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

This study provides a summary of the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) measures in Kuwait and the level of compliance with FATF recommendations, and contains how the AML/CFT system could be strengthened. A detailed assessment report (DAR) is prepared. The DAR was adopted by the Middle East and North Africa Financial Action Task Force (MENAFATF). The preventive measures adopted in financial institutions are explained. The National AML/CFT committee and the committee on Combating Terrorism (CCT) are outlined. Various preventive measures are also ascribed in this paper.

Abstract

This study provides a summary of the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) measures in Kuwait and the level of compliance with FATF recommendations, and contains how the AML/CFT system could be strengthened. A detailed assessment report (DAR) is prepared. The DAR was adopted by the Middle East and North Africa Financial Action Task Force (MENAFATF). The preventive measures adopted in financial institutions are explained. The National AML/CFT committee and the committee on Combating Terrorism (CCT) are outlined. Various preventive measures are also ascribed in this paper.

A. Introduction

This Report on the Observance of Standards and Codes (ROSC) for the Financial Action Task Force (FATF) 40 Recommendations for Anti-Money Laundering (AML) and 9 Special Recommendations on Combating the Financing of Terrorism (CFT) was prepared by the IMF.1 It provides a summary of the AML/CFT measures in place in Kuwait as well as of the level of compliance with the FATF 40+9 Recommendations, and contains recommendations on how the AML/CFT system could be strengthened. The Detailed Assessment Report (DAR) on which this document is based was prepared using the 2004 Assessment Methodology and the information available at the time of the mission from October 17, 2010 through November 1, 2010, or shortly thereafter. The DAR was adopted by the Middle East and North Africa Financial Action Task Force (MENAFATF) plenary on May 4, 2011 and by the FATF plenary on June 23, 2011. The views expressed here, as well as in the DAR, are those of the assessment team and do not necessarily reflect the views of the State of Kuwait or the Executive Board of the IMF.

B. Key Findings

1. Although there is currently no evidence of significant ML in the country, Kuwait’s financial sector is growing rapidly in terms of banking sector assets. This development has the potential of creating a suitable environment for money launderers and terrorist financers to exploit. No major terrorist activity has been recorded in the country. Less serious terrorist activity has been noted.

2. The AML Law was introduced in 2002. While it imposes obligations on a range of financial institutions (FIs), the AML Law does not criminalize the financing of terrorism (TF) and does not put in place a mechanism to implement the United Nations Security Council Resolutions (UNSCRs). A new draft AML/CFT law was sent before the National Assembly in 2007, but has not yet been adopted.

3. The AML/CFT framework has many shortcomings, such as (i) the fact that the predicate offenses for money laundering (ML) do not cover all the designated categories of offenses required by the FATF Recommendations; (ii) the weaknesses in the preventive measures for FIs and for designated non-financial businesses and professions (DNFBPs); (iii) the lack of adequate powers of some supervisors to monitor and ensure AML/CFT compliance by FIs and DNFBPs; and (iv) the failure to establish the Kuwait financial intelligence unit (KFIU) as an independent national centre responsible for the receipt, analysis, and dissemination of suspicious transactions reports (STRs) and other information regarding potential ML or TF.

C. Legal Systems and Related Institutional Measures

4. ML is criminalized under the AML Law. However, the smuggling of migrants and TF are not criminalized and are therefore not predicate offenses for ML. The AML Law also explicitly extends criminal liability for ML to companies. However, the notion of “companies” does not cover all other legal persons (e.g., associations, foundations).

5. TF is not criminalized in Kuwait. Kuwait is, however, a party to all the conventions listed in the Annex to the International Convention for the Suppression of the Financing of Terrorism (ICSFT).

6. With the exception of value-based confiscation, Kuwait has a comprehensive confiscation, freezing, and seizing framework. However, there are no laws and procedures in Kuwait that provide for the freezing of terrorist assets in the context of UNSCRs 1267 and 1373, and their respective successor Resolutions.

7. The KFIU does not have the legal and operational independence to carry out its core functions effectively. According to the AML Law, the Public Prosecutor’s Office (PPO) is the sole body authorized to receive STRs. The powers of the KFIU to collect information, analyze, and disseminate STRs are derived solely from the powers extended to it from the PPO via “report-by-report” memoranda.

8. Criminal financial investigations are directed and authorized by the PPO and are carried out by specialized divisions at the Ministry of Interior: the General Directorate for Criminal Investigations (CID) for ML-related cases and the State Security Bureau (SSB) for TF cases. The CID concentrates its investigations solely on the predicate crimes and does not follow the proceeds of crime and examine potential ML activities. Even though the SSB is investigating TF cases as crimes against the State, there have been no convictions.

9. Kuwait introduced a cross-border cash control regime in Article 4 of the AML Law. However, the AML Law covers only inbound movements of currency and monetary instruments, severely limiting the usefulness of this provision.

D. Preventive Measures—Financial Institutions

10. All financial activities covered by the FATF standard are conducted in Kuwait. Some requirements that are currently set out in other enforceable means (OEM) should be covered in primary or secondary legislation.

11. The AML Law, as well as Ministerial Resolution 9/2005, impose some customer due diligence (CDD) and record-keeping requirements on banks, investment companies, exchange companies, insurance companies, exchange organizations and brokerage companies. Additional CDD and record-keeping provisions have been laid out in the sector-specific instructions and guidance and these vary markedly in depth and quality across sectors.

12. The preventive measures for banks, investment companies, and exchange companies are more detailed and cover more aspects of the FATF recommendations, but are weaker for insurance companies, exchange organizations, and brokerage companies. Nevertheless, there are still a number of deficiencies in the legal and regulatory framework that apply to all sectors, such as: (i) the timing for undertaking CDD measures; (ii) the verification of persons purporting to act on behalf of certain types of legal persons; (iii) the identification and verification of beneficial owners; (iv) the conduct of ongoing due diligence on the business relationship; and (vi) the review of existing records collected under the CDD process.

13. There are no measures in place addressing politically-exposed persons (PEPs) for most FIs. Moreover, the existing requirements for banks and investment companies do not conform to the FATF standard (i.e., lack of appropriate risk management systems; no requirement for senior management approval to continue a business relationship).

14. The provisions to prevent the abuse of cross-border correspondent relationships and the misuse of new technologies, and to address the risks inherent to non face-to-face business relationships and transactions, are insufficient. The requirements to gather sufficient information about the respondent FIs and to document the respective AML/CFT responsibilities of each institution are not in line with the standard. There are no requirements in place for FIs to address any specific risks associated with non face-to-face business relationships and transactions and most FIs are not required to have policies in place to prevent the misuse of new technologies.

15. There is no legal and regulatory framework explicitly addressing the issue of FIs relying on intermediaries or other third parties to perform elements of the CDD process. While in practice a number of FIs rely on third parties to perform some CDD measures, there is no requirement that regulates the conditions of such reliance.

16. The implementing regulation for the AML Law includes requirements for training and internal controls. However, not all FIs are required to have AML programs with adequate internal controls, including a compliance officer and an annual audit.

17. Appropriate guidance (e.g., on the purpose of transaction monitoring) and feedback has not been provided to FIs and DNFBPs to assist them in complying with AML/CFT obligations. In addition, there is a lack of understanding primarily among non-bank FIs regarding the distinction between requirements to monitor transactions and those to report suspicious transactions. There are no requirements for various types of FIs to pay special attention to complex and unusual transactions. Guidance for ensuring that foreign branches and subsidiaries of FIs observe AML/CFT measures consistent with home country requirements and FATF Recommendations is also not provided.

18. STR reporting is established broadly in both law and regulation, but fails to meet the FATF standard in several ways, e.g., the STR regime is severely hindered by the lack of a requirement to file reports with the KFIU and the lack of criminalization of TF; brokerage companies, insurance companies and exchange organizations do not appear to understand the STR requirements or to whom they should be reporting. In addition, there is no requirement to file an STR for suspicious attempted transactions.

19. Although the secrecy provisions of Kuwaiti law do not inhibit the implementation of most of the FATF Recommendations, they restrict the free and direct international sharing of information outside consolidated supervision. Indeed, there is a need to go through the PPO to share information with foreign counterparts outside of the context of consolidated supervision, and that process is limited to criminal matters.

20. The regime in place with regard to shell banks fails to meet the FATF standards. In particular, it falls short of requiring the physical presence of an FI in a way that would encompass the concept of “mind and management” of the institution.

21. Implementation and effectiveness of preventive measures vary widely across financial sectors. There are more stringent AML requirements for entities supervised by the Central Bank of Kuwait (CBK) and less stringent requirements for those entities supervised by the Ministry of Commerce and Industry (MOCI) and the MC/Kuwait Stock Exchange (KSE). Concern exists with respect to the implementation of AML requirements by brokerage companies, insurance companies, and exchange organizations.

22. The supervisory framework and powers of the supervisors are different across sectors. The supervisory framework for the CBK over banks, investment companies, and exchange companies is generally adequate, but it is not for the MOCI and the KSE. The inspection and surveillance powers of the MOCI and the KSE are not adequate and lack a clear process. In particular, there is a lack of AML/CFT supervision by the KSE of brokerage companies and inadequate AML/CFT supervision by the MOCI of insurance companies and exchange organizations. Moreover, the MOCI and the KSE lack the resources to effectively conduct their AML/CFT tasks.

23. The powers of enforcement and sanction against FIs are not appropriate. There is a limited range of formal sanctions available to the MOCI and the KSE, and no monetary sanctions are available. Neither of these two supervisors have adequate powers. No sanction has yet been applied by the KSE for non-compliance with AML/CFT matters, and the sanctions applied by the MOCI are not effective. The data on the sanctions actually applied by some regulators for AML/CFT deficiencies clearly indicate that the framework does not provide for effective, dissuasive, or proportionate measures.

24. There are also general concerns about the adequacy of the licensing process of FIs. There are no legal or regulatory measures to prevent criminals or their associates from holding or being the beneficial owner of a significant or controlling interest or holding a management function in a financial institution. In addition, there are no fit and proper requirements for directors and senior management of investment companies, exchange companies, exchange organizations, insurance companies and brokerage companies.

E. Preventive Measures—Designated Nonfinancial Businesses and Professions

25. Of the six categories of DNFBPs, only three can operate in Kuwait under the FATF definition of DNFBP: real estate agents, dealers in precious metals and stones, and lawyers. These DNFBPs are subject to the requirements of the AML Law and of Resolution 9/2005. However, the DNFPBs display an overall lack of awareness of AML requirements and ML risks.

26. There is a lack of effective supervision of DNFBPs. The supervision conducted by the MOCI of real estate agents and dealers in precious metals and stones is inadequate; there is currently no AML supervision of lawyers.

F. Legal Persons and Arrangements and Non-Profit Organizations

27. Competent authorities are not able to obtain adequate, accurate, and current information on changes in ownership and control of legal persons. Kuwait’s legislation does not allow the use of bearer shares and does not provide for the creation of trusts or other similar legal arrangements.

28. Measures have been adopted in the domestic sector to prevent the abuse of charities and foundations. However, associations are treated differently and are not supervised and monitored effectively.

G. National and International Cooperation

29. Two mechanisms were put in place to ensure cooperation among the relevant authorities in the fight against ML and TF, namely, the National AML/CFT Committee and the Committee on Combating Terrorism (CCT). However, these Committees have not developed effective mechanisms to enable the relevant stakeholders to coordinate domestically on the development and implementation of policies and activities to combat ML and TF.

30. Kuwait has ratified and implemented most of the provisions of the Vienna and Palermo Conventions. However, it has not ratified or implemented the ICSFT.

31. Provisions regulating international cooperation are contained in Law No. 5/2006 ratifying the Palermo Convention, in the other international conventions to which Kuwait is party, in a number of regional and bilateral agreements, and in the AML Law. However, while the legal framework for Mutual Legal Assistance (MLA) is formally in place, the authorities have not provided, in most cases, rapid responses to foreign requests for assistance. The provisions of the Palermo Convention relating to MLA do not apply to TF per se, as the latter is not criminalized as such in Kuwait and is thus not a “serious offense” under Article 2.b of the Palermo Convention. This means that the authorities do not have a legal basis to provide MLA in TF cases. In addition, due to the limited number of cases of MLA relating to TF, it is not possible for the assessment team to assess the effectiveness of the system.

32. ML is an extraditable offense. Extradition of Kuwaiti nationals is not possible but in lieu of the extradition of its nationals, the judicial authorities can pursue legal action against a Kuwaiti national subject to an extradition request. The lack of a specific provision criminalizing TF prevents extradition in TF cases, where dual criminality is strictly applied.

33. Non-judicial international cooperation is insufficient. International cooperation with the CBK is limited to matters relating to consolidated supervision. The need to go through the PPO in certain situations is cumbersome and restrictive. There is an absence of clear gateways for information sharing on the part of the MOCI and the KSE. In addition, there is a lack of an established track record of information sharing between supervisors and their foreign counterparts. The KFIU cannot share information with its foreign counterparts. Finally, law enforcement agencies do not have sufficient controls and safeguards to ensure that information they receive is used only in an authorized manner.

H. Other Issues

34. Statistics need to be substantially improved in Kuwait. Moreover, the allocation of resources to AML/CFT appears to be uneven and there is a lack of specialist skills across competent authorities involved in combating ML/TF.

Summary Table of Observance and Key Recommendations

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1

The assessment was conducted by a team of assessors composed of staff of the International Monetary Fund (IMF). The assessment team consisted of Nadim Kyriakos-Saad (LEG, team leader), Carolina Claver, Gianluca Esposito, Chady El Khoury (all LEG); Erin Schenck (U.S. Treasury), and Robert Pasley (LEG Consultant).

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. Not applicable (NA): a requirement or part of a requirement does not apply, due to the structural, legal or institutional features of a country.

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