Intensified Fund Involvement in Anti-Money Laundering Work and Combating the Financing of Terrorism

Intensified Fund Involvement in Anti-Money Laundering Work and Combating the Financing of Terrorism

Abstract

Intensified Fund Involvement in Anti-Money Laundering Work and Combating the Financing of Terrorism

I. Introduction

1. Money laundering and the financing of terrorism are issues that affect countries at every stage of development, and involve both onshore and offshore financial centers. Recent events have demonstrated all too clearly that terrorism can not only imperil the peace of nations, but also have far-reaching negative consequences for global economic growth and financial stability. These events and their aftermath have therefore prompted a reexamination at national and international levels of mechanisms for the promotion and enforcement of laws against both money laundering and the financing of terrorism.1 In these circumstances the Fund too needs to reconsider its contribution to these international efforts. The primary responsibility for combating money laundering and the financing of terrorism rests with the supervisory authorities and other relevant institutions of individual countries. However, the Fund can play a facilitating role within its mandate and expertise, which imply that its involvement must concentrate on those areas that relate to the integrity and stability of the international financial system. The Fund’s contribution should also be complementary to the new undertakings of the Financial Action Task Force on Money Laundering (FATF), which remains in the lead on these issues, and should be closely coordinated with other standardsetters and with the World Bank.

2. This report summarizes the Fund’s current policies and activities in anti-money laundering (AML) (Section II), presents the principal considerations and objectives in determining an approach to intensified involvement in AML and combating the financing of terrorism (Section III), outlines the Fund’s expertise and mandate in this area and cooperation with other organizations (Section IV), and proposes a set of measures for consideration by the Fund Board (Section V).2 The measures are designed to build on the Fund’s strengths as an international institution, without going beyond the Fund’s mandate. These measures should be regarded as an immediate response to changed circumstances, and this response would evolve in due course as experience is gained. Adoption of the measures would require additional resources; a preliminary estimate of the needs is contained in Section VI, and a summary of the issues and suggested measures is contained in Section V. A number of issues are proposed for consideration by the Board (Section VII). Annexes contain additional information and background material on terrorist financing, the recommendations of the Financial Action Task Force on Money Laundering (FATF), related legal and institutional issues, and assessment methodologies.

II. The Board Decisions Of April 2001 and Follow-Up

A. The Board Decision On Enhancing Contributions To Combating Money Laundering

3. The Executive Board met on April 13, 2001 to discuss an enhanced role for the Fund in the area of anti-money laundering, and agreed that the Fund should enhance its contribution to international efforts to counter money laundering within its core mandate, confirming that it would not be appropriate for the Fund to become involved in law enforcement activities.3 In particular, it was agreed to:

  • Intensify its focus on AML elements in all relevant supervisory principles;

  • work more closely with major international AML groups;

  • increase the provision of technical assistance;

  • include AML concerns in Fund surveillance and other operational activities when macroeconomic relevant; and

  • undertake additional studies and publicize the importance of countries acting to protect themselves against money laundering.

4. Directors generally agreed that the FATF 40 Recommendations (FATF 40) should be recognized as the appropriate standard for combating money laundering, and that work should go forward to help adapt the standard assessment process with the view to preparing Reports on Observance of Standards and Codes (ROSC). Following the development of an appropriate methodology and an assessment procedure for the FATF Standard that would be uniform, cooperative, and voluntary, FATF could be invited to participate in the preparation of a ROSC module on money laundering. The Board invited staff to discuss these principles with FATF, as well as to contribute to the ongoing revision of the FATF 40 Recommendations. Most Directors felt at that time that the Fund should cover only those issues in the FATF 40 Recommendations that deal with financial regulation and supervision, and that responsibility for assessing legal/crime enforcement should be left to others.

Implementation of the April 2001 Board Decision4

  • Staff of the Fund and Bank has prepared an AML Methodology Document based on those financial sector supervisory standards relating to preventing abuse of the financial system by criminals.5 The document assesses the AML elements present within the financial sector supervisory and regulatory framework to ensure that adequate controls and procedures are in place to prevent abuse of the financial system by criminals. Included are requirements for due diligence reviews on those who control or use regulated financial intermediaries, which includes both fitness tests for owners/managers and know-your-customer rules. These elements overlap with about 19 of the FATF 40 Recommendations. Not included within the Fund-Bank Methodology Document—but included in the FATF 40 Recommendations—are legal and law enforcement elements such as mechanisms for freezing, seizing, and confiscating proceeds of crime; methods for investigating and prosecuting money-laundering crime; and related international cooperation.6

  • The AML Methodology Document is being piloted, with the authorities’ agreement, as part of the Luxembourg, Switzerland, Sweden and the Philippines FSAPs. Summary assessments in the FSSAs would be reported to the Board, and may be published with the consent of the member. Offshore Financial Center (OFC) assessments, which could also contain AML assessments, can also be distributed to the Board, and made public, with the consent of the requesting jurisdiction, and approval of management.

  • Fund and Bank staff is working closely with FATF to revise the FATF 40 Recommendations and to adapt the FATF 40 Recommendations to the ROSC process. In particular, Fund staff are contributing to the development of the associated assessment methodology document, consistent with the approach adopted by the two Boards for standards assessment and preparation of ROSCs.7 This ROSC module would cover not only AML supervisory principles, but also the broader legal, law enforcement and institutional framework of AML regimes, and extend beyond the regulated financial sector. FATF intends to complete this work and to prepare draft modalities for AML standard assessment and ROSC preparation, which could be considered by the Fund and Bank Executive Boards in 2002. If outstanding issues regarding FATF’s use of various standards can be resolved, FATF (and regional FATF-like bodies) could begin making assessments later in 2002.

  • Technical assistance in the AML area has focused on financial supervisory systems, but in many instances has also included both the unsupervised sector and legal and institutional framework for AML regimes. Technical assistance has extended beyond the regulated financial sector: AML laws have been reviewed in five cases, and intensive technical assistance is being provided to seven members of the Pacific Islands Forum to improve the legal and institutional framework for AML, including advice on the creation of a regional Financial Intelligence Unit (FIU; see Annex V and SM/01/46, Annex VIII).

III. Considerations In Determining Measures For Intensified Involvement

5. The events of September 11 have brought to the fore the questions of whether and how the Fund could extend its activities to prevent the use of financial systems for terrorist financing. At a general level, one approach would be to extend the Fund’s current AML efforts, focused on financial supervisory principles, to incorporate areas germane to countering terrorist financing. An alternative would be to expand the Fund’s role to include also the legal and institutional issues and, when relevant, the unsupervised financial sector that impact on the effectiveness of financial sector policies, including financial supervision, and that are germane to AML and anti-terrorist financing issues. (Law enforcement issues would always be left to others, in line with the April Board decision.) The second approach would respond to the great importance that the international community now attaches to the problems of money laundering and terrorist financing. However, complex questions arise concerning consistency with the Fund’s mandate and possible “mission creep,” as well as the division of labor amongst international bodies, particularly FATF. Questions also arise as to where to draw the line between activities related to financial supervision and legal and institutional aspects of supervision and financial sector policy generally, and law enforcement. These issues need to be reviewed in formulating effective and suitable measures for the Fund’s enhanced involvement.

6. Like money laundering, the financing of terrorism can involve both domestic and international financial systems. Both crimes are varieties of financial abuse that can compromise the integrity of the national and international financial system. As such they must be of concern to the Fund. However, in substance terrorist financing is an issue distinct from money laundering because it involves the processing of funds, often from legitimate origins, to be used for future crimes, rather than the processing of criminal proceeds to disguise their illegitimate origin (see Annex I). Nonetheless, many of the measures to combat each are closely related.8 Effective coverage and implementation of these measures raises a host of issues relating to information exchange among supervisory and other authorities, the scope of financial policies including supervisory principles, the role of both supervised and unsupervised institutions, and the related legal and institutional framework.

A. Information Exchange and International Cooperation

7. To be effective, financial supervisors and enforcement agencies need access to a broad range of information with respect to financial activities and transactions. Without such information, neither money laundering nor terrorist financing can be effectively identified nor appropriate countermeasures be applied. However, critical information gaps occur both at the national level (financial intermediaries do not convey information to authorities, authorities do not share information among themselves), and at the international level (authorities do not share information across borders). Because money laundering and terrorism often involve many jurisdictions, the failure to share information creates significant negative cross-border externalities that compromise the fight against predicate crime and terrorism.

8. The costliness of information gaps has two important implications. First, a concerted effort is needed to combat money laundering and terrorist financing. No country can resolve this issue alone. Second, the information gaps that lead to the negative externality need to be tackled through institution building at the national levels and through cooperative arrangements to foster the exchange of information at all appropriate levels.

9. Money laundering and financing for terrorism are complex phenomena, which cut across several quite separate dimensions (e.g., law enforcement, financial supervision, corporate vehicles, etc.). This complexity implies that no single agency can be expected to resolve the problem independently; multiple actors at the national and international levels must contribute.

10. All of this calls for a disciplined and collaborative approach. In this strategic vision, every partner engaged in the global fight against money laundering and the financing of terrorism must concentrate on a set of actions which respect the expertise, scope, and mandate of the other involved institutions.9 This approach makes best use of the limited resources at hand.

B. Financial Policies, Supervisory Principles, and Measures To Combat Terrorist Financing

11. Because the April Board meeting took place before the events of September 11, there was no discussion of financing of terrorism. As noted above, most Directors felt that the Fund’s contribution to AML efforts should cover financial regulation and supervision. There were at that time no financial supervisory principles specifically directed to preventing the use of the regulated financial sector for financing terrorism. However, since September 11 there have been two major relevant multilateral developments.

12. On September 28, the UN Security Council adopted Resolution 1373, which requires that all member states of the UN prevent and suppress the financing of terrorism, including confiscating terrorist assets. A UN Security Council Committee has been appointed, chaired by the United Kingdom, to report within 90 days on compliance with the Resolution.

13. On October 29 and 30 FATF, meeting in an extraordinary plenary, adopted eight new recommendations on terrorist financing, a number of which have relevance for financial supervision. Briefly, these new recommendations include:10

  1. take steps to ratify and implement relevant United Nations instruments,

  2. criminalize the financing of terrorism and terrorist organizations,

  3. freeze and confiscate terrorist assets,

  4. report suspicious transactions linked to terrorism,

  5. provide assistance to other countries’ terrorist financing investigations,

  6. impose anti-money laundering requirements on alternative remittance systems,

  7. strengthen customer identification measures for wire transfers, and

  8. ensure that entities, in particular nonprofit organizations, cannot be misused to finance terrorism.

14. FATF will develop additional guidance for financial institutions on the techniques and mechanisms used by terrorists to receive and launder their funds. FATF has requested that all countries undertake an immediate self-assessment against the new recommendations, which information could be used to assist the Security Council in evaluating compliance with Resolution 1373.

Regulated financial institutions

15. Recommendations 4, 6, and 7 in particular are directly related to supervision of financial institutions (application of customer due diligence, suspicious or unusual transaction reporting, standardizing information to be collected on wire transfers, and the extension of some form of supervision to bodies and persons that engage in financial transfers). The Basle Committee, IOSCO, and IAIS are expected to consider related supervisory principles in the near future. The application of “know your customer” (KYC) principles allows financial institutions more effectively to conduct customer due diligence. Therefore, they help an institution determine if the potential or actual customer (or beneficiary), or the maker or recipient of assets transfers, is a person identified as a terrorist. This allows financial institutions to implement orders to freeze assets and to record customer information relating to asset transfers. However, when the origin of the funds is legitimate and where no crime has yet been committed, KYC rules are relatively unhelpful in identifying as potential terrorists persons not already classified as such by law enforcement agencies. However, additional research into patterns of transactions that might suggest terrorist financing is currently being undertaken by FATF and others.

Unsupervised financial intermediaries and other organizations

16. As with money laundering, terrorist organizations are suspected of making extensive use of financial intermediaries that are not normally subject to prudential supervision, such as wire remittance services and informal banking systems. These unregulated intermediaries also facilitate money laundering or other financial transactions associated with criminal activity. The associated FATF recommendation proposes extension of anti-money laundering measures to these different intermediaries; further guidance in this area from FATF and from the financial institution supervisory bodies is expected. However, ensuring compliance by these intermediaries, especially with respect to informal banking or remittance systems, is expected to be difficult.

17. These informal institutions exist largely to fill the “gaps” created by inadequate formal financial systems. These inadequacies may arise from the slow development of institutions and high costs, which in turn may often be caused by regulatory constraints and other government policies. Hence, one important element in combating the abuse of informal financial intermediaries is the promotion of sound and efficient formal institutions.

18. Nonfinancial intermediaries that do not regularly engage in financial transactions on behalf of customers are also suspected of playing important roles in financing terrorism and in money laundering. These bodies include for-profit companies and nonprofit organizations (typically organized as trusts or foundations). In particular, nonprofit bodies have been suspected of either wittingly or unwittingly serving as a vehicle for financing terrorism. While not subject to prudential supervision, such organizations are typically required to fulfill certain “fit and proper” tests with respect to ownership and control, and are often required to file audited financial statements with relevant government authorities. In addition, many jurisdictions subject nonprofit organizations to greater scrutiny to ensure that they do not mislead the public when soliciting donations and, where relevant, are abiding by the terms of a tax exemption. While the relevant recent FATF recommendation is not specific, it suggests that heightened scrutiny in the form of fit and proper tests, audited accounts, and supervision of the not-for-profit sector should be encouraged.

19. In order to ensure effective coverage of terrorist financing, the Fund’s work could be extended to include, on a case-by-case basis, certain nonfinancial bodies that might play a role in money laundering or terrorist financing. Some of these issues are already being addressed by Fund staff in the context of its work on OFCs, when for example the regulation of company and trust service providers are typically discussed.11

C. National and International Systems For Information Sharing

20. The scope of national and international cooperation and information sharing on financial transactions has two distinct dimensions : the first deals with cooperation and information exchange arrangements for supervisory or regulatory purposes; the second is information exchange to uncover and prosecute criminal abuse of the financial system (e.g., money laundering crime).

21. In implementing supervision, domestic and international cooperation is essential to cover all material risk areas of a regulated financial institution. The cooperation is particularly important to provide effective supervision and oversight of (i) a financial conglomerate engaged in banking, insurance, securities, and/or other financial activities; (ii) a financial institution that operates in more than one jurisdiction; or (iii) a financial institution whose size or activities are systemically relevant in relation to the financial system.

22. The necessity of cooperation for prudential purposes is highlighted by each of the three financial sector supervision standard-setters, who have issued guidance for the exchange of supervisory information. The Basel Committee has issued two papers, “Minimum Standards for the Supervision of International Banking Groups and their Crossborder Establishments” (July 1992), and “Report on the Supervision of Cross-border Banking” (October 1996). IOSCO issued guidance in “Principles for Memoranda of Understanding” (1991). Finally, the IAIS issued its standard in a section of the Insurance Concordat titled “Principles applicable to the Supervision of International Insurers and Insurance Groups and their Cross-border Establishments.” Supervisory cooperation is also fostered through various regional supervisory groupings.12

23. Information exchange related to criminal or civil law enforcement purposes, particularly money laundering crime and terrorist financing, varies from that for supervisory purposes as the objective behind the exchange is to prevent or solve individual crimes. It is essential for national authorities to create mechanisms whereby financial information relevant to the prevention of money laundering and terrorist financing is collected, analyzed, and disseminated to appropriate supervisory and law enforcement authorities. Integral to the information exchange mechanism is that financial institutions must report instances when there is reasonable basis for suspicion of criminal activity. The typical process is one where the financial institutions are required to make suspicious activity reports, often through their national supervisors, to a financial intelligence unit (FIU; see Annex V). The FIU is frequently operated from within a finance or justice ministry. The FIU acts as the central repository to gather information, primarily in the form of suspicious activity reports, from financial institutions or other sources, and turns this raw reporting into intelligence that is provided to the appropriate government authority to support a national anti-money laundering effort.

24. The overall effectiveness of fighting money laundering crime (and now terrorist financing), which often involves financial transactions in more than one country, depends on the sharing of information and intelligence among several jurisdictions. This sharing of information frequently involves interaction between FIUs, law enforcement agencies and supervisory agencies. Through the sharing of information, money-laundering crime, and now the financing of terrorists, can be discovered and appropriate law enforcement be brought to bear. While there have been some advances in cooperation among FIUs (in particular there is a trend towards greater regional cooperation in the European Union, the Caribbean, and the Pacific Islands region), there is currently no formal global multilateral framework in place. However, international cooperation is encouraged through the informal association within the Egmont Group.13

25. While the primary responsibility for strengthening information sharing and avoiding critical information gaps lies with supervisors and other national authorities, the Fund can play a facilitating role in its assessments and technical assistance. For example, compliance with supervisory standards in information exchange is assessed in FSAP and OFC work. Also, the Fund-Bank Methodology Document expressly considers the legal and regulatory requirements whereby financial institutions must report suspicious activity to the FIU or other proper authority. Also, the methodology document inquires about the mechanism in place for sharing suspicious activity reporting information with foreign authorities.

IV. The Fund’s Comparative Advantages And Coordination With Other Groups

A. The Fund’s Mandate and Expertise

26. A range of activities is available to allow the Fund to intensify its involvement in anti-money laundering policies and extend its activities to support systems to combat the financing of terrorism. The Fund should pursue those activities that exploit the Fund’s core competencies and capacities, recognizing its unique global coverage and its expertise in certain financial sector issues. The Fund is a collaborative institution with near universal membership, which lends the Fund legitimacy and acceptance, and makes it a natural forum for sharing information and developing common approaches to issues. These strengths also make the Fund a vehicle for actively promoting desirable policies and standards in member countries.

27. The Fund has broad experience in conducting assessments and providing technical assistance in the financial sector. FSAPs, conducted jointly by the Bank and Fund, are the preferred vehicles to identify gaps and vulnerabilities in financial sectors, and ROSCs and FSAPs allow compliance with agreed international standards to be assessed. The FSSAs derived from FSAPs and Article IV consultation discussions, and the financial sector ROSC modules contained in the FSSAs are explicitly integrated in the Article IV consultation discussions and reports to the Board. They thus inform the Fund’s surveillance activities.14 At the same time, technical assistance in strengthening financial systems is increasingly being targeted to support follow-up on FSAP and ROSC assessments.

28. In addition, the Fund has long experience in exercising surveillance over members’ exchange systems in the context of Article IV missions, and providing technical assistance to reform such systems as part of its core mandate to assist in the development of a multilateral system of payments for current international transactions. In this context the Fund has often had to address issues relating to exchange and currency transactions in parallel exchange markets outside of official supervision, which can provide channels for money laundering and the financing of terrorism. Fund surveillance, advice, and technical assistance in this area has sought, inter alia, to eliminate distortions and restrictions in the exchange system, and to rectify deficiencies in the foreign exchange market organization and infrastructure, and thus to reduce the importance of the parallel exchange markets.

29. Yet, the Fund has a limited mandate and must respect the sovereignty of its members and the division of labor and responsibilities with other international organizations. In April 2001, the Board stressed that money laundering issues should continue to be addressed in Fund surveillance when they have macroeconomic effects, including effects arising from financial instability and reputational damage.15 A number of Directors considered that the cross-border implications of money laundering should be raised during Article IV consultations, even if it is not macroeconomic relevant for that member but when it had significant externalities for other countries. With regard to conditionality, many Directors were of the view that the “macro-relevance” test should continue to be applied, but a few Directors were opposed to applying conditionality to anti-money laundering measures. In July 2001, Directors agreed that those measures that are critical to achieving a program’s macroeconomic objectives should continue to be included in Fund conditionality, with a number of Directors stressing the need for strong justification when including measures outside the Fund’s core areas of responsibility and expertise. Some Directors cautioned against applying this criterion too narrowly, noting that in some cases criticality might be difficult to define ex ante, and that there is a risk that important areas of reform would not be properly covered.16

30. Under the Board’s existing policies and guidance in the area of anti-money laundering policies, attention has focused on the Fund’s capacities in the areas of technical assistance and the assessment of financial systems. The April Board decision emphasized the Fund’s efforts in assessing compliance with financial supervisory principles and providing corresponding technical assistance. However, implementation of financial supervisory principles is not readily separable from the legal framework in which they are applied, and depends on other institutional structures.17 This distinction is made more complicated as the objective is extended to encompass the combating of terrorist financing. The staff has already been involved in advising countries on AML legislation, and, in a limited number of cases, the registration of nonfinancial intermediaries and the creation of FlUs. The August report containing the draft AML Methodology Document makes reference to communication and cooperation between supervisors and relevant enforcement bodies. The Fund is not able or mandated to become involved in law enforcement, but greater attention to issues of immediate relevance to the effectiveness of financial sector policies, and especially financial supervisory principles is feasible and worthwhile.

B. Coordination With FATF

31. There was broad agreement at the Fund Board in April that the FATF 40 Recommendations be recognized as the appropriate standard for combating money laundering, and that work should go forward to determine how the Recommendations could be adapted and made operational in the Fund’s work. While FATF (like a number of other standard-setters) has a limited membership, the worldwide acceptability of its AML standards, the processes by which they are assessed, and how the results are used are crucial to an invitation to participate in the ROSC process.

32. FATF convened the working group charged with the development of the assessment methodology for the FATF 40 Recommendations (FATF 40 ROSC working group). The working group, chaired by the United States, includes Fund and Bank participants. In conjunction with the recent extraordinary plenary meeting in Washington, the working group discussed an initial draft assessment methodology and agreed to a preliminary timetable for completing a final version by the next plenary meeting in February 2002. At this juncture, the working group has elected to confine the assessment methodology to the current version of the FATF 40 Recommendations (i.e., the 1996 version) and not take up the special recommendations for countering terrorist financing. There was agreement within the working group that (i) the assessment criteria needed more precision to ensure consistency of application by assessors and (ii) that the detailed criteria from the Fund and Bank’s AML methodology document should be incorporated into the FATF assessment methodology. Thus, progress in this work has been made, but some major issues still need to be resolved.

33. At the meeting, staff noted that, while the IMF and Bank will help to draft the assessment criteria for the supervisory and regulatory elements for the banking, insurance and securities sectors, FATF was to develop the objective and specific guidance in the criminal and civil law enforcement areas. In particular, FATF was to develop criteria for assessing cooperation and information sharing in criminal investigation and prosecution; guidance on elements that should be present in mutual legal assistance treaties; and the minimum requirements for what constitutes a predicate offense, that is, a crime that gives rise to the funds that are laundered.

C. Coordination With The World Bank and Other Organizations

34. The World Bank Executive Board agreed in April 2001 that the Bank can play a supportive role, in partnership with the IMF and others, to help countries strengthen their defenses against money laundering and other financial abuse. In particular, it was mandated that the Bank in collaboration with the Fund should address these issues in FSAPs, and provide related technical assistance.18 19 The Bank has recently established an AML Coordinating Committee, and is expected to embark on an extensive training program for both Bank staff and officials from member countries on the global standards of AML policies, procedures, and implementation. In addition, the Bank has begun exploring with the Fund mechanisms to expedite and coordinate the delivery of technical assistance in response to country requests following FSAPs.

35. In addition to FATF and the World Bank, there are a number of organizations and bodies involved directly or indirectly in countering money laundering and the financing of terrorism.20 These include the regional anti-money laundering organizations (whose mandate is being expanded to include terrorist financing); the UN, including the Security Council (and the Committee charged with overseeing Resolution 1373); the UN ODCCP; the international standard-setting bodies in the area of financial sector regulation/supervision such as the Basel Committee, IOSCO, IAIS, and the International Federation of Accountants; and other financial supervisory bodies such as the Offshore Group of Banking Supervisors (OGBS), and the Offshore Group of Insurance Supervisors (OGIS).

D. Coordination Of Technical Assistance

36. The provision of Fund technical assistance on financial sector issues already involves coordination with supervisory and regulatory authorities and standard-setting bodies. This has included assistance in creating and enhancing the legal and institutional framework for supervision, for example by drafting and reviewing laws, and help with capacity and institutional building. With respect to assistance on countering money laundering, the Fund has coordinated with regional anti-money laundering organizations and with the ODCCP and UNDCP. For example, a comprehensive technical assistance project on AML and financial fraud in the Pacific Islands, which involves setting up a regional FIU, has included the creation of a coordinating unit comprised of the participating countries, the UNDCP, the Asia Pacific Group on Money Laundering, and the Pacific Islands Forum.21 This Coordinating Office for the Participating Countries Anti-Money Laundering Initiative (COAMLI) operates as a consultative group, and is supported by an expert in anti-money laundering operations in the Asia Pacific region. COAMLI ensures that each participating organization provides technical assistance in the appropriate area.

V. Measures For Intensifying The Fund’s Involvement

37. The considerations presented above suggest the direction in which the Fund’s involvement in AML might be intensified and extended to combating the finance of terrorism. The specific elements have been selected on the basis of their expected contribution to (i) achieving results, including the strengthening of the international financial system; (ii) maintaining consistency with the policies in place; (iii) exploiting Fund expertise and limiting the resource demands; and (iv) achieving “ownership” by member countries.

38. The approach goes substantially and visibly beyond that envisaged in the April Board decision, yet does not go outside the Fund’s mandate or area of expertise. The elements presented are those that seem essential to achieve a qualitative and quantitative intensification of the Fund’s involvement in AML and combating the financing of terrorism. Furthermore, the suggested measures seem appropriate and feasible at this time; the Board could revisit the issue and consider additional measures after the effectiveness of this approach has been assessed, taking account also of the need for flexibility in the light of rapidly changing events and initiatives. The measures proposed below indicate the direction for future work, and additional technical refinement of the proposals is needed before implementation can be initiated. The approach would not create the need for any special procedure not used elsewhere in the Fund’s work.

  • The Fund-Bank AML Methodology Document would be amplified and expanded by including:

    1. relevant parts of the anti-terrorist financing recommendations of FATF(see Annex I and Annex II). The recommendations relating to the reporting of suspicious transactions and remittance and wire-transfer systems have implications for a range of financial sector standards, including standards on payments system design and oversight.

    2. legal and institutional issues related to the effectiveness of financial sector policies in this area (see Annex II). Added to the prudential supervisory aspects of AML would be relevant legal and institutional issues such as the extension of KYC and other anti-terrorist financing AML/principles to the unsupervised sector, the existence of a suitable legal framework including criminal and civil statutes, institutions for effective implementation (including FIUs), resources and training needs of supervisors, and bilateral or multilateral arrangements for the exchange of information. Many of these topics can be addressed only by considering the relationship between the financial supervisor, financial institutions, and such organizations as the national and foreign FIUs.

    Once drafted, the expanded Methodology Document would be circulated to the Board to update the earlier document circulated in August 2001.

  • The expanded AML Methodology Document would be applied in all FSAP and OFC assessments 22 The AML assessment would be presented in detail as part of FSAP reports to the authorities, and would be included as a substantive chapter in the related FSSA reports, which, as now, would be made available to the Board. In addition, countries would be encouraged to approve the distribution of the detailed assessments in this area (either as separate documents or as part of larger technical assistance reports) to the Board and relevant bodies, such as FATF. Thus, the range of countries to which the AML Methodology Document would apply would be expanded, and the results could be made more widely available.

  • The number of OFC assessments to be concluded would increase from a target of 10 to a target of 20 per year. At the accelerated pace, the Fund OFC program would have conducted assessments of some two-thirds of all the 42 OFCs in the Financial Stability Forum list by the end of 2002, and OFC assessments would be completed in about two years rather than four, as currently envisaged. Most of the OFC assessments would be of supervisory standards (Module 2), and would include in 2002 many of the larger, systemically more important OFCs.

  • Where an FSAP or OFC assessment had been undertaken, the Article IV consultation mission would be expected to follow up on the authorities’ reaction to the relevant AML report, and on the implementation of recommendations in the area of AML and combating the financing of terrorism. The results of the discussions would be mentioned in the staff report.

  • When a recent assessment of a country’s AML and anti-terrorist financing regimes is not available, the related issues would be addressed in the staff report on the Article IV consultation discussions on a case-by-case basis, based on macroeconomic relevance. To this end, a limited questionnaire (based on the expanded staff AML methodology) could be distributed to members. The questionnaire would be designed to provide a broad overview of the current status of efforts to improve the application of financial regulatory principles in the areas of AML and anti-terrorist financing and related legal and institutional issues. A preliminary draft of some elements that might be included in the questionnaire—completion of which would be voluntary—is included in Annex VI. The results could inform Article IV consultation discussions, be used in determining topics for further discussion or determining cases where technical assistance or FSAPs may be warranted, and could facilitate “the preparation of studies designed to assist members in developing policies, which further the purposes of the Fund.”23 If a member chose not to complete the questionnaire, the Board would be notified, including the reasons given by the authorities.

  • It is suggested to start the process by piloting the questionnaire in the countries in which the AML Methodology is currently being applied, on the basis of which experience the questionnaire could be refined. The questionnaire could then be phased in, probably starting in spring 2002, with the aim of eventually covering the whole membership. Countries would be selected for early receipt of the questionnaire based on a judgment on macroeconomic relevance—based on the undertaking of reforms and legislative changes that might affect the integrity and stability of the domestic and international financial systems, and systemic importance, including possible cross-border effects—and considerations of balanced geographic coverage.

  • The Fund is contributing to revisions to the FATF 40 Recommendations and the associated FATF 40 Methodology Document; and will work closely with FATF in finalizing an AML ROSC procedure as soon as possible. Fund staff would work with FATF on how best to conduct assessments, and how FATF assessments could benefit from Fund and Bank work in the context of FSAPs (for instance, by AML reports being made available, if the member agreed, to FATF). Fund and Bank staff could also work closely with FATF on that part of the FATF 40 Recommendations which will be covered by the expanded AML Methodology Document.

  • The amount of technical assistance in this area would be increased. This technical assistance work would aim to help national authorities better understand and supervise the management by financial institutions of relevant AML and antiterrorist financing issues. The assistance could include helping countries address deficiencies in financial supervisory arrangements, either onshore or offshore—deficiencies which could relate also to the legal and institutional framework and to their practical implementation. In the area of the legal and institutional framework, assistance might be provided, for example, in the drafting of laws, regulations, and supervisory guidance that conforms to accepted standards; in the establishment and development of FIUs, possibly on a regional basis; and in the drafting of bilateral or multilateral arrangements on cooperation in this area. The technical assistance would be provided primarily in response to deficiencies identified in the course of FSAPs and OFC assessments. Circulation to the Board of related documents could be encouraged for countries that receive this increased technical assistance, in order to help keep the Board informed in an area where cross-border effects can be extremely important.24 In addition, the proportion of technical assistance currently aimed at improving formal payment and remittance systems could be increased, in order to direct more of this work at countries where (often because formal systems are inadequate) extensive use is made of informal systems, which can be used for the purposes of money laundering or terrorist financing.

  • The Fund and the Bank could take a more active role in coordinating technical assistance in AML and countering the financing of terrorism. The coordination role should cover technical assistance in the supervisory and legal and institutional areas, in which the Fund’s role in FSAPs and OFC assessments would be directly relevant. It would then be easier to monitor the distribution and effectiveness of assistance. This coordination function would have to be integrated with on-going Fund-Bank efforts to strengthen the design, delivery, and coordination of financial sector technical assistance, including through following up on FSAP and ROSC assessments.

  • Further research and analysis would be undertaken on relevant issues, including alternative remittance and payments systems, and corporate and nonprofit vehicles. This analysis could address such issues as the possible incidence of money laundering and the operations of alternative remittance and payment systems.

VI. Resource Demands

39. The more the Fund broadens the scope of its work to include AML and antiterrorism activities, extends its work throughout the entire financial sector and even beyond, and accelerates its work by doing more OFC assessments and other technical assistance in a shorter time frame, the larger the resource implications. The Board has requested that there should be no unfunded mandates, and this section presents a preliminary assessment of resource implications.

40. The total full year dollar cost of the proposed approach is provisionally estimated at some US$8 million (pending more complete information on the actual work program, which can be developed following the discussion by the Executive Board). This estimate provides for 14 extra regular staff years in MAE and LEG alone, most of whom would need to have specialized supervisory skills, along the lines of the table below. Any additional staff resource costs for PDR, area and other departments have yet to be fully projected.25 The dollar estimate also includes a projected 10 person years for short-term and long-term experts (6 for LEG and 4 for MAE, which are not included in the table below), and the necessary support (infrastructure costs such as office space, travel, and support department costs).26

Distribution of Additional Regular Staff

(In staff years)

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Assessment of compliance with AML Methodology Document.

It is envisaged that not all members would be covered immediately. For purposes of calculating resource costs, it is envisaged that 50 questionnaires would be sent out and analyzed each year.

41. These estimates are on a full year basis for FY2003; costs in the current fiscal year are likely to be small, but will need to be examined further. The costs for FY2004 would be a little higher (two additional regular staff years are envisaged costing some $410,000). The composition would change after all OFCs had been assessed at least once, while technical assistance and policy development demands could increase.

42. These tentative estimates have been discussed with the Office of Technical Assistance Management and the Office of Budget and Planning. They will be refined in consultation with concerned departments.

VII. Summary

43. Money laundering and the financing of terrorism are global problems that affect not only security, but also potentially harm economic prosperity and the state of the international financial system. The Fund’s mandate and core areas of expertise entail that it can and should help its member countries strengthen their defenses against these pernicious activities. The Board decided in April 2001 to enhance the Fund’s activates in AML, notably through the development and application of a detailed methodology to assess compliance with relevant financial supervisory principles, and closer cooperation with FATF, which is the recognized standard-setter in this area. Work has already begun in implementing this Board decision. For example, the current AML methodology is being applied in pilot cases, and Fund staff have contributed to the recent actions by FATF to prepare an AML ROSC module.

44. Recent events make the Fund’s contribution more urgent, and prompt a reexamination of what additional areas should be addressed in the Fund’s work. It has become clearer that protecting against abuses such as money laundering and the financing of terrorism requires effective supervision, national coordination and cooperation in the collection and processing of relevant information, and fluid cross-border exchange of information in both offshore and onshore financial centers. Combating the financing of terrorism is distinct from AML efforts, but they share some common elements, and international standards addressed directly at the former are now being developed. Relevant components of these standards can be added to the Fund’s assessment of supervisory principles, and promoted through associated technical assistance. At the same time, the Fund must recognize in its assessments and technical assistance that effective preventative measures depend not only on adherence to financial supervisory principles, but also upon the legal and institutional framework in which those principles can be applied, and coordination with measures covering the unsupervised financial sector.

45. On this basis the Fund could adopt a number of measures to intensify its involvement in AML and combating the financing of terrorism. First, the scope of FSAPs and OFC assessments could be expanded to include a more detailed evaluation of financial policies and in particular supervisory principles and the legal and institutional framework related to both AML and combating the financing of terrorism. Second, the provision of related technical assistance and OFC assessments could be accelerated. Third, these issues could receive more attention in Article IV consultation discussions, for example, in following up recommendations contained in FSAPs. Finally, the Fund would cooperate closely with FATF so that FATF can move ahead rapidly with an appropriate AML ROSC procedure. These measures would go beyond the April 2001 Board decision by addressing antiterrorist financing, and broadening the scope of the staff’s work to cover the legal and institutional framework in which financial sector policies and financial supervisory principles are applied to deter money laundering and the financing of terrorism.

46. These additional measures, taken together, would add substantively to the Fund’s output in this area, and to the international effort to counter money laundering and terrorist financing. The Fund would provide significant reinforcement to national authorities, and especially supervisors, in developing the architecture of preventative systems in the financial sector, which form one essential component of this effort. Yet, the Fund’s contribution will be limited. The Fund is not and will not be in a position to identify or help others identify individual instances of money laundering or terrorist financing. Nor will it normally be possible for regulated institutions to identify small amounts of money from legitimate sources—which may often be the way in which terrorism is financed.

VIII. Issues For Discussion

47. The summing up of the Board’s discussion of this paper provides an opportunity for Executive Directors to decide how the Fund’s efforts in AML should be further intensified and how to extend them to cover the combating of terrorist financing. The Board may wish to consider the following issues for discussion:

  • Do Directors agree that the Fund should intensify its contribution in its core areas of expertise to global efforts to combat money laundering and the financing of terrorism? Do they agree that the set of measures presented in this paper represents a broadly appropriate immediate response to current circumstances, consistent with the Fund’s mandate? Do they agree that the work needs to be carefully monitored in the light of experience, and should be revisited in one year’s time?

  • Do Directors agree to expand the issues covered in the joint Fund-Bank AML Methodology Document and technical assistance to include aspects relating to combating terrorist financing? Is it appropriate that the AML methodology and technical assistance be expanded to cover not only financial supervisory aspects, but also the relevant legal and institutional framework? Should the expanded AML methodology be applied in all FSAPs and all OFC assessments? Do Directors agree to an acceleration in the pace of OFC assessments?

  • Do Directors favor an increase in technical assistance to correct deficiencies in AML and combating the financing of terrorism identified in the course of FSAPs and OFC assessments, and include additional work on helping prepare AML legislation and develop FIUs at the national level? Do they support a greater role for the Fund in the coordination of technical assistance in these areas?

  • Do Directors agree that information sharing and cooperation among national authorities and international bodies constitute a key element in combating money laundering and terrorist financing effectively? Do Directors agree that these activities are primarily the responsibility of member governments?

  • Would a questionnaire based on the expanded AML methodology be useful in monitoring these issues?

  • Do Directors support enhanced collaboration with FATF, and do they confirm that the Fund should contribute to revisions to FATF 40 and the associated FATF 40 Methodology Document, and continue to work towards the timely finalization of an assessment process by FATF that is uniform, cooperative, and voluntary?

  • Do Directors agree that more resources are needed to fulfill the suggested task? Do they agree with the preliminary resource estimates contained in Section VI?