Palau
Report on the Observance of Standards and Codes: FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

This report examines Palau’s observance of Standards and Codes on the Financial Action Task Force’s recommendations for antimoney laundering (AML) and combating the financing of terrorism (CFT). Palau has strengthened its AML/CFT legislative framework with the amendments to the Money Laundering and Proceeds of Crime Act of 2001 and the Financial Institutions Act of 2001, as well as the enactment of the Counter-Terrorism Act of 2007 and the Cash Courier Disclosure Act of 2007.

Abstract

This report examines Palau’s observance of Standards and Codes on the Financial Action Task Force’s recommendations for antimoney laundering (AML) and combating the financing of terrorism (CFT). Palau has strengthened its AML/CFT legislative framework with the amendments to the Money Laundering and Proceeds of Crime Act of 2001 and the Financial Institutions Act of 2001, as well as the enactment of the Counter-Terrorism Act of 2007 and the Cash Courier Disclosure Act of 2007.

A. Introduction

1. This Report on the Observance of Standards and Codes for the FATF 40 Recommendations for Anti-Money Laundering (AML) and 9 Special Recommendations on Combating the Financing of Terrorism (CFT) was prepared by the IMF Legal Department.1

The report provides a summary of the AML/CFT measures in place in the Republic of Palau and of the level of compliance with the FATF 40+9 Recommendations and contains recommendations on how the AML/CFT system could be strengthened. The assessment is based on the information available at the time of the mission from March 3–17, 2008 and was conducted using the 2004 Assessment Methodology. The detailed assessment report on which this document is based was adopted by the APG plenary on July 10, 2008. The views expressed here, as well as in the full assessment report, are those of the staff team and do not necessarily reflect the views of the Government of Palau or the Executive Board of the IMF.

B. Key Findings

2. Palau has recently strengthened its AML/CFT legislative framework with the amendments to the Money Laundering and Proceeds of Crime Act of 2001 (MLPCA) and the Financial Institutions Act of 2001 (FIA), and with the enactment of the Counter-Terrorism Act of 2007 (CTA) and the Cash Courier Disclosure Act of 2007 (CCDA). Even though AML/CFT legislation has been in place since 2001, implementation has been lacking.

3. The offense of money laundering (ML) is criminalized in the MLPCA; however, only twelve of the twenty FATF-designated categories of predicate offenses are covered. The financing of terrorism (FT) was criminalized in 2007, yet the freezing of terrorist assets under UN Security Council Resolutions (UNSCRs) 1267 and 1373 is not adequately addressed. Palauan legislation shows deficiencies regarding provisional measures of seizing of evidence and property and the freezing of capital and financial transactions related to FT.

4. The amended MLPCA does not cover the AML/CFT preventive measures in a satisfactory manner. Significant deficiencies remain in the areas of customer due diligence (CDD), record keeping, monitoring of transactions, and supervision. The Financial Institutions Commission (FIC) is the AML/CFT supervisor, but it does not have the resources to ensure AML/CFT compliance nor to issue any regulations. The designated non-financial businesses and professions (DNFBPs) operating in Palau are not covered by the MLPCA.

5. The Financial Intelligence Unit (FIU) was moved from the Office of the Attorney General (OAG) to the FIC in February 2008, but the FIC, like the OAG, has not been provided with adequate resources to perform its FIU task. Without Palau dedicating adequate resources, the overall AML/CFT system remains deficient in several areas.

C. Legal Systems and Related Institutional Measures

6. Palau’s crime rate is relatively low, with prostitution and consumer marijuana sales being the major sources of criminal proceeds. Illegal fishing by unlicensed vessels poses a further problem. Authorities are not aware of any organized crime or FT activity in Palau.

7. ML is criminalized broadly in line with the international standard, including appropriate sanctions for ML, and most technical aspects of the Vienna and Palermo Conventions are addressed. A serious shortcoming is that eight out of the twenty designated predicate offenses are not covered by the money laundering offense, some of which are important given Palau’s economic dependence on tourism, agriculture, and fishing as well as its geographic location. The OAG has prosecuted six ML cases. The CTA criminalizes FT largely in line with the international standard. However, the CTA has only been enacted in April 2007 and at the time of the on-site visit, Palau had not conducted any criminal investigations or prosecutions relating to FT.

8. The legislation allows for the criminal confiscation of proceeds of ML and property related to FT, as well as civil forfeiture. However, neither property relating to or the proceeds of the predicate offense, instrumentalities used in or intended for use in the commission of the money laundering or a predicate offense, nor property of corresponding value to such proceeds or instrumentalities can be confiscated.

9. Provisional measures include the seizing of evidence and property as well as the freezing of capital and financial transactions, whereby any of those measures are subject to approval by the Supreme Court. While seizing is available both for ML and FT, freezing measures and measures to identify and trace property are available for ML but not for FT.

10. The freezing of terrorist assets under UNSCRs 1267 and 1373 is not adequately addressed. Hardly any of the required procedural aspects to ensure effective compliance with the Resolutions are covered. It is unclear which authority is responsible for receiving, issuing and disseminating designations pursuant to the Resolutions and no procedures are in place to ensure that terrorist funds are frozen immediately and without undue delay.

11. The functions of the FIU include the receipt, analysis, and dissemination of suspicious transaction reports (STRs), and it has maintained the law enforcement powers that it had prior to its transfer from the OAG to the FIC. The FIU has been operating without dedicated full-time resources since its inception in 2001. Despite this, it has been able to analyze all 71 STRs received and disseminate 49 to the Division of Criminal Investigation & Drug Enforcement (CID) for investigation, of which one resulted in a prosecution.

12. The lack of dedicated staff and documented standard operating procedures impedes the FIU’s effectiveness, as well as the need for a court order (in the absence of probable cause) to obtain additional information from reporting entities. The FIU has yet to provide STR forms, guidelines, and feedback to the reporting entities.

13. The CID has been tasked with investigating ML and FT cases. The CID has followed up on all STRs disseminated by the FIU, but never has initiated an investigation into ML or FT that was not related to an STR. The CID has not made use of any of the special powers provided to it by law for its investigations. The CCDA gives ample powers to Customs to check for cross-border cash transportations. Even though the law is new, Customs has been successfully implementing the law resulting in several seizures.

D. Preventive Measures—Financial Institutions

14. Palau’s small financial sector focuses on providing basic financial services. There are seven banks licensed by the FIC of which four are branches of foreign banks. The nonbank financial sector consists of insurance agents, finance companies, money and value transfer services (MVTS), and credit unions, all of which are covered by the MLPCA.

15. The FIC has been designated as the AML/CFT supervisor for banks, finance companies, credit unions, and MVTS, but not for the insurance agents who are not licensed nor supervised. It has not yet commenced AML/CFT supervision, nor has it issued AML/CFT regulations or guidelines. It has indicated that it will start licensing MVTS, but has yet to identify all providers and issue implementing regulations. With only one Executive Commissioner, one bank examiner in training, and one support person, it is not adequately staffed to execute its tasks. High priority should be placed on the proper staffing, funding, and training of the FIC to ensure appropriate AML/CFT implementation and supervision.

16. The AML/CFT framework has improved with the recent amendments to the MLPCA and the FIA, although significant deficiencies remain. Particular strengthening is needed in the areas of supervisory and oversight systems, CDD, record keeping, monitoring of transactions and relationships, and internal controls. CDD deficiencies include the need to address politically-exposed persons, cross-border correspondent banking, payable-through accounts, enhanced due diligence for high-risk customers, and wire transfers. Record-keeping deficiencies include the lack of requirements to maintain all necessary records on transactions, account files and business correspondence.

17. The requirements for monitoring transactions and relationships are new and have not been implemented, and financial institutions have not been provided information regarding weaknesses in the AML/CFT systems of other countries. Financial institutions are required to report suspicions for ML to the FIU, yet over the past years, only two of the seven banks and none of the other institutions have reported STRs. The reporting of suspicious transactions related to FT is not sufficiently covered in the MLPCA.

E. Preventive Measures—Designated Non-Financial Businesses and Professions

18. The only DNFBPs that operate in Palau are attorneys, who also provide company formation services, but they are not covered under the MLPCA. The only DNFBPs covered under the MLPCA are casinos, but there are no licensed casinos in Palau. Other businesses or professionals such as notaries, auditors, real estate agents, and dealers in precious metals or precious stones are present in Palau but their activities do not normally meet the thresholds or conditions that constitute a DNFBP under the international standard.

F. Legal Persons and Arrangements and Nonprofit Organizations

19. There are no adequate measures to ensure that the information on legal persons and arrangements and their ownership and control structure is accurate and current. Corporations, including trusts, have to register with the Registrar of Corporations, but the Registrar does not conduct any examinations to determine if the data provided is accurate, nor is there satisfactory information available on the beneficial owner, which causes problems for the FIU and CID.

20. Palau has a rudimentary oversight of its nonprofit organizations (NPO) sector. There is a basic registration requirement with the Registrar and a requirement for annual reports. However, no review of the NPO sector nor any monitoring of activities has been undertaken.

G. National and International Cooperation

21. Palau has created a Money Laundering Working Group (MLWG) in 2003 to provide input on AML/CFT policies; this group has been meeting too irregularly to have played a significant role in AML/CFT policy development. Although there are no specific legal mechanisms in place for operational cooperation, due to the fact that Palau is a small community, ad hoc operational cooperation has been taking place.

22. The legal framework of the Mutual Legal Assistance in Criminal Matters Act and the Extradition and Transfer Act is basically sound, and international cooperation has taken place in a few cases. Subject to the dual criminality requirement, authorities may take any measure on behalf of another country that could be taken with respect to a domestic case. However, the application of dual criminality entails that all shortcomings of the ML offense may directly limit Palau’s ability to provide mutual legal assistance with respect to ML. Equally, the limitations on the availability of provisional measures also apply in cases where the authorities execute a request of another country.

H. Other Issues

23. It is strongly suggested to draft a new law on AML/CFT in order to provide for a common set of requirements applicable to the financial and nonfinancial sectors, ensure a clearer legal environment and eliminate the inconsistencies and duplications that resulted from previous amendments.

Summary Table of Observance and Key Recommendations

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I. Authorities’ Response

The Republic of Palau Authorities have reviewed the IMF-APG Mutual Evaluation Assessment in detail. We agree with a majority of the findings and are committed to working on the majority of the items contained in the “Recommended Action Plan to Improve the AML/CFT System”.

We thank the evaluators for their taking the time to gain a detailed understanding of the strengths and weaknesses of the Palau AML/CFT system. We are glad that the evaluators appreciate the limited financial system in the Republic of Palau and the recent updates to national legislation which took prolonged periods and concentrated efforts by the authorities to enable passage through our congress. The updates address a majority of the shortcomings in the AML/CFT system, which were identified during the previous assessment in 2003. Other new aspects of the system, such as bulk cash couriers have also been addressed in new legislation which is being vigorously implemented and enforced by the appropriate authorities. For a small jurisdiction with such limited financial and personnel resources, we believe the Republic is maximizing on these limitations in order to implement the FATF 40+9 Recommendations; and to that end, have experienced success within this context.

While we agree with the majority of the recommendations, we are not as agreeable with the importance given by the evaluators to some technical deficiencies in the laws, such as a lack of criminalization of organized criminal group and racketeering, illicit arms trafficking, piracy, and insider trading and market manipulation for the reason that such crimes are nonexistent in the in Palau at this time and do not pose an immediate or eminent threat. As the assessment team determined, there are no major organized criminal groups, all possession of arms is highly illegal, therefore trafficking is included, there have been no instances of piracy, and finally as there are no markets (stock or capital) to be manipulated, the Republic believes these are mere technical deficiencies that should be rectified in the future and the authorities will continue to work within the current political environment to effectuate needed changes.

Many of the deficiencies contained in the Action Plan are currently being addressed by FIC and FIU regulations that will come into effect during 2008. These include in particular the basic and enhanced CDD requirements and record keeping requirements.

In summary, the Republic of Palau accepts the assessment report and agrees with a majority of the findings. The Republic further agrees to the publication of the assessment report. Lastly, the Republic believes that a majority of the noted deficiencies will be addressed during the remainder of 2008 and into the first quarter of 2009.

1

The assessment team consisted of Maud Bökkerink (team leader), Marlene Manuel (both LEG), Gabriele Dunker, John McDowell (both consultants for LEG), and Lindsay Chan (active observer, APG Secretariat).

2

Compliant (C): the Recommendation is fully observed with respect to all essential criteria.

Largely compliant (LC): there are only minor shortcomings, with a large majority of the essential criteria being fully met.

Partially compliant (PC): the country has taken some substantive action and complies with some of the essential criteria.

Non-compliant (NC): there are major shortcomings, with a large majority of the essential criteria not being met.

Palau: Report on the Observance of Standards and Codes: FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism
Author: International Monetary Fund