Session

2 – Lecture Notes

FATF Recommendations

History:
Ø The Financial Action Task Force (on Money Laundering)
(FATF)
Ø Groupe d'action financière (GAFI)
Ø An intergovernmental organization founded in 1989
by G7 to develop policies to combat money laundering.

Summary:
Ø Money Laundering Methods have kept evolving
o Increased use of “legal persons” to disguise & control
illegal activities
o Professional advice from lawyers/bankers
o FATF – 37 Members, several Observers +
o Initially FATF was only focused on Drug Trafficing
related Money Laundering (Narcos)
o 40 Recommendations – comprehensively revised – to
combat ML & Terror Finance
§ What should countries do?
§ What should Financial Institutions do?
§ What should DNFBP do?
§ How to coordinate internationally?
§ How to combat Terror Finance?
§ Measures to deal with uncooperative nations?

Ø Endorsed by 130 countries – FATF Recommendations are
the standard for AML & CFT


A. LEGAL SYSTEMS of COUNTRIES

1. CRIMINALIZE MONEY LAUNDERING ON THE BASIS:
i. the United Nations Convention against Illicit Traffic
in Narcotic Drugs and Psychotropic Substances,
1988 (the Vienna Convention)
ii. United Nations Convention against Transnational
Organized Crime, 2004 (the Palermo Convention)
iii. Define ML to include the widest range of predicate
(accompanying) offences - at a minimum
“designated offences” (listed)
iv. Include offences conducted overseas
2. INTENT, KNOWLEDGE, MENTAL STATE & PROCECUTION:
i. Intent & Knowledge required for proof are
consistent with Vienna & Palermo Conventions
ii. Including “Mental State” inferable from objective
factual circumstances
iii. Criminal liability should apply to legal persons
iv. Civil liability should apply, at a minimum
v. Sanctions should be Effective, Proportionate &
Dissuasive
3. LEGISLATIVE MEASURES FOR CONFISCATION:
i. Confiscate property used in ML
ii. Confiscate cash proceeds of ML
iii. Confiscate instruments used in ML
iv. Confiscation without conviction placing burden of
proof on the plaintiff
4. DO NOT LIMIT FI’S DUE TO BANKING SECRACY LAWS


B. MEASURES FOR FIs – CDD & Record Keeping

5. NO ANONYMOUS OR FICTICIOUS ACCOUNTS
i. CUSTOMER DUE DILIGENCE (CDD) TO BE DONE
WHEN:
1. Establishing business relations
2. Occasional transactions above risk thresholds
3. Suspicion of money laundering
4. Doubt about veracity/adequacy of client data

ii. CUSTOMER DUE DILIGENCE MEASURES
1. Verify identity through independent reliable
sources
2. Reasonable measures to identify beneficial
owner
3. Establish the purpose and intended nature of
the business
4. Based on Risk Assessment, conduct periodic
ongoing due diligence to ensure transactions
are consistent with knowledge of customer
and the business

6. CDD for POLITICALLY EXPOSED PERSONS (PEPs)
i. Have appropriate risk management systems to
identify peps
ii. Obtain senior management approval
iii. Reasonable measures to establish sources of
wealth and funds
iv. Conduct enhanced ongoing monitoring

7. CROSS-BORDER CORRESPONDENT BANKING
i. Gather sufficient information on respondent:
1. Nature of the business
2. Public reputation
3. Quality of management & supervision
4. Subject of AML&CFT investigation
5. Regulatory actions
ii. Institution’s own AML&CFT control quality
iii. Obtain senior management approval

8. POLICIES FOR ML THREAT FROM DEVELOPING
TECHNOLOGIES – NON FACE-TO-FACE BUSINESS

9. CDD THROUGH INTERMEDIARIES/3rd Parties
i. Banks must make every effort to obtain
original identifying documents without delay
ii. Ensure that 3rd party is regulated

10. MAINTAIN DATA FOR AT LEAST 5 YEARS
i. Data maintenance after end of relationship
ii. Records should be sufficient to reconstruct
transactions accurately and available
iii. For domestic & international transactions




11. SPECIAL ATTENTION TO TRANSACTIONS
i. Unusually large
ii. Unusually complex
iii. That form unusual patterns
iv. Are for no apparent economic or visible lawful
reason
v. Their background & purpose should be
examined, documented and highlighted

12. CDD for DNFBP
i. Requirements in 5,6,8,9,10,11 apply
ii. Casinos – financial transaction above
applicable designated threshold
iii. Real Estate Agents – Buying/Selling for their
client
iv. Dealers in Precious Metals & Stones –
transactions above applicable designated
threshold
v. Lawyers, Notaries, Accountants
1. Real estate sale or purchase
2. Managing client money, securities, etc.
3. Managing bank, savings, securities
accounts
4. Setting up companies - contributions
5. Buying/Selling companies (Legal Persons)
vi. Trust & Company services providers when
they are transacting for clients

13. MANDAROTY REPORTING OF SUSPICIOUS ACTIVITY
If a financial institution suspects that funds are the
proceeds of a criminal activity, or are related to
terrorist financing, it should be required by law or
regulation, to report its suspicions promptly to the
financial intelligence unit (FIU).

14. IMMUNITY FOR FI & MANAGEMENT FROM BREACH OF
RESTRICTION ON DISCLOSURE
i. Confidentially reporting any suspicious activity
(STR) to FIU even if it turns out that no illegal
activity was taking place
ii. Prohibiting by law for breach of confidentiality
about the disclosure of STR to FIU

15. DEVELOP AML/CFT PROGRAMS, TRAINING & AUDIT
i. Develop AML/CFT internal policies, procedures
and controls, compliance management and high
level screening process for hiring staff
ii. Ongoing employee training
iii. Audit function to test the system’s robustness
DESIGNATED NON-FINANCIAL BUSINESSES & PROFESSIONS
16. DNFBF - AML/CFT 13, 15 & 21 Apply
i. Lawyers, Notaries
ii. Accountants
iii. Trust & Company Services firms

OTHER MEASURES TO DETER MONEY LAUNDERING &
TERRORIST FINANCING
17. COUNTRIES TO DESIGN AML/CFT SANCTIONS
i. Countries should ensure that effective,
proportionate and dissuasive sanctions, whether
criminal, civil or administrative, are available to
deal with natural or legal persons covered by
these Recommendations that fail to comply with
anti-money laundering or terrorist financing
requirements.
18. PROHIBITION ON ESTABLISHMENT OR DEALING WITH
SHELL BANKS
i. Countries should not allow creation of shell banks
ii. FI’s should not deal with them or with any other FI
that deals with shell Banks
19. COUNTRIES SHOULD CONSIDER CREATING A REPOSITORY
OF TRANSACTION INFORMATION ABOVE A CERTAIN
AMOUNT IN DOMESTIC & FOREIGN CURRENCY
i. Banks and other FIs & intermediaries would report
transactions to a national central agency
ii. Computerized database available to regulators for
AML/CFT checks
iii. Information to be used with strict safeguards
against misuse
20. COUNTRIES SHOULD WIDEN FATF-40 TO OTHER DNFBPs
i. Widen the application to other DNFBPs which pose
an AML/CFT risk
ii. Encourage development of modern money
management techniques which are more difficult
to manipulate
 MEASURES TO BE TAKEN WITH RESPECT TO COUNTRIES
WHICH DO NOT SUFFICIENTLY COMPLY WITH FATF RECS
21. FI’s SHOULD GIVE SPECIAL ATTENTION TO RELATIONSHIPS
& TRANSACTIONS
i. Transactions for no apparent economic or viable
lawful reason should be investigated, documented
and highlighted
ii. FI’s should take their own measures to counter
non-compliance with FATF recommendations
22. SAME SPECIAL ATTENTION TO BE GIVEN TO OVERSEAS
BRANCHES AND MAJORITY OWNED SUBSIDIARIES
REGULATION & SUPERVISION
23. FINANCIAL SECTOR SHOULD BE ADEQUATELY REGULATED
i. FI’s should be registered and licensed and
implementing FATF recommendations
ii. Regulator should ensure criminals or associates do
not own or manage financial institutions
24. DNFBPs S.T. REGULATORY/SUPERVISORY MEASURES
i. Casinos – licensed, free of criminality, supervised
for AML/CFT compliance
ii. Other DNFBPs should be supervised and
monitored for ALM/CFT compliance
25. COMPETENT AUTHORITY SHOULD SET GUIDELINES &
PROVIDE FEEDBACK FOR EFFECTIVE AML/CFT BY FIs &
DNFBPs


 C. INSTITUTIONAL & OTHER SYSTEM MEASURES NECESSARY
FOR AML/CFT
COMPETENT AUTHORITIES, THEIR POWERS & RESOURCES
26. ESTABLISHMENT OF FINANCIAL INTELLIGENCE UNIT (FIU)
i. STR repository doing analysis and dissemination of
information on AML/CFT
ii. FIU should have direct or indirect timely access to
information required for STR analysis :
1. Financial
2. Administrative
3. Law enforcement
27. COUNTRIES SHOULD DESIGNATE LAW ENFORCEMENT
AUTHORITIES FOR AML/CFT INVESTIGATIONS
i. Should develop special investigative techniques
ii. Should develop cooperating with counterparts
overseas
28. DESIGNATED AUTHORITIES SHOULD HAVE REQUIRED
POWERS FOR EFFECTIVE INVESTIGATION
i. Require FI’s to release required documents
ii. Search of persons, premises and for the seizure
and obtaining information
29. AUTHORITY OF SUPERVISOR/REGULATOR
i. Supervisors should have powers to monitor and
ensure ALM/CFT compliance by FIs
ii. They should also be able to conduct audits and
apply administrative sanctions for non-compliance
30. COUNTRIES SHOULD PROVIDE DESIGNATED AUTHORITIES
ADEQUATE FINANCIAL, HUMAN & TECHNICAL RESOURCES
i. Staff should be of the highest integrity

31. COUNTRIES SHOULD ENSURE COORDINATION BETWEEN
POLICY MAKERS, FIU, REGULATORS & LAW ENFOREMENT

32. COUNTRIES SHOULD ENSURE COMPETENT AUTHORITIES
CAN REVIEW EFFECTIVENESS OF THEIR AML/CFT SYSTEMS
i. Maintaining comprehensive statistics on:
1. STR data received and disseminated
2. ML&TF investigations
3. Prosecutions & convictions
4. Property frozen, seized, confiscated
5. Mutual legal assistance
6. International cooperation

TRANSPARENCY OF LEGAL PERSONS & ARRANGEMENTS
33. COUNTRIES – MEASURES FOR PREVENTION OF UNLAWFUL
USE OF LEGAL PERSONS
i. Adequate, accurate and timely information on
control of legal persons
ii. Particularly in countries where legal persons can
own bearer shares – ensure that this provision is
not used for AML/CFT
iii. Beneficial ownership & Control information should
be provided to FI’s as required in Rec 5 above




34. COUNTRIES – MEASURES FOR PREVENTION OF UNLAWFUL
USE OF LEGAL ARRANGEMENTS
i. Adequate, accurate and timely information on
express trusts – settlor, trustees and beneficiaries
ii. Beneficial ownership & Control information should
be provided to FI’s as required in Rec 5 above

35. INTERNATIONAL COOPERATION – Join, Ratify, Implement
i. Vienna Convention
ii. Palermo Convention
iii. UN International Convention for the Suppression
& Financing of Terrorism
iv. Council 0f Europe Convention on Laundering,
Search, Seizure & Confiscation of Proceeds from
Crime
v. Inter-American Convention Against Terrorism
MUTUAL LEGAL ASSISTANCE & EXTRADITION
36. RAPID, CONSTRUCTIVE & EFFECTIVE MUTUAL ASSISTANCE
i. Not place unduly restrictive conditions
ii. Develop a clear and efficient process
iii. Not refuse on “fiscal” nature grounds
iv. Not refuse on Banking Secrecy grounds
v. Avoid and manage conflicts of jurisdiction

37. WAIVE DUAL CRIMANILITY REQUIREMENT, IF ANY
i. Dual criminality, is a requirement in the
extradition law of many countries.
ii. It states that a suspect can be extradited from one
country to stand trial for breaking a second
country's laws only if a similar law exists in the
extraditing country.

38. AUTHORITY TO IDENTIFY, FREEZE, SEIZE & CONFISCATE
i. Develop provisions to take these actions on the
request of a foreign law enforcement agency:
1. Proceeds from ML or predicate offences
2. Instrumentalities employed in the crime
3. OR Property of corresponding value
ii. Develop provisions for coordinating of seizure &
confiscation proceedings and sharing of seized
assets.

39. RECOGNISE MONEY LAUNDERING AS EXTRADITABLE
OFFENCE
i. Change laws to make ML offences extraditable
ii. Simplify extradition by making it effective through
inter-ministry coordination based on court
judgements.
iii. Simplify extradition process for individuals
choosing to waive formal extradition proceedings
iv. If not possible, ensure seamless cooperation in
evidence sharing and criminal prosecution.
OTHER FORMS OF COOPERATION
40. REITERATING IMPORTANCE OF COMPLETE COOPERATION
i. Countries should create an atmosphere of
complete cooperation
1. No refusal due to “fiscal” nature
2. No refusal due to Bank Secrecy
3. Conduct enquiries on behalf of foreign
counterparts
4. Approach foreign “non-counterparts” but only
after first approaching counterparts
5. Establish safeguards to ensure share
information is used solely in an authorized
manner within obligations for privacy and
data protection.


Required Reading:

Articles:

The FATF ‘grey list’ means more for Pakistan than you think, Farooq Tirmizi
– March 5, 2018, Profit (Magazine)

FATF grey list implications, Babar Ayaz – March 10, 2018, Daily Times
(Newspaper)