2 International Cooperation Standards and Practices in Combating Money Laundering and Countering Terrorist Financing
- International Monetary Fund
- Published Date:
- June 2007
WILLIAM C. MURDEN1
1.1. This chapter discusses the recommendations of the Financial Action Task Force (FATF) that relate to international cooperation and information exchange and their implementation.
1.2. Since its creation, the FATF has spearheaded the effort to adopt and encourage implementation of measures designed to counter the use of the financial system by money launderers, terrorist financiers, and other criminals. It first adopted its 40 Recommendations on Money Laundering in 1990, setting out a basic framework for anti-money-laundering (AML) efforts intended to be of universal application. Since then, the FATF has revised its Forty Recommendations twice—first in 1996 and then more recently in 2003—to ensure that they remain up to date and relevant to the evolving threats. The FATF 40 Recommendations are now the recognized international standard for anti-money laundering.
1.3. Following the terrorist attacks in the United States on September 11, 2001, the FATF expanded its mission beyond anti-money laundering to also focus its energy and expertise on a worldwide effort to combat the financing of terrorism (CFT). The FATF issued Eight Special Recommendations on Terrorist Financing in October 2001 and added a Ninth Special Recommendation (on cash couriers) in October 2004—and it calls on all countries to adopt and implement these special measures along with the FATF 40 Recommendations. The objective is to deny terrorists and their supporters access to the international financial system.
1.4. The Working Group on International Financial Institutions Issues (WGIFI) was established by the FATF Plenary in Paris in February 2003. The Working Group was successful in helping the international community reach consensus on several technical and policy issues. Its mandate was to serve as a point of contact on matters arising with the international financial institutions (IFIs) on the collaborative effort on AML/CFT issues, and to oversee and coordinate the FATF’s participation in the pilot program implementing use of the AML/CFT methodology. The WGIFI expired in October 2004, and it was replaced by the Working Group on Evaluations and Assessments, which has a broader mandate addressing all AML/CFT assessments by the IFIs and the FATF.
2. Information Exchange and the FATF Recommendations
2.1. The ability of various authorities in different countries to freely exchange information about money laundering and terrorist financing targets and investigations is key to combating money laundering and terrorist financing effectively on a global scale. The FATF has recognized this need in a number of recommendations, including Recommendation 40, which covers general administrative and regulatory international cooperation, and Special Recommendation 5, which concerns cooperation in the context of terrorist financing. Special Recommendation 3, on freezing and confiscating terrorist assets, is also relevant to the question of information exchange. These recommendations are discussed, in turn, later in this paper.
2.2. Recommendations 36 through 39, which deal with the specific issues surrounding judicial cooperation, including mutual legal assistance, extradition, confiscation, and compulsory measures, are not discussed further here.
2.3. To understand the implications of these recommendations for regulators and other practitioners—including those in offshore centers (OFCs)—it is appropriate to go beyond the recommendations themselves and look at the Interpretative Notes and Best Practices papers that the FATF has issued on these subjects. It is also important to examine the assessment criteria associated with each recommendation in the AML/CFT Methodology, adopted in February 2004 by the FATF Plenary and by the IMF and World Bank Executive Boards in late March 2004. The methodology is being used by FATF, the FATF-style regional bodies (FSRBs), and the IFIs to assess jurisdictions’ compliance with the FATF AML/CFT Recommendations.2
2.4. The FATF has been engaged in an active dialogue with the Basel Committee, the International Organization of Securities Commissions (IOSCO), the International Association of Insurance Supervisors (IAIS), and the Egmont Group on how to enhance cooperation and information exchange—especially in the complex circumstances where bank regulators and financial intelligence units (FIUs) need to share information. For example, the FATF president held a conference call with the Basel Committee and the IAIS in May 2004 and another with IOSCO in June 2004. All participants agreed to identify experts to collaborate on this issue.
3. Recommendation 40: “Other Forms of Cooperation”
3.1. Recommendation 40 sets forth a comprehensive framework for the widest possible range of international information exchange. It does the following:
3.1.1. calls for countries to establish and maintain gateways to facilitate prompt and effective information exchange between counterparts;
3.1.2. states that jurisdictions should not invoke bank secrecy laws or fiscal matters alone as reasons not to exchange information; and
3.1.3. calls for the protection of the information under privacy and data-protection standards.
3.2. Based on this broad-ranging recommendation, the criteria for Recommendation 40 in the AML/CFT Methodology specify the following points:
3.2.1. Countries should ensure that their competent authorities provide the widest possible range of international cooperation to their foreign counterparts—and provide such assistance in a rapid, constructive, and effective manner.
3.2.2. Such exchanges should not be subject to disproportionate or unduly restrictive conditions.
3.2.3. There should be clear and effective gateways, mechanisms, or channels that facilitate prompt and constructive information exchange directly between counterparts.
3.2.4. Examples of such gateways (other than mutual legal assistance or extradition treaties, which are addressed in Recommendations 36–39 and do not adequately provide for certain types of exchanges) include laws allowing exchange of information on a reciprocal basis, bilateral or multilateral agreements, or arrangements such as memoranda of understanding (MoUs) and exchanges through appropriate international or regional organizations such as Interpol or the Egmont Group. Such information exchanges should be possible both spontaneously and upon request and in relation to both money laundering and the underlying predicate offenses.
3.2.5. Countries should ensure that all their competent authorities are authorized to conduct inquiries on behalf of foreign counterparts and, in particular, should ensure that their FIU is authorized to make specified types of inquiries on behalf of foreign counterparts.
3.2.6. Requests for cooperation should not be refused on the grounds of laws that impose secrecy or confidentiality requirements on financial institutions or designated nonfinancial businesses and professions (DNFBPs) (except where legal profession privilege or legal profession secrecy applies).
3.2.7. Countries should establish controls and safeguards to ensure that the information received by their competent authorities is used only in the manner authorized, consistent with their obligations concerning privacy and data protection.
3.3. One key issue of particular interest in the implementation of Recommendation 40 has been the matter of “diagonal” information exchange. This refers to exchanges with noncounterparts, such as between an FIU and a non-FIU in another country. This issue generated a great deal of discussion during the revision of the 40 Recommendations. As a result, Recommendation 40 is quite forward leaning in the realm of international information exchange. Countries should seek to enable diagonal information exchange to the extent possible.
4. Special Recommendation V
4.1. Special Recommendation V calls for countries to provide the greatest possible assistance to another country in connection with criminal, civil enforcement, and administrative investigations inquiries and proceedings relating to the financing of terrorism. This could be implemented on the basis of treaties, formal and informal arrangements, and other mechanisms for mutual legal assistance (MLA) or information exchange, in connection with criminal, civil enforcement, and administrative investigations.
4.2. The assessment criteria are essentially the same as those for Recommendations 36 to 40 applied to the financing of terrorism.
4.3. In going forward, diagonal information exchange remains an issue, and there will be further discussion between FATF, the Basel Committee, IOSCO, the Egmont Group, and others to discuss sharing of information with supervisory authorities within the context of implementing Special Recommendation V.
5. Special Recommendation III
5.1. Timely communication between authorities is especially crucial for the freezing of terrorist assets. This is covered by FATF Special Recommendation III. The FATF “Best Practices” paper on SR III fleshes out this issue in some detail.3
5.2. Special Recommendation III states that each country should implement measures to freeze without delay funds or other assets of terrorists, those who finance terrorism, and terrorist organizations in accordance with the United Nations resolutions relating to the prevention and suppression of the financing of terrorist acts.
5.3. Each country should also adopt and implement measures, including legislative ones, which would enable the competent authorities to seize and confiscate property that is the proceeds of, or used in, or intended or allocated for use in, the financing of terrorism, terrorist acts, or terrorist organizations.
5.4. The global nature of terrorist financing networks and the urgency of responding to terrorist threats require unprecedented levels of communication, information exchange, cooperation, and collaboration among authorities in different jurisdictions.
5.5. In the immediate aftermath of the tragic events of September 11, 2001, the U.S. government took immediate and decisive action to improve its arsenal of financial weapons in the war on terror. It issued an executive order that, among other provisions, authorized the Secretary of the Treasury to freeze the financial assets of terrorist groups and their supporters in the United States. Since terrorism is a global phenomenon, however, the United States needed to work closely with its allies to ensure that freezing actions were simultaneous and multilateral to prevent terrorists and their supporters from moving funds elsewhere. The Group of Seven finance ministers and, later, the Group of Eight (G-8) foreign and justice ministers reached agreement to institute a “prenotification” program whereby countries would provide enough advance notice and information to their partners to take coordinated freezing action against designated terrorists and supporters. The program has expanded beyond the initial small group of countries and demonstrates the importance of strong communications, information sharing, and cooperation.
5.6. Among the key elements of this communication are
5.6.1. timely and secure prenotification of pending designations, to enable the greatest possible simultaneity of action;
5.6.2. facilitating consultation between jurisdictions to gather, verify, and correct identifier information for designated persons;
5.6.3. rapidly and globally communicating new designations and the supporting information; and
5.6.4. maximizing the sharing and publicizing of information about the amount of funds and other assets that each jurisdiction has frozen.
5.7. There is one interesting issue to note in connection with information sharing on freezing designations that is perhaps unique or at least more prevalent in connection with terrorism. Much information on terrorist targets is obtained from clandestine or intelligence sources. This information can be highly classified to protect its sources and methods and can be difficult for foreign governments to share with one another. This has presented some particular challenges not found in supervisory and regulatory information sharing, especially in protecting the disclosure of information when it is passed onward to other governments.
6. Implementation Implications
6.1. Sharing of information and full and effective international cooperation has been a basic FATF principle from its inception. The revision of the FATF Recommendations in 2003 and the new AML/CFT Methodology continue and expand on that tradition.
6.2. FATF considers full compliance with the information sharing and cooperation measures of the FATF Recommendations to be a vital component of an effective AML/CFT regime. Assessments in the past have indicated that countries have focused on this vital aspect but that there has remained room for improvement. We are learning more as we gain experience with the new methodology.
These comments reflect the personal views of their author and do not necessarily reflect the official positions of the U.S. Department of the Treasury, the Financial Action Task Force, or the International Monetary Fund. The author appreciates the valuable contributions to this article by Nan Donnells, Juhan Jaakson, Paul Ashin, and Richard Pratt, but any remaining errors are entirely his own.
The AML/CFT Methodology was amended in February 2005 to add criteria for assessing compliance with Special Recommendation IX (SR-IX) and is available on the FATF website at http://www.fatf-gafi.org.
“Freezing of Terrorist Assets: International Best Practices” published by the FATF in October 2003.