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

This report is on the observance of standards and codes for the FATF 40 recommendations for antimoney laundering (AML) and special recommendations on combating the financing of terrorism. The government of Georgia indicated that the recommendations of the report have already been put into an action plan to implement appropriate corrective measures. Executive Directors approve that the regime has significantly improved since the last assessment. However, weaknesses with regard to compliance with key elements of the standard should be urgently addressed in light of significant vulnerabilities and threats.

Abstract

This report is on the observance of standards and codes for the FATF 40 recommendations for antimoney laundering (AML) and special recommendations on combating the financing of terrorism. The government of Georgia indicated that the recommendations of the report have already been put into an action plan to implement appropriate corrective measures. Executive Directors approve that the regime has significantly improved since the last assessment. However, weaknesses with regard to compliance with key elements of the standard should be urgently addressed in light of significant vulnerabilities and threats.

A. Introduction

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.1 The report provides a summary of the AML/CFT measures in place in Georgia 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 November 28 to December 13, 2011 and was conducted using the 2004 Assessment Methodology. The Detailed Assessment Report (DAR) on which this document is based was adopted by the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) plenary on July 3, 2012. 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 Georgia or the Executive Board of the IMF.

B. Key Findings

1. The Georgian AML/CFT regime has significantly improved since the last assessment in 2007. The amendments to the legal framework enacted between 2008 and February 20122 have improved technical compliance with the FATF recommendations, in particular with respect to the criminalization of ML and FT and the preventive measures for financial institutions. Significant progress has been made since 2007 with regard to the effective use of the ML criminal provisions, provisional and confiscation measures, and international cooperation.

2. However, weaknesses remain with regard to compliance with key elements of the standard. A combination of technical deficiencies, poor implementation, and limited resources undermine the effectiveness of the financial intelligence unit (FIU) and AML/CFT supervision. In addition, there are still major loopholes in terms of transparency of legal entities, domestic cooperation, measures to prevent terrorism financing, and preventive measures for designated non-financial businesses and professions (DNFBPs).

3. These weaknesses should be urgently addressed in light of the significant ML/FT vulnerabilities and threats. These include: i) customers that are, or are owned by, offshore companies for which the identity of their beneficial owners is unknown or where the identity has not been verified; ii) a rapid and ongoing increase of nonresident deposits; iii) the development of private banking activities, including a clientele of foreign politically-exposed persons (PEPs); iv) the rapid growth of the casino business and rising number of non-face–to-face transactions; v) the existence of large Georgian-led criminal organizations abroad which exposes the risk of proceeds of crime being transferred back to Georgia; and vi) domestic statistics demonstrating the existence of major proceeds-generating crimes, such as corruption, tax evasion, and drug trafficking.

C. Legal Systems and Related Institutional Measures

4. Georgia has a comprehensive legal framework in place criminalizing both ML and FT as autonomous offenses. ML is criminalized through three separate provisions in the Criminal Code. The provisions are in line with the Vienna and Palermo Conventions. In particular, all categories of predicate offenses listed in the international standard are covered, the ML offenses extend to any type of property that represents the proceeds of crime, and all acts constituting an ancillary offense to ML are criminalized.

5. While no shortcomings have been identified in the legal framework, concerns remain with respect to the implementation of the ML provisions. Based on statistics provided by the authorities, the ML provisions do not seem to be applied effectively to combat the most prevalent proceeds generating crimes, or to combat transnational organized crime. The modest number of legal persons investigated or prosecuted for ML raises concern since the authorities indicated the widespread use of companies in ML schemes. The statutory sanctions available are proportionate. However, the very liberal and frequent use of plea agreements, including in the majority of aggravated ML cases, undermines the dissuasive effect thereof.

6. FT is criminalized under Georgian law broadly in line with the FATF standard. However, some legal shortcomings remain. In particular, the requirement for an act to “infringe upon public safety etc.” to qualify as a terrorist act unduly narrows the scope of the terrorism offense. The scope of the definition of the term “terrorist acts” does not fully cover the offenses defined in the Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation and the International Convention for the Suppression of Terrorist Bombings. The definitions of the terms “terrorist” and “terrorist organization” should be expanded to extend to all “terrorist acts” as defined under the FATF standard. At the time of the on-site mission, prosecutions of three persons for terrorism financing were ongoing. There had been no convictions for terrorism financing.

7. Provisional and conviction-based confiscation measures are available with respect to all predicate offenses, as well as the ML and FT offenses, and are applicable to proceeds as well as instrumentalities of crime. Confiscation is a mandatory sanction and may be applied against property equivalent in value to the proceeds of crime. Around US$13 million has been confiscated since 2005 in the context of ML offenses. However, statistics provided by the authorities suggest that the legal provisions could be applied more effectively to confiscate proceeds of other types of crimes. Concerns also remain in relation to the authorities’ practice to apply confiscation measures only in cases where property is actually available for confiscation at the time of conviction.

8. Georgia has established a framework to implement the relevant United Nations Security Council Resolutions (UNSCRs) and amended this framework in December 2011. The revisions constitute a significant improvement of Georgia’s framework to implement its obligations under international law. However, given its very recent enactment, the effectiveness of the new framework could not be established.

9. The FIU should further strengthen performance of its core functions. Some sectors are not under a legal obligation to report suspicious transactions (real estate agents, lawyers, trust and company service providers (TCSPs), and electronic money institutions), thus the FIU is not capable of requesting additional information from them. The quality of analysis of suspicious transaction reports (STRs) is poor, mostly due to lack of analytical tools and weak quality of reporting, and limited use of its powers to access law enforcement information on ongoing investigations and prosecutions, or information from financial and nonfinancial institutions other than banks. In recent years, the FIU’s increased workload was handled without a corresponding increase in its budget and a significant decrease in human resources.

10. Although the framework for law enforcement authorities is broadly in place, there is room for improvement in implementation. Since the decision of the Minister of Justice in 2010 recommending initiating ML investigations when law enforcement agencies (LEAs) suspect the presence of illegal proceeds, the number of ML investigations has increased. LEAs started to make better use of their powers and available investigative techniques. However, LEAs still lack the power to access information held by lawyers when the latter conduct financial activities on behalf of their clients. LEAs also need to increase their reliance on financial analysis and investigation techniques, in particular in relation to stand-alone money laundering cases, to trace the origin of the illegal funds, detect patterns between suspects and associates, and to identify the ultimate beneficial owners of legal persons, accounts, and transactions, and share this information between different agencies and departments.

11. The measures in place to detect the physical cross-border transportation of currency and bearer negotiable instruments are not comprehensive, nor effective. Customs or other competent authorities do not have the power to stop and investigate the movement of cash and bearer negotiable instruments unless they deem the relevant conduct to be smuggling. Only a small percentage of inbound and outbound movements of currency and bearer negotiable instruments are actually declared.

D. Preventive Measures – Financial Institutions

12. The scope of Georgian preventive measures for the financial sector has been recently updated and is relatively comprehensive. However, it does not cover factoring and credit card services (currently offered only by banks), as well as electronic money and investment funds. Some forms of money value transfer (MVT) operators are not subject to regulation and supervision. They include electronic money institutions, casino accounts operated to move value within Georgia, and self-service terminals accepting cash and providing transfer facilities (known as Pay-boxes).

13. While most of the customer due diligence (CDD) and record-keeping provisions required under the international standard are in place, their implementation and effectiveness are limited. There are still some deficiencies in the legal framework, such as the lack of a prohibition on numbered accounts, the existence of a minimum monetary threshold for when standard CDD must be carried out, inconsistencies relating to measures that can be applied on a risk-sensitive basis, and the timing for undertaking CDD. In addition, implementation is generally poor regarding the identification and verification of beneficial owners, documentation of the purpose and nature of the account business, ongoing customer due diligence, and the application of risk-sensitive measures to customers. There are still major legal shortcomings regarding reliance on third parties and introduced business, as well as the monitoring of wire transfers.

14. The requirement for reporting ML and FT suspicious transactions and other information is largely in line with the standard; however, its implementation should be improved. The number of STRs submitted to the FIU is relatively high. Most of them are filed by banks. Electronic money institutions are not required to report and other sectors are not filing suspicious reports (i.e., leasing, insurance companies). The number of STRs can be explained by financial institutions’ reliance on a system based on fixed indicators triggering automatic reports, and by a tendency of defensive reporting. Overall, the quality of STRs is poor and reporting entities are confused about the distinction between requirements to monitor transactions and those to report suspicious transactions, particularly as there is no appropriate guidance. While there are known FT risks in Georgia, no FT-related STRs have ever been received by the FIU.

15. Internal control and compliance provisions need to be strengthened, particularly for money remittance operators and currency exchange bureaus. These professions are not required to ensure that the AML compliance officer and other relevant staff have timely access to customer information, nor are they obliged to screen their employees and provide adequate AML/CFT training. There is also no requirement for nonbank financial institutions to have an adequately resourced and independent audit function. Internal control requirements pertaining to CFT were added for all financial institutions after the mission and were, therefore, not assessed.

16. The National Bank of Georgia (NBG) has introduced many notable improvements to its supervisory framework since the onsite visit, but has limited resources for AML/CFT supervision. The NBG exercises regulatory and supervisory oversight over the financial institutions (around 1,700 institutions), it has only 5 staff for onsite AML/CFT inspection. Electronic money institutions are not yet subject to AML/CFT supervision. Given its limited resources, the supervisory cycle has been quite long for some institutions, such as currency exchange bureaus and money remittance operators. Furthermore, there has been a lack of systematic off-site monitoring and on-site supervisory planning. Pecuniary sanctions available under sectorial regulations are low for several categories of violations (such as CDD requirements) to be considered as dissuasive and effective. Improvements have been introduced but are too recent to be assessed.

17. Significant reforms have been recently introduced to the market entry framework. As these took place after the on-site mission, their implementation has not been reviewed. At the time of the onsite visit, there were no fit or proper tests for owners and administrators for a number of categories of financial institutions.

E. Preventive Measures – Designated Non-Financial Businesses and Professions (DNFBPs)

18. The preventive measures for DNFBPs are substantially similar to those applicable to financial institutions; however, their implementation is at its early stages. Preventive measures only apply to notaries, casinos, dealers in precious metals and stones and, more recently, accountants. Notaries have implemented the majority of CDD requirements but the identification of beneficial owners presents some challenges. Reporting levels for notaries are relatively low for the number of transactions being conducted and implementation of internal control requirements is weak. The same observation can be made in respect of casinos, where there is little to no compliance with requirements other than customer identification. No STRs have been reported by casinos despite the rapid growth of this industry. Obligations for dealers in precious metals and stones have not been implemented and accountants have only been subject to the AML/CFT requirements since January 2012. The absence of requirements for lawyers, real estate, and Trust and Company Service Providers (TCSPs) exacerbates the risk in these already vulnerable sectors.

19. With the exception of notaries, DNFBPs are not supervised. A number of supervisory authorities have been designated as AML/CFT supervisors in their respective areas of responsibility. However, other than activities undertaken by the Ministry of Justice pertaining to notaries, no AML/CFT examinations have been conducted.

F. Legal Persons and Arrangements & Non-Profit Organizations

20. In light of the risk that criminals integrate proceeds generated abroad in Georgia or use Georgian entities to invest abroad, the inability to ensure adequate and accurate information on beneficial ownership of legal entities is a serious weakness. The recent establishment of the National Agency of Public Registry (NAPR) has enhanced access to information on legal persons. However, at the time of the mission, most of the data included in existing registries had not been migrated nor updated. Bearer shares exist under Georgian law but except for listed companies, there are no appropriate measures to ensure that bearer shares are not misused for money laundering.

21. The measures in place in Georgia relating to nonprofit organizations (NPOs) are deficient and do not adequately address the risks in Georgia. No formal review of the sector has been carried out, and there is no formal supervision of the sector. The NAPR provides publicly-available information on NPOs registered since 2010; however, data prior to 2010 is deemed to be unreliable. There is a lack of outreach to the NPO sector. Domestic coordination mechanisms related to NPOs are weak and there is no appropriate point of contact and procedures to respond to international requests related to NPOs.

G. National and International Co-operation

22. Georgia does not have a central coordinating body/committee to steer and coordinate the development and implementation of policies and activities to combat ML and TF. There is no mechanism allowing for cooperation between the supervisory agencies of FIs and DNFBPs, notably the NBG, the Ministry of Justice, and the Ministry of Finance.

23. Georgia’s mutual legal assistance (MLA) framework is solid and allows for the provision of a wide range of assistance to foreign countries in the context of criminal investigations and prosecutions. Such assistance does not seem to be subject to any unduly restrictive or unreasonable requirements. While some of the grounds for refusal of MLA are drafted in a rather general manner, the low number of rejected requests leads to the conclusion that in practice these provisions are interpreted in a narrow manner. Both ML and FT are extraditable offenses. For those types of assistance that require dual criminality to be met, the shortcomings noted with respect to the FT offense may limit Georgia’s ability to provide MLA or extradite a person in certain cases. Georgia’s lack of diplomatic relations with Russia constitutes a practical challenge to effectively provide and receive international cooperation in ML and FT cases.

24. International cooperation mechanisms are in place for the FIU, LEAs, and supervisors. Information exchanged with foreign FIUs is comprehensive; however, timeliness could be improved and the FIU would benefit from making more proactive use of international collaboration channels. The NBG is responsive to requests from foreign supervisors but could make additional use of cooperation mechanisms to help ascertain if fit-and-proper criteria are met. LEAs exchange information through a variety of channels including Interpol as well as bilateral and multilateral agreements. However, there is a lack of a clear legal basis that allows LEAs to compel production of information detained by lawyers based on international requests.

Summary Table of Observance and Key Recommendations

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H. Authorities’ Response

Georgian authorities appreciate the time and efforts evaluators dedicated to the assessment of Georgian AML/CFT system. The authorities indicated that the recommendations of the Report have already been put into an Action Plan in order to implement appropriate corrective measures.

Georgian authorities would like to pay special attention to the instances where the opinions of the authorities and the assessors diverged. We note that out of 49 FATF Recommendations certain recommendations (e.g. R7, 11, 15, 25, 26) were rated as partially compliant without sufficient justification in the light of non-relevant interpretation of Georgian legislation.

First of all we would like to pay attention to Recommendation 7 where the large majority of essential criteria are fully met by the Georgian AML/CFT legal framework. The same situation is extended on Recommendation 11. Though, in this case evaluators’ conclusions on effectiveness still remain rather subjective.

Furthermore, Georgian authorities consider that in case of Recommendation 15 the essential criteria are also fully met by the Georgian AML/CFT legislation. Only minor shortcomings are in place and they are related to currency exchange bureaus and money remittance services. It is worth to note that in most of cases these entities conduct their activities as sole entrepreneurs. Therefore, it will be a very high burden for them to introduce a requirement that they shall employee a separate person as an AML/CFT compliance officer.

As regards Recommendation 26, there are number of factual circumstances that have not been taken into consideration by the evaluators’ team. Due to the requirements of the R26, such circumstances are the following:

  • Publication of annual reports on the official web site of the FIU;

  • Publication of guidance by the FMS for each monitoring entity on the manner of reporting (since the establishment of reporting obligations);

  • For the purpose of conducting appropriately its functions the access of the FIU to the large number of databases for (list of databases are given in par 322).

Georgian authorities and the evaluators’ team have also different positions on financial guarantees of the activity of the FIU. Since 2007 the budget of the FMS has only been increased that is quite obvious from paragraph 352. As regards increasing workload within the FMS, the issue has been resolved by the special software facilitating the process of data collection within FIU. This fact is also directly linked to the decreasing number of the staff of the FMS. Unfortunately, the evaluators’ team did not take into account the mentioned circumstances that strictly underline the compliance of the current Georgian AML/CFT system to the relevant criteria.

Georgian authorities would like to underline once more that based on the Action Plan of the Detailed Assessment Report we will continue our efforts in order to strengthen the AML/CFT legal framework of Georgia in compliance with FATF standards.

Finally, we would like to thank once again to the Assessment Team for their cooperation.

1

The assessment team consisted of Emmanuel Mathias (team leader); Kristel Poh, Chady El-Khoury, Marilyne Landry, Rocío Ortiz-Escario (all LEG), and Gabriele Dunker (LEG consultant).

2

A number of changes to the legal framework were enacted between December 2011 and early February 2012, during the eight-week period following the mission. While their technical compliance with the standard was assessed, the assessment of their implementation has not been possible.

Georgia: Report on Observance of Standards and Codes—FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism
Author: International Monetary Fund. Legal Dept.