2 Establishing an FIU
- International Monetary Fund
- Published Date:
- June 2004
In their simplest form, FIUs are agencies that receive reports of suspicious transactions from financial institutions and other persons and entities, analyze them, and disseminate the resulting intelligence to local law-enforcement agencies and foreign FIUs to combat money laundering (see Figure 1).
Figure 1.Typical FIU Information Flow
Source: Adapted from FINTRAC (Canada) 2001 Annual Report, Appendix III.
Establishing an FIU is an important step in combating financial crime. As such, it should be based on criminal policy considerations specific to each country, and the basic features of the FIU should be consistent with the supervisory framework of the country, as well as with its legal and administrative systems and its financial and technical capabilities. The process of establishing an FIU is discussed in the next section. The establishment of an FIU also responds to international norms and standards, and these are discussed in the section on “International Considerations.” As a government agency, the FIU must be given the degree of autonomy necessary to fulfill its responsibilities while being accountable for the results it achieves. This is discussed in the section on “Institutional Autonomy and Accountability.” Organization and staffing issues are discussed in the following section.
Steps in Establishing an FIU
The establishment of an FIU signals the determination of country authorities to heighten the priority they accord to combating financial and other crimes in the country, and to cooperating with other countries in this regard. An effective FIU can make a significant contribution to combating these crimes nationally and internationally.
Although, in establishing an FIU, authorities may feel the need to respond to the calls of the international community, their decisions as to the FIU’s functions and the modalities of its operations need to be based on the country’s own crime-fighting policy objectives, resources, and priorities. The responsibilities of the FIU also need to be harmonized with those of existing national agencies involved in the fight against financial crime, including law-enforcement and supervisory agencies and policy-setting government bodies.
Moreover, the establishment of an FIU will entail the use of budgetary resources. As a matter of good public administration, the objectives pursued by the establishment of the FIU need to be defined; and the FIU must be given the means to successfully pursue these objectives, for which it will become accountable. Care should be taken not to give the FIU more responsibilities than it can cope with, given its expected resources. In some cases, other agencies that have resources and experience may be in a position to exercise certain functions, such as the supervision of AML/CFT requirements, in a more effective way that an FIU. Overlapping functions should be avoided to the extent possible, and to the extent such overlap is unavoidable, coordination mechanisms should be established to minimize conflicts and maximize cooperation between the concerned agencies.
It follows that the establishment of an FIU and the determination of its functions and resources should be based on an analysis of the country’s situation with respect to money laundering, the financing of terrorism, and serious crime in general. In this connection, it is useful to note that one of the critical functions of an FIU is the exchange of information with other FIUs. In addition to the contribution the FIU can be expected to make in combating domestic crime, it will also be called upon to respond to requests for intelligence from other FIUs.
Also to be considered are the general features of the country’s legal system, and the existing strengths and weaknesses of the government agencies where the FIU could be located. As will be seen in the next section, some arrangements with regard to the placement of the FIU in the government structure are tailored to the particular features of the legal and administrative systems of a country. Similarly, relative strengths and weaknesses of the agencies where the FIU may potentially be located need to be assessed, since it may not be prudent to establish an FIU within an administration that does not enjoy the trust of those under its authority. The challenges countries face in establishing FIUs are often considerable. In the small developing island economies, these challenges can become daunting. (See Box 8.)
Political support is necessary to ensure the success of the FIU. Such support is needed not only to secure the adoption of the law establishing the FIU but also, on a continuing basis, to ensure that the FIU receives sufficient budgetary resources to achieve its objectives.
The analysis of the issues that a country faces in terms of financial crime and the role the FIU will play in meeting the country’s criminal policy objectives will make it possible to sketch the FIU’s broad outlines, status, and functions. Among the key elements of this outline are the following:
The basic objectives to be pursued by the FIU;
the authority and functions necessary to achieve its objectives;
any functions the FIU will be required to exercise in addition to the core functions (such as, for example, the supervision of reporting entities’ compliance with reporting or other obligations, and the freezing of transactions);
the means to ensure the operational autonomy and the accountability of the FIU;
the basic transaction-reporting requirements: who reports and what is reported (for example, suspicious transactions, cash transactions, cross-border movements of cash);
the general size of the FIU (after a start-up period) in terms of budget or staff, in relation to the expected flow of information to and from the FIU and any additional responsibilities assigned to the FIU;
the role of the FIU in relation to other national agencies and government bodies and to other FIUs, including the exchange of information; and
the location of the FIU in the administration, its autonomy and accountability, and the means to make it operational.
After these key issues have been decided, an executive team may be formed to start the process of establishing the FIU. At this stage, drafting of the law may be initiated, incorporating the decisions on the above topics.
Consultations with Private Sector
In many countries, it has been found productive to discuss the proposed FIU and the draft law with the representatives of the segments of the private sector that will be most directly affected by the establishment of the new AML/CFT regime. Most of the information to be provided to the FIU will come from the private sector, and most of the latter will come from the financial sector. Consulting the representatives of the most directly concerned sectors before the draft legislation is presented to parliament can have a number of advantages.
First, consulting the private sector offers the government an opportunity to build confidence in the proposed agency on the part of the institutions that will be required to send suspicious-transaction and other reports to it. Second, such consultations should facilitate understanding of the new obligations to be imposed on the financial and other sectors, and thus facilitate discussion in parliament. Third, for the FIU, the consultations may help the planners, and later the FIU itself, in developing requirements for reporting transactions that can realistically be expected to be followed by the reporting entities. And fourth, for the reporting entities, the advance consultations will serve to make the concerned institutions aware of their future obligations and the related need to develop the necessary programs to fulfill their obligations.
Early consultations with the private sector will also provide an opportunity for the authorities to highlight the benefits of the new system to financial and other institutions that will have to begin reporting transactions to the FIU. The adoption of an AML/CFT framework can reduce the risks of the sector being negatively affected by instances of fraud, money laundering, and other financial crimes perpetrated through their institutions. The fact that the framework would be based on international standards reflecting worldwide practice that would protect the financial and economic environment of the country can also be highlighted.
Financing an FIU
To be able to achieve its objectives, an FIU needs resources commensurate with its size and the amount of data it is expected to receive, process, and disseminate.7 This, in turn, is a function of the size and variety of financial and nonfinancial entities that will provide reports to the FIU, and the scope of the reporting obligation. Other responsibilities that may be assigned to the FIU also need to be taken into account in determining its resource needs. The location of the FIU in a ministry or government agency may reduce some of its operational costs somewhat (for example, if personnel management and building maintenance costs are either absorbed centrally or shared with others parts of the same ministry or agency). Some costs specific to the FIU, however, such as those for specially trained staff or high-level computing facilities, may be substantial and should be factored into the preparation of the FIU budget.
Most FIUs are financed directly from the state budget. For example, most administrative-type FIUs8 that are part of a ministry of finance have their own budget within the budget of that ministry (for example, Korea’s KoFIU, Monaco’s SICCFIN, Slovenia’s OMLP, and the United States’ FinCEN). Law-enforcement-type FIUs are usually financed by the police, the ministry of interior, or the prosecution service (for example, Estonia’s RA, Jersey’s FCU, and Hungary’s ORFK).9 (See Appendix III for definitions of abbreviations of the names of countries’ FIUs.)
Some FIUs are cofinanced by different state authorities or ministries. For example, the MOT in the Netherlands and the MOT in the Netherlands Antilles receive their financing under an arrangement between the Netherlands’ Ministry of Finance and the Ministry of Justice. A small number of FIUs are partly or wholly financed by the central bank or the financial sector supervisory agency of the country (for example, Bolivia’s UIF, Italy’s UIC, Spain’s SEPBLAC, and Venezuela’s UNIF). Some FIUs are placed directly under the government, outside the budget of any other agency, and are financed as a separate budgetary unit (for example, Colombia’s UIAF, Panama’s UAF, and Romania’s ONPCSB).
In all countries, the reporting institutions and professionals must absorb their own costs of implementing the AML/CFT laws, including the costs of setting up systems for detecting and reporting suspicious and other transactions. In countries where the FIU’s budget comes from the financial sector supervisory agency, the FIU may be indirectly financed by the contributions, levies, and fines imposed on the supervised institutions. In Belgium, the reporting institutions contribute directly to the financing of the FIU’s operations. The Belgian FIU’s operational expenses are paid without any contribution from the federal budget.10 The budget ceiling is set annually by agreement between Belgium’s Ministers of Finance and Justice.11 The bulk of the contributions is provided by credit institutions, insurance companies, and stock market brokers and dealers, while the central bank, the postal service, and other reporting entities and professionals pay a small portion.12 The main advantage of this arrangement is that the FIU is shielded from the political vagaries of budget making, which contributes to the FIU’s independence. It is noteworthy, however, that no other country has adopted this approach. It may be that the idea of financing the operations of a public agency with funds levied directly from the private sector entities subject to its jurisdiction does not fit well in the public finance framework of most countries or that this arrangement does not necessarily guarantee that the FIU will receive a sufficient amount of resources over time.
Types of FIUs
Over the years, countries have established FIUs for the general purpose of combating money laundering and have generally given them the three core functions that are part of the accepted definition of an FIU. The administrative arrangements by which these functions are carried out, however, vary considerably from country to country. These variations arise from different country circumstances, together with the lack of an internationally accepted model for the functions of an FIU in the early 1990s, when the first such units were established. For example, in some countries, the function of the FIU as an additional tool for law-enforcement organizations in combating money laundering and associated crimes was emphasized, and this led to the establishment of the FIU in an investigative or prosecutorial agency. Other countries emphasized the need for a “buffer” between the financial institutions and the police, and consequently their FIUs were established outside these agencies.
The wide variety of arrangements for FIUs may be summarized under four general headings: the administrative-type FIU, the law-enforcement-type FIU, the judicial- or prosecutorial-type FIU, and the “mixed” or “hybrid” FIU.13 It should be emphasized, however, that such classification is, to a certain degree, arbitrary and that other ways of classifying FIUs are possible. Nevertheless, these categories illustrate the wide variety of administrative arrangements under which FIUs are established. While these are not exhaustive lists, advantages and disadvantages of each type of FIU are summarized in Boxes 1, 3, and 5, respectively; and, by way of examples, the main features of an administrative-type FIU (the OMLP of Slovenia) and a law-enforcement-type FIU (the National Criminal Intelligence Service (NCIS) of the United Kingdom), are set out in Boxes 2 and 4, respectively.
Administrative-type FIUs are usually part of the structure, or under the supervision of, an administration or an agency other than the law-enforcement or judicial authorities. They sometimes constitute a separate agency, placed under the substantive supervision of a ministry or administration (“autonomous” FIUs) or not placed under such supervision (“independent” FIUs). The main rationale for such an arrangement is to establish a “buffer” between the financial sector (and, more generally, entities and professionals subject to reporting obligations) and the law-enforcement authorities in charge of financial crime investigations and prosecutions. Often, financial institutions facing a problematic transaction or relationship do not have hard evidence of the fact that such a transaction involves criminal activity or that the customer involved is part of a criminal operation or organization. They will therefore be reluctant to disclose it directly to a law-enforcement agency, out of a concern that their suspicion may become an accusation that could be based on a wrong interpretation of facts. The role of the FIU is then to substantiate the suspicion and send the case to the authorities in charge of criminal investigations and prosecutions only if the suspicion is substantiated.
The actual administrative location of such FIUs varies: the most frequent arrangements are to establish the FIU in the ministry of finance, the central bank, or a regulatory agency. A few have been established as separate structures, independent of any ministry (CTIF/CFI in Belgium, for example). In most cases, the decision to establish the FIU outside the law-enforcement system also leads to the decision that the FIU’s powers will be limited to the receipt, analysis, and dissemination of suspicious transaction and other reports, and that they will not be given investigative or prosecutorial powers. Similarly, the powers of the FIU to disclose the information contained in transaction reports is usually defined narrowly, to preserve the confidential character of the information provided to it.14 Administrative-type FIUs may or may not be responsible for issuing AML/CFT regulations or for supervising compliance with AML/CFT laws and regulations on the part of reporting institutions.
Box 1.Administrative-Type FIUs
The FIU acts as an interface between the financial and other sectors subject to the reporting obligation, on the one hand, and law-enforcement authorities on the other hand, thus avoiding the creation of direct institutional links between these institutions and law-enforcement agencies while bringing disclosures to the attention of law-enforcement agencies.
Financial institutions are more confident about disclosing information if they know that dissemination will be limited to cases of money laundering and financing of terrorism and will be based on the FIU’s own analysis rather than the reporting institution’s limited information.
The FIU is a “neutral,” technical, and specialized interlocutor for the reporting parties.
If the FIU is placed in a regulatory agency, it is the natural interlocutor of the financial institutions.
Information can be easily exchanged with all types of FIUs.
Because the FIU is not part of the law-enforcement administration, there may be a delay in applying law-enforcement measures, such as freezing a suspicious transaction or arresting a suspect, on the basis of financial disclosures.
The FIU usually does not have the range of legal powers that law-enforcement agencies and judicial authorities have to obtain evidence.
The administrative-type FIUs (unless they are truly independent) are more subject to the direct supervision of political authorities.
Examples of countries with administrative-type FIUs include Andorra, Aruba, Australia, Belgium, Bolivia, Bulgaria, Canada, Colombia, Croatia, the Czech Republic, France, Israel, the Republic of Korea, Liechtenstein, Malta, Monaco, the Netherlands, the Netherlands Antilles, Panama, Poland, Romania, Russia, Slovenia, Spain, Ukraine, the United States, and Venezuela.
By making an administrative authority a “buffer” between the financial institutions and law-enforcement sectors, authorities can more easily enlist the cooperation of reporting institutions, which are often conscious of the drawbacks vis-à-vis their clients of having direct institutionalized links with law-enforcement agencies. Administrative-type FIUs are often preferred by the banking sector. They may also appeal to other institutions and professionals that have been added to the list of reporting entities for the same reasons.
Box 2.Example of an Administrative-Type FIU: Slovenia’s Office for Money Laundering Protection (OMLP)
|Budget for 2003|
|Approximately $670,000—more than 80 percent of which is used for personnel charges.|
|The director, two administrative staff (one with an undergraduate degree, one with a graduate degree), and 12 highly educated individuals with at least a bachelor’s degree in law, computer science, or economy.|
|Functions and Powers|
|Other legal powers|
In some countries, the emphasis on the law-enforcement aspects of the FIU led to the creation of the FIU as part of a law-enforcement agency, since this was the easiest way to establish a body with appropriate law-enforcement powers without having to design from scratch a new entity and a new legal and administrative framework.
Operationally, under this arrangement, the FIU will be close to other law-enforcement units, such as a financial crimes unit, and will benefit from their expertise and sources of information. In return, information received by the FIU can be accessed more easily by law-enforcement agencies and can be used in any investigation, thus increasing its usefulness. Exchange of information may also be expedited through the use of existing national and international criminal information exchange networks.
Box 3.Law-Enforcement-Type FIUs
built on an existing infrastructure, so there is no need to set up a new agency;
maximum law-enforcement use can be made of financial disclosure information;
quicker law-enforcement reaction to indications of money laundering and other serious crimes;
information can be exchanged using the extensive network of international criminal information exchange networks (such as Interpol); and
easy access to criminal intelligence and to the intelligence community at large.
tends to be more focused on investigations than on prevention measures;
law-enforcement agencies are not a natural interlocutor for financial institutions; mutual trust must be established, which may take some time, and law-enforcement agencies may lack the financial expertise required to carry out such a dialogue;
the FIU usually does not receive data on currency transactions above a fixed amount;
gaining access to the financial organizations’ data (other than the reported transactions) usually requires the launching of a formal investigation;
reporting institutions may be reluctant to disclose information to law enforcement if they know it could be used in the investigation of any crime (not just money laundering and the financing of terrorism); and
reporting institutions may be reluctant to disclose information to law enforcement on transactions that are no more than “suspicious.”
Examples include Austria, Estonia, Germany, Guernsey, Hungary, Iceland, Ireland, Jersey, Slovakia, Sweden, and the United Kingdom.
Also, a law-enforcement-type FIU will normally have the law-enforcement powers of the law-enforcement agency itself (without specific legislative authority being required), including the power to freeze transactions and seize assets (with the same degree of judicial supervision as applies to other law-enforcement powers in the country). This is likely to facilitate the timely exercise of law-enforcement powers when this is needed.
Box 4.Example of a Law-Enforcement-Type FIU: United Kingdom’s National Criminal Intelligence Service (NCIS)
|Budget and Staff (2004, Financial Intelligence Division only)|
|Approximately £4 million, more than 88 percent of which is used for personnel charges (staff: 120).|
|Functions and Powers|
|Other legal powers|
Judicial or prosecutorial-type FIUs
This type of FIU is established within the judicial branch of the state and most frequently under the prosecutor’s jurisdiction. Instances of such an arrangement are found in countries with a continental law tradition, where the public prosecutors are part of the judicial system and have authority over the investigatory bodies, allowing the former to direct and supervise criminal investigations.
Disclosures of suspicious financial activity are usually received by the prosecutor’s office, which may open an investigation if suspicion is confirmed by the first inquiries carried out under its supervision. The judiciary’s powers (e.g., seizing funds, freezing accounts, conducting interrogations, detaining suspects, and conducting searches) can then be brought into play without delay. Judicial and prosecutorial FIUs can work well in countries where banking secrecy laws are so strong that a direct link with the judicial or prosecutorial authorities is needed to ensure the cooperation of financial institutions. It may be noted that the choice of the prosecutor’s office as the location of an FIU does not exclude the possibility of establishing a police service with special responsibility for financial investigations. Also, in many countries, the independence of the judiciary inspires confidence in financial circles.
The principal advantage of this type of arrangement is that disclosed information is passed from the financial sector directly to an agency located in the judiciary for analysis and processing.
Box 5.Judicial or Prosecutorial-Type FIUs
usually have a higher degree of independence from political interference;
disclosure information is brought directly to the agency authorized to investigate or prosecute; and
allows the judiciary’s powers (e.g., seizing funds, freezing accounts, conducting interrogations, detaining people, conducting searches) to immediately be brought into play.
generally has the same disadvantages as are listed in the first five bullets of Box 3 on law-enforcement-type FIUs; and
may have difficulty exchanging information with nonjudicial or prosecutorial FIUs.
Examples are Cyprus and Luxembourg.
This last category encompasses FIUs that contain different combinations of the arrangements described previously. This hybrid type of arrangement is an attempt to obtain the advantages of all the elements put together. Some FIUs combine the features of administrative-type and law-enforcement-type FIUs, while others combine the powers of the customs office with those of the police. For some countries, this is the result of joining two agencies that had been involved in combating money laundering into one. It may be noted that in some FIUs listed as administrative-type, staff from various regulatory and law-enforcement agencies work in the FIU while continuing to exercise the powers of their agency of origin. Among the countries that have established “hybrid” FIUs are Denmark, Jersey, Guernsey, and Norway.
Although the international community quickly developed standards on combating money laundering in general, mostly through the work started by the FATF in 1989, formal recognition of the FIU as a crucial element in anti-money-laundering strategy is more recent. In the 1990 FATF Recommendations, mention was made of the need for financial institutions to report suspicious transactions to “the competent authorities,” but these “competent authorities” were not defined, and could be any government agency designated for the purpose. It is only with the issuance of the 2003 Recommendations that the FATF Recommendations recognized the need for an FIU in the sense defined by the Egmont Group.
The FATF Recommendations
The 1990 FATF Recommendations mentioned “competent authorities” for receiving and processing suspicious-transaction reports.15 The recommendations touched upon the main roles of “competent authorities” and alluded to some of the functions and attributes that could be vested in such authorities (without requiring that FIUs have all of them): receiving suspicious or currency transactions above a certain limit; giving instructions to financial institutions; having a computerized database, compliance control and supervision powers, and regulatory powers; issuing guidelines; and carrying out international information exchange. Some of the rules governing suspicious-transaction reports were also set out in the recommendations, such as the immunity enjoyed by those who make reports to the FIU in good faith and the rule against “tipping off.”16 At about this same time, the first national FIUs were being established. The 1996 FATF Recommendations did not introduce major changes in the manner in which the recommendations referred to “central authorities” in the context of reporting suspicious transactions.17
The FATF Special Recommendations on Terrorist Financing, adopted in October 2001, broadened the scope of the reporting obligation to include transactions suspected of being related to terrorist financing.18 The issuance of the revised 40 FATF Recommendations in June 2003 marks an important milestone in the evolution of the FATF’s approach to FIUs. Largely on the basis of the work of the Egmont Group, the recommendations, for the first time, explicitly mention the FIU as the recipient of reports of suspicious transactions and specify that countries should establish FIUs.19 With the FIU firmly established as one of the “competent authorities” in the AML/CFT system, Recommendation 30, which specifies that competent authorities should have adequate financial, human, and technical resources, clearly applies to FIUs. Similarly, Recommendation 40, which specifies that countries should ensure that their competent authorities provide “the widest possible range of international cooperation to their foreign counterparts” and that “exchanges should be permitted without unduly restrictive conditions,” also applies to FIUs.
Box 6.Egmont Group of Financial Intelligence Units
The fight against money laundering has been an essential part of the overall struggle to combat illegal narcotics trafficking; the activities of organized crime; and, more recently, the financing of terrorist activity. It became apparent over the years that banks and other financial institutions were an important source of information about money laundering and other financial crimes being investigated by law-enforcement. Concurrently, governments around the world began to recognize the corrosive dangers that unchecked financial crimes posed to their economic and political systems.
To address that threat, a number of specialized governmental agencies were created as countries around the world developed systems to deal with the problem of money laundering. These entities are now commonly referred to as “financial intelligence units” or “FIUs.” They offer law-enforcement agencies around the world an important avenue for information exchange.
In 1995, a group of FIUs meeting at the Egmont Arenberg Palace in Brussels decided, in view of the benefits inherent in the development of a FIU network, to establish an informal group for the stimulation of international cooperation. Now known as the Egmont Group, these FIUs meet regularly to find ways to cooperate, especially with regard to information exchange, training, and the sharing of expertise.
There are currently 84 countries with recognized operational FIU units, with others in various stages of development. Countries must go through a formal procedure established by the Egmont Group in order to be recognized as meeting the Egmont definition of an FIU. The Egmont Group as a whole meets once a year. Since the Egmont Group is not a formal organization, it has no permanent secretariat. Administrative functions are shared on a rotating basis. Aside from the Egmont support position, working groups and the newly established Egmont Committee are used to conduct common business.
FIUs, at a minimum, receive, analyze, and disclose information on suspicious or unusual financial transactions provided by financial institutions to competent authorities. Although every FIU operates under different guidelines, most FIUs, under certain provisions, can exchange information with foreign counterpart FIUs. In addition, many FIUs can provide other government administrative data and public record information to their counterparts, which can also be very helpful to investigators. One of the main goals of the Egmont Group is to create a global network by promoting international cooperation among FIUs.
The ongoing development and establishment of FIUs exemplify how countries around the world continue to intensify their efforts to focus on research, analysis, and information exchange in order to combat money laundering, terrorist financing, and other financial crimes.
Source: Adapted from “The Egmont Group Financial Intelligence Units (FIUs),” at http://www.egmontgroup.org/about_egmont.pdf.
In the last few years, a number of international conventions have recognized the usefulness of FIUs in modern anti-money-laundering systems and have encouraged the states that are parties to these conventions to establish FIUs. These are (in the order in which they were opened for signature), the Convention for the Suppression of the Financing of Terrorism (1999), the United Nations Convention Against Transnational Organized Crime (2001), and the United Nations Convention Against Corruption (2003).
The first of these conventions requires the criminalization of the financing of terrorism; the second requires the criminalization of participation in organized international criminal groups, corruption, money laundering, and obstruction of justice. The third requires the criminalization of various forms of corruption, money laundering, concealment of the proceeds of crime, and obstruction of justice. One common element in the three conventions is that each one requires states that are parties to criminalize money laundering and to adopt measures to prevent it. The preventive measures are, in large part, inspired by the FATF recommendations and include references to the reporting of suspicious transactions to competent authorities.20 In the two most recent conventions, the references to the FIU are explicit. For example, the United Nations Convention Against Transnational Organized Crime requires states that are parties to “ensure that administrative, regulatory, law-enforcement and other authorities dedicated to combating money-laundering … have the ability to cooperate and exchange information at the national and international levels … and to that end, shall consider the establishment of a financial intelligence unit to serve as a national centre for the collection, analysis and dissemination of information regarding potential money-laundering.”21
The institutions of the European Union (EU) have taken a number of significant initiatives to combat money laundering and international organized crime. The norms adopted by the EU form part of the legal framework for the fight against money laundering in the members of the European Union, whose membership was expanded from 15 countries to 25 as of May 1, 2004. In addition, because they are elaborated with a view to being implemented in countries with differing legal systems, these norms and standards are of interest to countries outside the membership of the European Union. The main instruments bearing directly on the work of FIUs are briefly described in Box 7.
Box 7.Norms and Standards on FIUs in European Union
1991—Council Directive on prevention of the use of the financial system for the purpose of money laundering (91/308/EEC)
The Council Directive on prevention of the use of the financial system for the purpose of money laundering of 1991 embodied the basic requirements of sound anti-money-laundering programs, including customer identification, record keeping, and the blocking of suspicious transactions. With respect to FIUs (which were not mentioned as such but were included among the “authorities responsible for combating money laundering”), the directive contained three basic principles: (i) full cooperation of financial institutions with these authorities by furnishing to them, on their own initiative, information on any fact that might be an indication of money laundering and furnishing to them additional information on their request; (ii) blocking suspicious transactions until the responsible authorities had been notified; and (iii) furnishing information to the FIU whenever, as a result of an inspection or otherwise, supervisors or regulators of financial institutions discover facts that could constitute evidence of money laundering.
1997—Amsterdam European Council Meeting: EU action plan to combat organized crime
This action plan, which was endorsed at the Amsterdam European Council in June 1997, stated that “money laundering is at the very heart of organised crime.” Although the action plan was directed mainly at cooperation among law-enforcement agencies, it also included preventive measures; and, in particular, it recommended the establishment of a system for exchanging information concerning suspected money laundering at the European level (which was followed by Council Decision of October 17, 2000—see below).
1999—Tampere European Council Meeting: creation of an area of freedom, security, and justice
The 1999 European Council meeting in Tampere, Finland was devoted to “the creation of an area of freedom, security and justice in the European Union.” One of its pillars is an EU-wide fight against organized and transnational crime in which special actions against money laundering are called for. One of these actions attempts to remove the remaining legal obstacles to the exchange of information among member states’ FIUs. The Presidency Conclusions state that “regardless of secrecy provisions applicable to banking and other commercial activity, judicial authorities as well as FIUs must be entitled, subject to judicial control, to receive information when such information is necessary to investigate money laundering.”
2000—EC Council Decision of October 17, 2000 concerning arrangements for cooperation between financial intelligence units of the Member States in respect of exchanging information
Council Decision of October 17, 2000, which followed the Action Plan to Combat Organized Crime mentioned above, sets out detailed requirements to improve the exchange of information between FIUs. The decision endorses the Egmont Group definition of an FIU and requires that performance of their functions (including the exchange of information) not be affected by their internal status, “regardless of whether they are administrative, law-enforcement or judicial authorities.”
2001—Directive 2001/97/EC of the European Parliament and the Council of December 4, 2001 amending the Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering
The 2001 amendments to the 1991 Directive reiterate the basic obligation of full cooperation and reporting of suspicious transactions set out in the 1991 Directive and extends its scope beyond financial institutions to a number of activities and professions susceptible to money laundering.
Core Principles of Financial Sector Supervision
International standards regarding the prudential regulation or supervision of financial institutions include AML/CFT compliance among the aspects of financial institutions that are subject to the powers of the regulators or supervisors.22 The standards regarding AML/CFT are set out in general terms and directly or indirectly refer back to the FATF Recommendations.23 For their part, the 2003 FATF Recommendations state, as a general matter, that financial institutions should be subject to adequate regulation and supervision and that they effectively implement the FATF Recommendations. For financial institutions subject to prudential supervision based on the Basel Committee, IOSCO, or IAIS standards, the AML/CFT regulatory and supervisory measures that are applied to financial institutions as a matter of prudential regulation are also applied as a matter of implementation of the FATF standards under the 2003 Recommendations.24 The three groups of supervisors coordinate their own efforts to combat money laundering and terrorist financing, using the FATF common standards as the basis of their work.25
This system of cross-references minimizes the possibility of conflicts between the anti-money-laundering standards applied by prudential regulators and supervisors and those set out in the FATF Recommendations.
Although they do not constitute norms or standards, model laws prepared by experts may help authorities wishing to tap international experience on the establishment of FIUs. Among relevant model laws are the United Nations Model Bill on Money Laundering, Proceeds of Crime and Terrorist Financing (2003) (for common law countries), the United Nations Model Legislation on Laundering, Confiscation and International Cooperation in Relation to the Proceeds of Crime (1999) (for civil law countries), the Commonwealth Model Law for the Prohibition of Money Laundering (1996) (for common law countries), and the OAS (Organization of American States) Model Regulations Concerning Laundering Offenses Connected to Illicit Drug Trafficking and Other Serious Offenses (December 2002).
All of these model laws put the FIU at the center of the suspicious-transaction-reporting system and contain useful suggested provisions on the functions and powers of the FIU. It may be noted in this connection that, in general, the model laws suggest legal provisions for a wide range of functions that may be exercised by the FIU but do not provide guidance as to which functions should be given to an FIU in a particular case; nor do they provide guidance on the linkages that need to be established between the FIU and other agencies. Thus, although they provide useful guidance to the drafters of legislation and regulations, model laws do not replace a careful consideration of a country’s own characteristics, objectives, and resources through its political and technical decision-making process.
Institutional Autonomy and Accountability
The core functions of an FIU call for objectivity in decision making, the timely processing of incoming information, and strict protection of confidential data. As the exchange of information between FIUs is based in large part on trust, building an FIU that inspires trust from its counterparts is key to effective cooperation. To ensure that these requirements are met on an ongoing basis, FIUs need to be given enough operational autonomy to allow them to carry out their assigned tasks without undue interference.
At the same time, as government agencies, FIUs are accountable for the way in which they carry out their mission. The means by which FIUs account for their actions and the person or body to which they are formally accountable will vary from country to country. Accountability mechanisms, however, need to ensure that the special powers entrusted to the FIU are not abused and that the public resources put at its disposal are used efficiently for the intended purposes.
A number of factors enter into the definition of the autonomy and accountability of the FIU. One is the placement of the FIU in the national administration and, in particular, whether it is established as part of an existing government ministry or agency, or outside any existing structure. The law may also protect the independence of the FIU by defining the manner in which its head is appointed and replaced. Specific reporting arrangements may be set out. These factors are often intertwined, and decisions about the degree of autonomy and accountability of an FIU should take all of them into account. In addition to these legal factors, other factors may affect the autonomy of the FIU, such as the local conditions related to the relations between the political power and the administration, and the actual budgetary resources provided to the FIU.
Placement in Administration
Some FIUs are established as autonomous bodies outside any preexisting government structure (see the previous discussion of autonomous or independent FIUs), while others are established as components of existing ministries or agencies. A body that is not part of a preexisting government structure is likely to enjoy a greater degree of operational autonomy than would a department within a ministry. Also, an FIU placed in an independent government agency, such as the central bank, is likely to be more independent of the government than one placed in a ministry.
Even among the FIUs established within an existing government structure, however, there are variations as to the degree of autonomy each FIU enjoys. Some FIUs are established as departments of a ministry or agency. For example, in the Czech Republic, the powers of the FIU are given to the ministry of finance and are exercised by a department of the ministry.26 In other countries, the FIU is located in a ministry, but is given a high level of autonomy. In the United States, FinCEN was originally established as an agency of the U.S. Department of the Treasury and was elevated, after September 11, 2001, to a bureau, a more autonomous status within the department.27 Even for FIUs located in a ministry or agency, special provisions on the appointment and dismissal of the head of the FIU or on reporting arrangements may affect the autonomy of the FIU.
Appointment and Dismissal of FIU Head
In the absence of specific provisions in the law, the head of the FIU would be appointed in the same manner and would be subject to removal and dismissal in the same way as other civil servants of comparable rank. In an FIU located in a ministry, this would normally entail appointment by the responsible minister (or the cabinet) and removal at the discretion of the appointing authority.28 The laws of many countries contain special provisions that tend to protect the autonomy of the head of the FIU. In some cases, the appointment is given more solemnity by being made by the president of the country on the recommendation of the concerned minister or ministers. This is the case, for example, in Brazil29 and Colombia.30 In other countries, the prime minister is involved in the appointment of the head of the FIU. In Bulgaria, the head of the FIU is appointed by the minister of finance “with the approval of the Prime Minister.”31
The autonomy of the head of the FIU may also be enhanced by provisions limiting the power of the appointing authority to remove him or her from office. A restrictive set of conditions on the removal of the head from of the FIU would help to strengthen the person’s independence by preventing other officials from exerting undue influence or interference. Such restrictive provisions are set out in the Bulgarian law, for example, where the head of the FIU is appointed for a term of five years and can only be removed from office, with the approval of the prime minister, for one of the reasons stated in the law.32 In Antigua and Barbuda, the head of the FIU, who is appointed by the prime minister on the advice of the cabinet, may be removed from office only for the reasons set out in the law, and only on the recommendation of a select committee of the house of representatives.33
In some countries, the relations between the FIU and the minister to whom it is responsible are left unstated in the law. In such cases, these are similar to those between any similar entity or department and the responsible minister. In some cases, the law specifies an aspect of the relationship. In particular, some laws set out the kind of direction a minister may properly give to the FIU, thus excluding direction that would constitute improper interference. For example, the Canadian law specifies that the responsible minister “may direct the [FIU] on any matter that, in the Minister’s opinion, materially affects public policy or the strategic direction of the [FIU].”34
The most usual vehicle through which the FIU enables the responsible authority to exercise its supervisory function is by issuing a periodic report on its activities. Most laws on FIUs provide that the FIU issue such a report on an annual basis, but the structure and contents of the report is left to the FIU. Most FIUs provide a narrative account of the past year’s activities, as well as statistical data on reports received, files sent for investigation or prosecution, and exchanges with foreign FIUs. Some FIUs (Australia, for example) organize the report along the lines of their broad qualitative objectives and provide their own assessment as to the extent to which they have achieved these objectives. This organization facilitates the assessment of the performance of the FIU on the part not only of the responsible minister but also of the general public.
Most often, the responsible minister exercises his or her supervision of the FIU directly. In a few countries, however, a high-level committee is placed between the FIU and the minister. The functions of such committees vary from country to country, but some of them have a clearly defined supervisory role with regard to the FIU.
In Italy, a “guidance committee” was established in 1997 to make an annual “overall examination of the activity [of the FIU in implementing the anti-money-laundering law] in order to evaluate the progress and the results of the activity and to formulate proposals aimed at enhancing the effectiveness of anti-money laundering action.” The committee is chaired by the director general of the treasury and includes high-level representatives of the Bank of Italy and the ministries of interior, finance, justice, and foreign trade. The FIU is required to provide half-yearly reports on its activity to the committee, including all the information to the committee needs to carry out of its functions.35
Similarly, in the Netherlands, an “assistance committee” made up of representatives of the concerned ministries, law-enforcement, and prosecution agencies; financial sector supervisors; and the sectors to which the AML law applies is charged with “assisting the [FIU] in its functioning, offering its knowledge and expertise to it,” and “advising [the FIU’s supervising ministers] on the way the FIU carries out its duties and on the effectiveness of the disclosure obligation.”36
In South Africa, a “money laundering advisory council” advises the supervising minister on “policies and best practices to identify the proceeds of unlawful activities and to combat money laundering activities, and the exercise by the minister of his powers under the AML act, to advise the [FIU] concerning the performance of [its] functions, and act as a forum in which the [FIU], associations representing categories of accountable institutions, organs of state and supervisory bodies can consult one another.”37
As these examples show, committees established to supervise the work of the FIU may also advise the responsible minister more broadly on ways to improve the AML/CFT framework. These committees may provide an institutional basis for responding to FATF Recommendation 31, which states that “[c]ountries should ensure that policymakers, the FIU, law-enforcement and supervisors have effective mechanisms in place which enable them to co-operate, and where appropriate coordinate domestically with each other concerning the development and implementation of policies and activities to combat money laundering and terrorist financing.”
Organization and Staffing
The internal organization of an FIU varies depending on the functions entrusted to it and on its size. In countries with a limited financial infrastructure, the FIU is likely to be small, and its structure may be very simple. In larger jurisdictions, where the FIU will be larger and have more complex responsibilities, a sound internal organization will be essential to efficiency and success. In such countries, most FIUs will, for example, have a department dedicated to the receipt and analysis of transaction reports, since this is a core function of all FIUs. Exchange of information may be dealt with in the same department or become the responsibility of a separate department if the volume of exchanges warrants it. Similarly, once an FIU reaches a certain size, administrative matters may be entrusted to a separate department. An administrative-type FIU that is responsible for supervising the compliance of reporting entities with AML/CFT requirements (a function that requires additional resources) will normally have a department dealing with supervision.38 Beyond this, organizational arrangements vary.
A typical FIU may be organized as shown in Figure 2. It should be emphasized that such a structure is shown strictly as an example to illustrate the links between the functions entrusted to the FIU and the possible organization of the corresponding tasks inside the FIU—other arrangements are certainly possible. Also, in very small FIUs, such a formal organization may not be necessary.
Figure 2.Typical FIU Organization Chart
The department responsible for receiving and analyzing reports (the analysis department) is the key department in an FIU, since it receives suspicious-transaction and other reports and analyzes them. The analysis department may also communicate with the compliance officers or other authorized representatives of reporting entities on individual cases. Staff of the analysis department usually manage the internal databases on suspicious transactions and on freezing orders issued (if applicable), unless the information technology function becomes so important as to be made the responsibility of a separate department. Staff of this department may be authorized to request information from other FIUs or may initiate the requests if they are sent by the international cooperation department. The department may also prepare typologies for purposes of training and sharing of information on trends in criminality.
A department for international cooperation and information exchange usually covers multilateral and bilateral cooperation matters. Typically, the international cooperation department maintains a database on information exchanged with other agencies and FIUs that is shared with the analysis department. The international cooperation department may be authorized to communicate directly with counterpart FIUs and other foreign bodies dealing with money laundering in individual cases.
FIUs with regulatory or supervisory responsibilities often establish a separate department to carry out these functions. This department monitors compliance with AML/CFT requirements and initiates the sanctions mechanism in cases of serious failures to report transactions. If the FIU has the power to apply administrative sanctions, the department would be responsible for this as well. This department also cooperates with primary supervisory bodies of the reporting institutions and exchanges information with them (if legally possible) on compliance matters. The department also works with professional associations in improving sector compliance and offers training to improve reporting.
In many FIUs, sophisticated data storage, retrieval, and analysis technologies are employed, and the maintenance of the supporting computing infrastructure becomes a vital component of their operations. A group of highly skilled information technology (IT) staff is needed for this purpose. In some FIUs, these staff are located in the analysis department, where most of the computing is done, although the IT staff serve the entire FIU. In other FIUs, a separate department is established to denote the importance of information technology to the FIU as a whole and facilitate the work of the organization.
Human resources are usually part of the central management functions, except in the larger FIUs, where a separate human resources department may be established. An organization chart describes the tasks and required qualifications for each position. An FIU may need expertise in a wide range of fields, especially when the scope of the reporting obligation is broadened beyond financial institutions. Economists, bankers, lawyers, law-enforcement officers, information technology engineers, securities brokers, insurance specialists and gaming specialists, are among the experts who may be needed to analyze reports. In addition to sector knowledge, staff in the analysis department will also need good analytical skills. Security is of paramount importance in an FIU, and thorough background checks (involving a review of criminal, financial, and personal records) must be performed on candidates for employment. In many cases, the staff of FIUs can be composed of experts seconded by administrations or departments concerned with financial crime (such as justice, police, finance and customs departments, and supervisory authorities).
Liability of Staff and Confidentiality of Information
In most cases, FIU staff will be civil servants, subject to the laws and regulations governing the status and conduct of civil servants and protected by the general rules governing suits against them. In many countries, these rules include a general duty of discretion with respect to the matters staff deal with and general protection against claims of liability for actions taken in the course of their employment.
The very special nature of the work of an FIU often leads, however, to inclusion in the legislation of strict rules regarding the confidentiality of the information handled by its staff and immunity from liability for disclosure of the information to authorized persons (such as the prosecutor’s office or a foreign FIU). Some countries may also have rules barring the use of suspicious-transaction reports in court proceedings and shielding FIU staff from compulsory testimony in court cases. In addition, most FIUs have internal confidentiality regulations that describe in detail the procedures for handling the information and data available in the FIU. Controls over the uses made of FIU information is exercised on a regular basis.
Along with confidentiality of information, security issues are most important in an FIU. Staff are informed (and often reminded) of the security procedures they must follow. The premises of the FIUs are protected (by alarms and security officers). Access of visitors is limited. Special protection is often arranged for the rooms where data on suspicious transactions and other FIU databases are located.
The separation of the FIU’s databases from the outer electronic world is an important element in maintaining the security and confidentiality of FIU information. In many FIUs, the computer system consists of an internal network with limited connection to the outside. Special software for data protection is installed, and message-encrypting systems are used in all exchanges of sensitive data with the outside.
Box 8.FIUs in Very Small Developing Island Economies
In the very small developing island economies, such as some of those in the Caribbean and the South Pacific, the challenges in establishing an FIU can be daunting. These economies are the size, in terms of population, of a small town in most other countries, and their revenues per capita are very low.
Finding suitable staff is the first challenge. Persons skilled in financial investigations, forensic accounting, and other AML/CFT tasks are less likely to be locally available, and it may not be easy to attract such persons from elsewhere.
Second, since the conventional banking system does not usually cover as much of the population in these jurisdictions (since operational costs are usually high in relation to the number of persons served), their FIUs need to focus their efforts on the informal banking or funds-transfer networks, which pose the additional challenge of lack of documentation, thereby adding to the FIU’s costs.
Third, FIUs in these jurisdictions may find that it is not always easy to obtain financial intelligence and information from other FIUs, because they tend to be less well known outside their regions. Many of them are not members of the Egmont Group, a situation that may raise concerns among other FIUs as to the safeguards available to protect the confidentiality of data held by them.
Finally, the establishment and operation of an FIU involves a level of financial commitment that is proportionately much greater for the very small and developing jurisdictions than for other economies. Operating even the most basic FIU entails certain costs, in terms of staffing, training, equipment, and secure facilities, and these costs are proportionally higher in these jurisdictions.
Would a regional FIU provide the solution to these problems? Studies were carried out to explore the possibility of setting up regional FIUs in the Caribbean and South Pacific subregions. In October 2003, the Caribbean project, which related to an FIU that would have coexisted with national FIUs, was “laid to rest in light of the fact that the Caribbean Financial Action Task Force (CFATF) members from the subregion have not responded enthusiastically with regard to taking this matter forward” (CFATF, Annual Report 2002-2003, p. 23).
After a number of studies, including a feasibility study by the IMF Legal Department, the concerned Pacific island countries, together with the Pacific Forum Secretariat, the APG Secretariat, the IMF Legal Department, and the Egmont Group (Oceania Region), decided in September 2003 that “(a) the notion of a regional approach for supporting [Pacific island countries] in addressing their needs in relation to financial intelligence information be approved; and (b) the IMF Legal Department will produce a proposal to advance the development and implementation of the regional approach.” Work toward this objective is under way. What is envisaged is an organization to support national FIUs in the subregion, rather than a regional FIU. Under the definition of an FIU endorsed by the Egmont Group and the FATF, FIUs are national entities.
The 2003 FATF Recommendations set the following standard: “Countries should provide their competent authorities involved in combating money laundering and terrorist financing with adequate financial, human and technical resources. Countries should have in place processes to ensure that the staff of those authorities are of high integrity” (Recommendation 30).
See the next section for a discussion of the various types of FIUs.
In Bulgaria, 25 percent of the annual amount of fines levied under the AML law reverts to the FIU to be used to fund salaries, and 30 percent reverts to the FIU to be used for “capital investments for improvement of the equipment, training and participation in international events” (Law on Measures Against Money Laundering, article 17a, paragraphs (2) and (3)) [Bulgaria].
Law of January 11, 1993 on Preventing Use of the Financial System for Purposes of Laundering Money, Article 11, paragraph 7, and Royal Decree of June 11, 1993 on the Composition, Organization, Operation and Independence of the Financial Intelligence Unit, amended by Royal Decrees of May 30, 1994; February 23, 1995; and February 4, 1999, Chapter X [Belgium].
Royal Decree of June 11, 1993 on the Composition, Organization, Operation and Independence of the Financial Intelligence Unit, amended by Royal Decrees of May 30, 1994, February 23, 1995, and February 4, 1999, Article 12, paragraph 1 [Belgium].
For the fiscal year ending December 31, 2003, out of an operational budget of about €2,360,000, contributions from credit institutions, insurance companies, and stock market brokers and dealers represented about 72 percent of the total, while the other reporting entities and professionals, together with the central bank and the postal service, contributed about 27 percent (see C.T.I.F., 10e Rapport d’ Activités, 2002-2003, page 150).
On the “typology” of FIUs, see generally J.F. Thony, 1996, “Processing Financial Information in Money Laundering Matters, The Financial Intelligence Units,” European Journal of Crime, Criminal Law and Criminal Justice, Brussels, pp. 257-82; B. Verhelst, 2002, The Financial Intelligence Units in the International Context, paper available from the Egmont Group; and P.A. Schott, 2003, Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism (Washington: World Bank and International Monetary Fund), Ch. VII.
These FIUs are sometimes referred to as “closed-box” FIUs.
Recommendation 16, 18, 24, 26, 27, 28, and 32 mention “competent authorities” in this context.
Recommendations 16 and 17 (1990).
Recommendations 15, 18, 23, 26, 27, 29, and 32 dealt with “competent authorities.”
FATF Special Recommendation on Terrorist Financing IV (see Appendix VIII).
FATF Recommendations 13 and 26 (2003); the methodology developed by the IMF, the World Bank, and the FATF in 2001 mentioned FIUs specifically.
Convention for the Suppression of the Financing of Terrorism, Article 18 (b) (ii); United Nations Convention Against Transnational Organized Crime, Article 7, paragraph 1 (a); and United Nations Convention Against Corruption, Article 14, paragraph 1 (a).
United Nations Convention Against Transnational Organized Crime, Article 7, paragraph 1 (b). The United Nations Convention Against Corruption contains similar language (Article 58).
Basel Committee on Banking Supervision, 1997Basel Core Principles for Effective Banking Supervision, September, Principle 15; International Organization of Securities Commission (IOSCO), 2002, Objectives and Principles of Securities Regulation, February, paragraph 8.5; and International Association of Insurance Supervisors (IAIS), 2003, Insurance Core Principles and Methodology, October, ICP 28.
In the case of the Basel Committee and the IAIS Core Principles, the standards contain an explicit reference to the FATF Recommendations; in the case of the IOSCO Principles, the substance of the standard also leads back to the FATF Recommendations.
FATF Recommendation 23, second paragraph (2003).
The “Joint Forum” of the three associations of supervisors has issued a note on Initiatives by the BSBS, IAIS And IOSCO to Combat Money Laundering and the Financing of Terrorism, June 2003.
Act No. 61 Coll. of February 15, 1996. on Selected Measures against Legitimization of Proceeds from Criminal Activities and on the Amendment of Related Legislation, Article 7, paragraph (2) [Czech Republic].
FinCEN Strategic Plan for the fiscal years 2003-08, page 1 [United States].
As a civil servant, the person would normally be protected from arbitrary demotion and firing by civil service rules, but he or she could be transferred to another position at the minister’s discretion.
Law No. 9613 of March 3, 1998, Article 16, paragraph 1 [Brazil].
Law No. 526 of 1999 establishing the Financial Information and Analysis Unit, Article 2 [Colombia].
Law on Measures Against Money Laundering, Article 10 (4) [Bulgaria].
Id., Article 10 (8).
Office of National Drug and Money Laundering Control Policy Act, 2002, Section 6 [Antigua and Barbuda].
Proceeds of Crime (Money Laundering) and Terrorist Financing Act, Section 42 (2) [Canada].
Decree Law 143 of May 3, 1991, as amended by Legislative Decree 153 of May 26, 1997, Article 3-ter [Italy].
Act of 16 December 1993 containing regulations on the disclosure of unusual transactions relating to financial services, Sections 15 and 16 [Netherlands].
Financial Intelligence Centre Act, 2001, Sections 17—20 [South Africa].
Examples are the AMLD in Croatia, the FIA in Bulgaria, and the OMLP in Slovenia.