6 Cooperation and Exchange of Information on Supervision of Institutions in Relation to Prevention of Money Laundering and Terrorist Financing
- International Monetary Fund
- Published Date:
- June 2007
ALVARO PINILLA RODRÍGUEZ
1.1. This chapter focuses on the relationship between financial intelligence units (FIUs) and the bodies responsible for the supervision of those institutions that have special responsibilities in the fight against money laundering at the national and international levels.
2. Definition of Financial Intelligence Unit
2.1. A financial intelligence unit is defined by the Egmont Group1 as:
“a central national agency responsible for receiving (and, as permitted, requesting), analysing and disseminating to the competent authorities, disclosures of financial information:
(i) concerning suspected proceeds of crime and potential terrorist financing, or
(ii) required by national legislation or regulation, in order to combat money laundering and terrorism financing.”
2.2. In order to meet the FIU’s objectives, it is essential that either there be a fluid relationship and exchange of information at the national level between the FIU and the authorities responsible for supervising the obligated institutions, or that the FIU has the power of supervision in relation to the prevention of money laundering and terrorist financing. In either case, it is important that there be a good relationship between the FIU and the supervisory body.
2.3. There needs to be a mechanism for international cooperation and information exchange that includes not only information about suspicious transactions, which may be of interest to an FIU in another country, but also information concerning the obligated institutions being supervised. Where the information concerns a supervised institution, and the body responsible for supervision of anti-money laundering/combating the financing of terrorism (AML/CFT) controls is the FIU, it is important that the FIU be able to share this information with the foreign supervisory body, as its counterpart, without informing the domestic supervisory authority.
3. Institutions with AML/CFT Obligations
3.1. The most significant institutions obliged to comply with the regulations on the prevention of money laundering and terrorist financing are in the banking sector, the securities sector, and the insurance sector. These sectors, especially banking, are normally responsible in most countries for a large share of the disclosures of suspicious transactions that are passed on to FIUs for further analysis. These sectors bring together institutions that, given their size and volume of business, are more liable to be used for money laundering and terrorist financing. For this reason, the Financial Action Task Force (FATF) Recommendations (and the Basel Committee on Banking Supervision’s guidelines) include special requirements necessary for the effective prevention of these phenomena. The FATF Recommendations also require jurisdictions to ensure that compliance with these obligations by obligated institutions is monitored by an external authority—usually the supervisory authority but sometimes the FIU.
4. Measures to Be Adopted by Obligated Institutions
4.1. The FATF Recommendations and specific guidelines issued by the regulatory standard setters2 require that obligated institutions adopt procedures and controls, which, in view of their importance, are listed here:
4.1.1. internal controls and compliance departments appropriate for their size and structure;
4.1.2. clearly defined internal regulations and corporate policies for the prevention and control of money laundering and terrorist financing;
4.1.3. procedures to identify customers, to know their business, and to build a profile of the expected account activity (with the level of detail to be determined on a risk-weighted basis);
4.1.4. procedures for monitoring the activity on the account so as to compare it with the expected profile and thereby detect unusual transactions (using automatic means wherever possible);
4.1.5. established internal rules for the disclosure of suspicious transactions;
4.1.6. appointment of a person or a department in the institution able to provide advice and to receive reports;
4.1.7. training for all staff of the institution;
4.1.8. controls applicable to subsidiaries and branches in foreign countries; and
4.1.9. specific procedures for high-risk areas and businesses.
4.2. These are mentioned only as a brief guide to those aspects that should be considered in order to ensure effective supervision of obligated institutions by national authorities.
5. How Should Supervision Be Carried Out and by Whom?
5.1. The task of supervising institutions to prevent money laundering and the financing of terrorism should be carried out only by the FIU where this supervisory role has been assigned to the FIU. Otherwise, it should be carried out by the relevant sector supervisor.
5.2. If the task of supervision lies with the sector supervisor, this assignment of responsibility will have the following advantages:
5.2.1. it will take advantage of the human resources and experience of the supervisory teams in inspection tasks—in that the supervisors will be familiar with the business, organization, personnel, and culture in the financial institution, all of which are relevant to the effective analysis of compliance with the special requirements relating to money laundering and terrorist financing; and
5.2.2. preventing money laundering and terrorist financing would be one of the areas to cover within broader inspection, and the supervisor can examine and apply controls that are valid for both financial aspects and for checking compliance with the obligations on prevention of money laundering and terrorist financing.
5.3. When the FIU plays the role of supervisor, the advantages are as follows:
5.3.1. it will be able to take advantage of the specific experience it has accumulated regarding money laundering and terrorist financing of the FIU; and
5.3.2. it will be easier for the FIU, which will receive all suspicious transaction reports, to monitor the performance of institutions in submitting reports and to take remedial action where appropriate.
5.4. Whatever course is chosen, it is essential to ensure proper coordination between the supervisory authorities and the FIU. Moreover, it will be essential to have adequate human resources to ensure proper coverage of obligated institutions.
6. The Case of Spain
The Supervisory Function
6.1. Responsibility for supervision tasks on money laundering issues lies with the Spanish financial intelligence unit, the Servicio Ejecutivo de la Comisión de Prevención de Blanqueo de Capitales e Infracciones Monetarias (SEPBLAC). This role gives SEPBLAC direct permanent knowledge of the systems for prevention of money laundering and terrorist financing of the obligated institutions in Spain.
6.2. This knowledge is complemented by a specific procedure for the evaluation of disclosures of suspicious transactions from obligated institutions, which this chapter does not aim to describe.
Types of Supervision and Selection of Institutions for Inspection
6.3. Supervision visits to obligated institutions may be initiated on either the initiative of the institution itself or the requirement of the authorities. In turn, visits may be general or specific.
6.4. An annual supervision plan is drawn up for a set of institutions that are to be inspected. These are selected according to a number of parameters, including:
6.4.1. the level of risk of the sector to which they belong;
6.4.2. the number and quality of the disclosures of suspicious transactions received; and
6.4.3. compliance with the requirements of the organization and procedures for the prevention of money laundering and terrorist financing.
Scope of Supervision Visits
6.5. Supervision visits to obligated institutions focus primarily on the following two areas:
6.5.1. review of the regulatory compliance department (on the prevention of money laundering and terrorist financing): its organization, structure, and functions; and
6.5.2. compliance with the internal procedures and controls established for the prevention of money laundering and terrorist financing.
6.6. On a more detailed level, they should include a review of the following points:
6.6.1. organization of the institution;
6.6.2. corporate policies;
6.6.3. policies and procedures on knowing their customers;
6.6.4. high-risk transactions;
6.6.5. disclosures of suspicious transactions;
6.6.6. controls applied to subsidiaries and branches; and
6.6.7. specific procedures for high-risk areas and businesses.
Conclusion of Supervision Visit
6.7. At the end of the visit, a report is prepared stating the inspected institution’s level of compliance with the requirements for prevention of money laundering and terrorist financing.
6.8. The risk of exposure to transactions relating to money laundering to which the institution is exposed is also evaluated, for the internal use by the office.
6.9. The most important point is the preparation of a series of written recommendations on those measures that the institution should adopt and implement. This report is sent to the regulatory compliance officer and the senior management of the institution.
6.10. The institution must reply to this report within the period established, explaining how the process of adoption and implementation of these measures will be undertaken.
6.11. SEPBLAC’s supervisory department will verify this process through the following phase, which is referred to as recommendation follow-up.
6.12. In this phase, SEPBLAC’s supervisory department has to verify that the measures have been adopted and implemented. To do so, it requires that the institution provide the relevant documentary evidence. Where necessary, it will carry out a fresh inspection visit to make the necessary checks in situ.
6.13. Lack of compliance with the recommendations drawn up by SEPBLAC constitutes an infringement of Spanish regulations on the prevention of money laundering and may result in penalties being imposed in accordance with these regulations, such as civil fines, public or private statements of censure, and the temporary removal of certain officers.
Supervision Undertaken in Framework of Agreements with Sector Supervisors
6.14. As noted previously, it is important to ensure close coordination between the FIU and the corresponding sector supervisors in respect of supervision of the procedures and bodies that the obligated institutions have to establish to enable them to prevent money laundering and terrorist financing. To do so, it is necessary to define the terms of the collaboration between the FIU and the supervisory body in a document, which should also specify the procedure to carry out these tasks in a coordinated way.
6.15. To implement an effective collaboration mechanism, the agreements between the FIU and the supervisor should describe and specify at least the following relevant aspects:
6.15.1. Money laundering prevention may be the object of an inspection visit or one of the areas covered by the inspection team within the context of a general inspection. Where the FIU, rather than the supervisor, has responsibility for monitoring compliance with money laundering and terrorist financing obligations, there is a danger of inconsistent approaches; and it is essential that any recommendations for changes made by the supervisor are agreed to by the FIU, so that they will be in conformity with its criteria and needs, and be subject to periodic review and update.
6.15.2. Again, where the FIU is responsible for supervision of compliance with defenses against money laundering and terrorist financing, there may be a further problem if the priorities of the FIU and the supervisor are different. The FIU should therefore indicate the institutions, in accordance with their appropriateness, that it wishes to have included in the supervision plan for the prevention of money laundering.
6.15.3. The supervisor makes the inspection visit and prepares the final report, sending either his report or the chapter on the prevention of money laundering, as applicable, to the FIU.
6.15.4. On the basis of the report by the supervisor’s inspectors, the FIU formulates its written recommendations.
6.15.5. The supervisor follows up these recommendations and reports back to the FIU on the adoption and implementation of the measures adopted by the supervised institution.
6.16. The agreement may also encompass cooperation between the two institutions on the detection and identification of practices or transactions by institutions, which may constitute infringements of the regulations on the prevention of money laundering or, in general, other regulations of the sector in which they operate.
6.17. The agreement may envisage, and contribute effectively to, the maintenance of a permanently updated census of all institutions in the sector. This is a particularly useful tool for the FIU when it is controlling and maintaining an up-to-date census of obligated institutions.
Requirements to Be Met by Newly Created Institutions
6.18. The new regulations implementing Spanish legislation, which have recently come into force, establish that financial institutions (including bureaux de change and money transfer companies), firms operating in the stock market, and insurance companies must have a prior favorable report on their systems of compliance with rules on money laundering and terrorist financing issued by SEPBLAC before receiving authorization to start business.
Cooperation and Information Exchange at National Level
6.19. At the national level, we can distinguish two types of cooperation:
6.19.1. between supervisors and the FIU, as was alluded to previously; and
6.19.2. between obligated institutions and the FIU, other than that relating to the process of supervision and emanating from the former’s obligations to notify the latter of suspicious transactions.
6.20. This second case refers to other forms of cooperation, such as
6.20.1. profiles of suspicious transactions and irregularities specifically affecting the sector in question; and
6.20.2. sessions, training activities, and forums for exchange of experience between obligated institutions and the FIU.
6.21. It is worth noting that in no circumstances will the information obtained be subject to restrictions upon the FIU’s ability to pass it on to the law-enforcement authorities when there are signs that it is related to money laundering or terrorist financing.
Cooperation and Information Exchange at International Level
6.22. In the Spanish experience, apart from the exchange of information arising from suspicious transaction reports, the most common case where international cooperation arises or becomes necessary is where the head office of a financial institution, as a result of its own internal procedures, has doubts about whether a foreign subsidiary is complying with the regulations on prevention of money laundering and terrorist financing applicable in its host country.
6.23. Cooperation in this sphere should take place between the FIUs of the two countries, or between the FIU and the supervisory authority. In any event, international cooperation will seek to prevent obligated institutions from taking advantage of the territorial scope of the regulations and will encourage the involvement of the head office, which in any case should know and oversee adequately the subsidiary’s compliance with the rules on the prevention of money laundering and terrorist financing.
International cooperation on Revised Forty Recommendations of the Financial Action Task Force/Grupo de Acción Financiera sobre el Blanqueo de Capitales (FATF/GAFI)
6.24. It is, again, worth highlighting that this discussion is referring to forms of cooperation and information exchange other than those relating to the disclosures in suspicious transaction reports.
6.25. The new Forty Recommendations of the FATF also cover this type of cooperation in Recommendation 40 (supplemented by its Interpretative Note).
6.26. It is worth highlighting the following points regarding Recommendation 40’s content:
6.26.1. it states that the competent authorities must provide the widest possible range of international cooperation to their foreign counterparts;
6.26.2. it defines these terms, for the purposes of the FATF Recommendation, as follows:
– competent authorities are those administrative and law-enforcement authorities, including FIUs and supervisory bodies, concerned with combating money laundering and terrorist financing; and
– counterparts are those authorities that exercise similar responsibilities and functions;
6.26.3. it specifies that exchanges of information must also be encouraged with institutions that are not considered counterparts for these purposes, when the capacity to obtain this information is not within the competence of the counterpart;
6.26.4. exchanges of information may take place on the basis of signed agreements or be based on the principle of reciprocity, but such preconditions are not required and, indeed, it is best to have as few preconditions as possible; and
6.26.5. the scope of cooperation, as it is observed, is covered by the new text of the Forty Recommendations such that there is no scope for alleging conflicts of competencies between the parties when either is seeking to provide the other country with relevant information on issues concerning money laundering and terrorist financing.
6.27. Additionally, the new concept of exchange of information, present throughout the international regulatory sphere, contemplates the possibilities that information is passed on either at the request of one of the parties or spontaneously. This latter case will include within its scope the spontaneous sending of information on a subsidiary under the supervision of the authority of the country in which it operates, to the corresponding authority in the country in which its head office is based, when irregularities have been detected in the host country as regards the compliance with the regulations on the prevention of money laundering and terrorist financing. Equally, it is important that the supervisor or FIU in the country where the head office of a multinational institution is situated inform the FIU or supervisor of the country where a subsidiary is located when they have information about money laundering or terrorist financing that takes place in the country of the head office but has implications for accounts in the subsidiary. This is consistent with the requirements that already exist in respect of supervision of financial institutions.
“Interpretative Note concerning the definition of a Financial Intelligence Unit,” published by the Egmont Group on November 15, 2004.
See, for example, the Basel Committee’s papers, “Customer Due Diligence for Banks” and “General Guide to Account Opening and Customer Identification” on the Web at http://www.bis.org.