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Webinar Synopsis – The Financial Action Task Force (FATF)’s Compliant Countries: Lessons for Non-Compliant Jurisdictions

Synopsis of the Global South Dialogue on Economic Crime (GSDEC)’s Inaugural Webinar themed The Financial Action Task Force (FATF)’s Compliant Countries: Lessons for Non-Compliant Jurisdictions

On 26 February 2021, the Global South Dialogue on Economic Crime (GSDEC) hosted a webinar themed ‘The Financial Action Task Force (FATF)’s Compliant Countries: Lessons for Non-Compliant Jurisdictions’. The webinar focused on exploring the best practices of the FATF’s most compliant countries (Bermuda, the United Kingdom and Spain) following the FATF’s 4th Mutual Evaluation Report Round or its equivalents. It further examined lessons that non-compliant jurisdictions can learn to improve their compliance trajectory. Speakers addressed the practice of jurisdictional compliance in a manner that facilitated a cohesive understanding of lessons for non-compliant countries. Speakers’ presentations are adumbrated below.

Jennifer Haslett, examined key factors that countries must consider in preparing for mutual evaluations. She stated that timing, accountability and coordination (TAC) are three critical factors for ensuring enhanced compliance and effectiveness outcome. On timing, she stated emphatically that thoroughly prepared countries perform better on the FATF’s evaluation as they do not consider the FATF’s assessments a one-off but prepare adequately and imbibe standards as ‘ongoing-processes’ towards tacking illicit financial flows. Conversely, countries with minimal overall strategy or engagement are hindered in tackling financial crime or meeting the requisite standards. Furthermore, she emphasized that mock assessments are critical to preparing countries for real assessments. This is because it exposes the weaknesses of countries, heightens inter-agency collaboration, enhances procedural familiarity and advances preparedness, thereby potentially catalyzing improved ratings of countries who have more time to address identified challenges.

Jennifer further highlighted the critical importance of accountability in a country’s assessment management. She contended that having a focal person (backed by a team) responsible for communicating with the assessment team, the supervisory bodies and other relevant actors is critical. She recommended that such focal person must have strong inter-personal skills to resolve disputes alongside the knowledge, capacity and seniority that can drive change. More importantly, she emphasized the need for political backing necessary to foster agency accountability. Jennifer typified this with the United Kingdom (UK) where a government minister was integral to the assessment processes and facilitated information sharing across relevant government departments and agencies – actions which were critical in getting other agencies on board.

Lastly, Jennifer highlighted the crucial need for coordination. She pointed out that the FATF assessments are complex because they cover all elements of systems within countries – systems that ordinarily work in silos. Yet, the FATF assessment warrants an assemblage of law enforcement actors, supervisors, company registries, private sector, non-profit sector etc. that ordinarily have minimal engagement. Forming a representative team comprising of these actors and guided by procedures is challenging but necessary for a comprehensive assessment process. She concludes by stating that whilst no system is perfect, continued improvement is critical.

Professor Nicholas Ryder discussed ‘Terrorism Financing and Fraud: The FATF’s Mutual Evaluation Report on the United Kingdom’. He commenced by examining the UK’s compliance strategy, stating that, whilst impressive, no country is perfect with regards tackling illicit financial flows. Within this context he emphasized the existing disconnect between the fraud and terrorist financing strategy in the UK as the necessary documents (National Fraud Authority, the Strategic Document etc.,) are silent on potential nexus. The silence perpetuates irrespective of the nexus established by a chain of literature (IMF, FATF, Interpol, UK Treasury Department, Woodford and Smith etc.). Professor Ryder argued that the UK’s silence is not mimicked by the United States where 17% of terrorism financing prosecutions involved fraud and a quarter of convictions involving terrorism were linked to fraud. Conversely, the UK recorded 114 terrorism convictions and only 3 were fraud related.

Ryder argued that UK’s fraud/terrorism financing strategy disconnect is largely attributable to information exchange challenges between agencies. For instance, critical information from Her Majesty’s Revenue and Customs (HMRC) was not provided to the UK security services on grounds of taxpayer confidentiality despite home office guidance, and three pieces of legislation specifically allowing exchange of information. This is contrary to the position in the US. Consequently, Ryder concluded that the disconnect between fraud and the UK’s counter terrorism financing strategy which is heightened and masked by information exchange challenges. He calls for government focus on this area potentially solvable through the Joint Money Laundering Intelligence Task Force (JMLIT).

Professor’s Ryders research was partly funded by RUSI and partly financed through Innovate UK in relation to Activist Financing Research and Development Program.

Professor Abel Miguel-Souto considered ‘Spain’s Technical Compliance and Effectiveness: Lessons for Least Compliant Jurisdictions’. He emphasized the country’s recognition as the second-highest compliant countries with full compliance with 25 recommendations, largely compliant with 12 and partially compliant with 3 recommendations. He stated that on record, there is no recommendation that Spain is not compliant with. Furthermore, he highlighted the country’s rating on pertinent areas. Noting the absence of perfection in any country, he contended that money laundering vulnerabilities remains evident across pertinent areas in Spain. These include the activities of criminal organizations from the Gibraltar area, North Africa, Latin America and former Soviet Union involved with these drugs crimes, customs offenses, counter fighting and human trafficking, Islamist terrorist groups, returning foreign terrorist fighters, abuse of nonprofit organizations, providing funds for terrorism. Other vulnerable areas include the real estate sector alongside the money value transfer sector.

He, however, highlights that Spain has taken critical steps to curb identified money laundering vulnerabilities, which included the adoption of new regulation and strategies. These have facilitated the introduction of a beneficial ownership register, enforcement of registration and declaration of real owners. More particularly, Spain created a National Registry of Foundations alongside a Centralized Body for the Prevention of ML/TF of the Council of Companies, land and Personal Property Registrars (CRAB). Additionally, it has applied the EU Wire Transfer Regulations (2015/847) which facilitates information transparency on payments from origination to destination. Spain’s banking sector, its strongest financial sector is now ranked as the most compliant. In concluding, he stated that Spain trajectory indicates that countries can improve their compliance with the FATF standards with tailored practical steps.

Cheryl-Ann Lister examined ‘Bermuda’s Technical Compliance and Effectiveness: Lessons for Least Compliant Jurisdictions’. She stated that as the FATF most compliant jurisdiction, critical steps which included inter-agency focus, consistency and core understanding of the country’s treats of vulnerabilities and threats were critical to improved ratings. She mentioned that having assumed the chair of the National Anti-Money Laundering Committee (NAMLC) since 2008, she was involved in appraising the previous recommendations on past assessments. After the FATF’s overhaul, her team engaged in series of meetings to facilitate improved understanding of the FATF’s intention on the recommendations and compliance. Consequently, by 2013, the country had clear understanding of the cruciality of risk for improved compliance and Bermuda embarked on its first risk assessment of money laundering vulnerability and threats. Resulting publications warranted high level political commitment from relevant ministers and the Premier. The subsequent anti-money laundering committee which advanced inter-agency collaboration included these government officials.  Cheryl emphasized that government buy-in was critical to improved compliance.

Furthermore, Cheryl emphasized that robust understanding the threats/vulnerabilities was critical to improved ratings it aids in mitigating them. She highlighted that the country’s engagement in National level risk assessments on ML and TF inculcated private sector participation. Additionally, Bermuda had a mechanism for cooperation and coordination at the domestic level with the NAMLC at the center of it. These structures, supported by a strong and robust system of supervision spearheaded by the Bermudan Monetary Authority coupled with a framework for supervision for designated non-business and professionals (DNFBPs) and the non-profit sector enhanced Bermuda’s compliance rating outcomes. Moreover, the country focused on private sector training, outreach and partnerships to make them integral to the process of compliance. Additionally, the country has developed frameworks for international cooperation, and with conjunction with the UK, established a robust framework for terrorist financing.

Cheryl emphasized that irrespective of its height of achievements, it would not rest on its laurels, but would work on ensuring that its regime is as robust as possible whilst not being overly burdensome. She closed by stating that ‘Bermuda’s reputation has and will continue to be built on a strong history of knowing our clients and compliance with international standards within a risk-based risk-focused framework that is conducive to quality and ethical business. That is what Bermuda is about, seeks to be about, and that is what all of this work has been done to emphasize, and to ensure that we can continue to have a reputation as a quality International Financial Center.’

Professor Shehu discussed ‘What Lessons for West African Countries’, looking particularly at lessons that West African countries can learn from highly compliant countries to improve theirs. He highlighted that contextually West Africa remains one of the least developed regions but is not least in terms of compliance with the FATF recommendations. Indeed, there is significant compliance improvement with GIABA countries, as compared to their previous evaluation outcomes. Yet, there is still room for improvements given the challenges with regards effectiveness. He highlighted that none of the GIABA countries attained one ‘highly effective’ rating with regards the immediate outcomes. Ghana barely received a substantial rating on immediate outcome 2 but recorded low effectiveness on all other IOs which was particularly worrying given the FATF’s concerns with respect to IO 4, 5, 6 and 9. Ghana’s situation is reflective of the occurrence across the GIABA countries.

Consequently, Prof Shehu noted that there are significant issues to highlight. First, whilst there is significant improvement in technical compliance, effectiveness is still weak. Secondly, there is significant weakness in the AML system in West Africa as most systems remain undeveloped despite efforts to improve them. Thirdly, institutions, despite investments in capacity, training, equipment etc. remain weak in terms of regulatory and enforcement functions. Lastly, dearth of human and material resources, requiring continuous training and capacity advancement for those involved in the mutual evaluation alongside regulatory/enforcement actors. Drawing inspiration from compliant countries, Prof Shehu makes some recommendations. First, he contends that there is a need for observable and strong political will, which needs to be transparently demonstrated in terms of institutional outputs. In such circumstances, political authorities are to refrain from interfering with law enforcement with respect to money laundering offences. Rather, they are to channel resources to relevant institution to strengthen their capacity whilst ensuring effective coordination nationally and internationally. Second, the need for sustained capacity building – in terms of training and equipment for the prevention and control of money laundering. Third, the need for the strengthening of institutions of governance especially those responsible for preventing money laundering and terrorist financing. Lastly, the need to examine the factors that inhibit effectiveness, such as corruption and transnational organised crime which catalyzes vulnerabilities and create money laundering risk. Professor Shehu concludes that good governance is critical to circumvent the enablers such as corruption, transnational organised crime etc. with the aim of preventing money laundering occurrences.

Stuart Yikona examined the ‘AML/CFT Implementation Challenges for Developing Countries’. He made three key points. Firstly, on political economy. He contended that it is necessary for supervisory and law enforcement agencies to have the necessary space to implement anti money laundering and terrorist financing laws.  Secondly, he argued that space should be accompanied by human, financial and technological resources to facilitate operational autonomy. Currently, there is a pretention of basic political commitment undermined by the limited resources provided to agencies tasked with implementing an effective AML regime. Thirdly, independent operation of agencies with expertise, capacity, competence and no interference. Presently, whilst some agencies have strong systems in place, this is not the case with others – as for instance, whilst the investigators and prosecutors may be strong, the judiciary may have weak understanding of financial crime, which is problematic. He contends that these issues are interrelated as within developing countries you cannot divorce these challenges from developmental concerns. For instance, where a country is observably politically committed, it may have other priorities, regarding education, health, infrastructure, addressing poverty or even digitalization of the economy which compete with addressing financing crime. Indeed, focus on these legitimate developmental priorities are tangible and can dictate electoral outcomes, which creates a dilemma regarding resource allocation.

Yikona contends that core to these points is an implementation challenge hinged on capacity and skills dearth, an occurrence in many developing countries. Whilst there is improvement regarding supervision/regulation, there is a need for continuous training and capacity building. The weak effectiveness evidences the failing implementation even with improving technical compliance. For instance, there is lack of ability to leverage the financial information from financial intelligence units to assist in examining financial flows from corruption, fraud, or tax evasion in terms of where that money is going, where those proceeds of criminal activities are being invested. The reason is because this requires some painstaking, meticulous understanding of how to undertake forensic investigations.

Beyond this Yikona argued that countries have bare understudying of their vulnerabilities and risks. He typifies this with a personal experience where top criminal activities generating proceeds of crime involved corruption, tax evasion, fraud, or drug trafficking, yet the national risk assessment reports or mutual evaluation reports are not focusing on these threats. So beyond perfecting financial investigations, it is critical to question whether the country is focusing on identified threats. Finally, he contends that domestic coordination between the public and private sectors informed by the country’s national risk assessment is critical.

Jean-Pierre Brun discussed ‘AML/CFT Assessment Processes: Observable Challenges in Developing Countries’. Brun contends that that his experience in evaluations have occasioned an understanding of critical factors necessary to achieving good evaluation reports. He discussed five factors. First, coordination mechanisms. He stated that Bermuda, UK and Spain’s successes was hinged on their strong coordination. Second, the quality of the risk-based approach, and its implementation. He stated that the application of RBA in a manner central to the national and sectoral risk assessment is critical. Beyond banks, it needed to encapsulate other sectors/actors involved in the fight against money laundering, including lawyers, real estate agents, casinos amongst others, as whilst banks have sturdy supervision, this is not necessarily the case externally. Furthermore, threat analysis is critical to understand the threat of predicate offences within a particular jurisdiction. These are core to a good evaluation. Three, the capacity to produce data and statistics. He argued that countries need to have adequate data on what they are doing – the number of convictions, confiscations, the amounts involved, number of supervision missions, sanctions applied etc. Very often, there are challenges with gathering significant data but only qualitative information which making the report writing very challenging especially as backing up assertions is difficult. This has usually led to bad results in terms of evaluation. Four, the quality of the supervision, on the banking system and other professionals involved in fighting money laundering. It should be risk-based and applied with good resources and practices within the banking sector and outside it. Five, the quality of the prosecution and investigation that is conducted in the context of money laundering crime and predicate offenses must be robust. He emphasized the importance of engaging with internal mutual legal assistance. He stated that addressing this issue is critical to improving disappointing evaluation reports.

Dr Nkechi Valerie Azinge-Egbiri summed up the discussions, stating the conversations illustrate that whilst correlations exist between the FATF compliant countries regarding their compliance strategies, which are backed studied preconditions for effective regulations, they are still challenges within these countries which need to be addressed. Conversely, there are lessons to be learnt by non-compliant countries which must be applied contextually factoring their national risk assessments.  Fundamentally, she emphasized that some critical factors that undermine these countries’ compliance trajectory cannot consistently be glossed over. She stated that many jurisdictions lack the necessary preconditions for compliance such as capacity, resources and most particularly, political will. Consequently, there are contentions that some recommendations may indeed have paradoxical implications for non-compliant developing countries. And the assessment process in itself may have margins for errors that will then affect eventual ratings. She stated that these challenges in themselves pose a critical hindrance to financial crime to combating financial crime within developing countries, particularly within the global south, where incidentally, many illicit funds flow out of. She concluded by stating that these challenges form building blocks for further conversations on this topic.