refer to original information or consult legal experts to get guidance.