Annex 1. Selected Fatf Recommendations
The FATF Recommendations introducing changes that are of particular interest to the Fund are reproduced below:23
Annex 2. Politically-Exposed Persons (Peps) of International Organizations: The Revised Financial Action Task Force (Fatf) Recommendation 12 And Its Implications For The Fund
The FATF is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering, the financing of terrorism and, more recently, the financing of the proliferation of weapons of mass destruction. It was established by the G7 in 1989 in response to mounting concern over money laundering. Its membership has grown from 16 members at its inception to 36 at present (34 jurisdictions and two regional organizations). The FATF is complemented by nine FATF-style regional bodies (FSRBs); together, the FATF and the FSRBs comprise over 180 member jurisdictions. The Fund is an observer at the FATF and the FSRBs.
See PIN No. 11/74.
Predicate crimes are the underlying crimes that give rise to money laundering. Traditionally, the most important of these crimes was considered to be narcotics trafficking. As the 1990s progressed, however, the increasing recognition of the significance of the proceeds generated by non-drug related crimes led to the designation of such crimes as predicates to money laundering. The revised FATF standard designates the following categories of offenses as predicate offenses to money laundering: participation in an organized criminal group and racketeering; terrorism, including terrorist financing; trafficking in human beings and migrant smuggling; sexual exploitation, including sexual exploitation of children; illicit trafficking in narcotic drugs and psychotropic substances; illicit arms trafficking; illicit trafficking in stolen and other goods; corruption and bribery; fraud; counterfeiting currency; counterfeiting and piracy of products; environmental crime; murder, grievous bodily injury; kidnapping, illegal restraint and hostage-taking; robbery or theft; smuggling; (including in relation to customs and excise duties and taxes); tax crimes (related to direct taxes and indirect taxes); extortion; forgery; piracy; and insider trading and market manipulation.
Directors also agreed that, if such an approach was adopted, under a framework for risk-based assessments, the first AML/CFT assessment for a member would be comprehensive while subsequent assessments would focus on those areas that present the greatest risk of money laundering and/or terrorist financing taking place without being detected or sanctioned. This approach would produce better targeted and more focused assessments. Directors agreed that a shift to targeted and risk-based AML/CFT ROSCs would need to be agreed with the standard setter and other stakeholders. In particular, the methodology for conducting such assessments and criteria for the selection of issues to be assessed with respect to specific countries need to be developed in cooperation with the FATF and the FATF-style regional bodies along with other stakeholders. (See PIN No. 11/74.)
Box 2 provides some background on the considerations that led to the inclusion by FATF of tax crimes as predicate offenses to money laundering.
The General Glossary to the FATF Recommendations notes that, when deciding on the range of offenses to be covered as predicate offenses under each category, countries may decide, in accordance with their domestic law, how they will define these offenses and the nature of any particular elements of those offenses that make them serious offenses.
Previously FATF Special Recommendation (SR) III, now Recommendation 6.
These are: Resolutions 1718 (2006); 1737 (2006); 1747 (2007); 1803 (2008); and 1929 (2010).
Particularly with respect to the designation of persons or entities (to be made by the UN Security Council or the Security Council Committees set up pursuant to the relevant UNSCRs), national procedures, freezing and prohibition of dealing in funds or other assets of designated persons or entities, de-listing, unfreezing and access to frozen funds/assets.
See, for instance, paragraphs 85–89 of the Cannes Summit Final Declaration, and the priorities and discussion paper of the Mexican Presidency of the G20 (http://www.g20.org/en/mexican-presidency-of-the-g20/mexican-presidency-of-the-g20).
Only 14 countries around the world have not yet ratified the United Nations Convention against Corruption.
Box 4 describes briefly the treatment of PEPs by the United Nations in UNCAC and by the Wolfsberg Group.
See the definition of PEPs in the General Glossary to the FATF Recommendations which specifically excludes middle ranking or more junior individuals from its scope.
See paragraph 692 of the Legislative guide for the implementation of the United Nations Convention against Corruption.
The Wolfsberg Group is an association of eleven global banks, which aims to develop financial services industry standards, and related products, for Know Your Customer, Anti-Money Laundering, and Counter Terrorist Financing policies.
See the Wolfsberg Group Frequently Asked Questions on PEPs (http://www.wolfsbergprinciples.com/pdf/Wolfsberg_PEP_FAQs_(2008).pdf).
In 2002, the Fund’s Executive Board endorsed the addition of the FATF Recommendations to the list of areas and associated standards and codes useful to the operational work of the Fund. As indicated in the information note, once the assessment methodology for the revised standard is finalized, both the revised standard and the methodology will be submitted to the Board with a request for their endorsement.
Customer due diligence measures include identifying the customer and verifying that customer’s identity, identifying and verifying the identity of the beneficial owner, understanding and obtaining information on the purpose and intended nature of the business relationship, and conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship. Enhanced CDD measures include, but are not limited to, obtaining information on the source of funds or source of wealth of the customer, obtaining the approval of senior management to commence or continue the business relationship, conducting enhanced monitoring of the business relationship, by increasing the number and timing of controls applied, and selecting patterns of transactions that need further examination.
The General Glossary to the revised FATF standard defines foreign PEPs as “individuals who are or have been entrusted with prominent public functions by a foreign country, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.”
Note that FATF Recommendation 22 extends the application of the customer due-diligence requirements contained in Recommendation 12 to the so-called designated nonfinancial businesses and professions (DNFBPs), i.e., casinos, real estate agents, dealers in precious metals and stones, lawyers, notaries, other independent legal professionals and accountants, and trust and company service providers. Therefore, the references in this note to financial institutions apply, mutatis mutandis, to DNFBPs.
For many countries, the extension of this requirement to domestic PEPs is not entirely new: Article 52, paragraph 1, of the United Nations Convention against Corruption (UNCAC) already contains a similar provision and makes no distinction among the various types of PEPs. Only 14 countries around the world have not yet ratified it.
The General Glossary to the revised FATF standard defines international organizations as follows: “International organizations are entities established by formal political agreements between their member States that have the status of international treaties; their existence is recognized by law in their member countries; and they are not treated as resident institutional units of the countries in which they are located. Examples of international organizations include the United Nations and affiliated international organizations such as the International Maritime Organization; regional international organizations such as the Council of Europe, institutions of the European Union, the Organization for Security and Cooperation in Europe and the Organization of American States; military international organizations such as the North Atlantic Treaty Organization, and economic organizations such as the World Trade Organization or the Association of Southeast Asian Nations, etc.”
This is part of the greater emphasis placed by the FATF on anti-corruption, following G20 calls.
While with regard to foreign PEPs, financial institutions have no choice but to apply enhanced due-diligence measures, as regards PEPs of international organizations, enhanced due diligence will only be applied if the financial institution determines that they pose a higher risk.
The FATF is currently preparing a Best Practice paper which, once finalized, may help further clarify some of the issues contained in this note.
This refers to the origin of the PEP’s entire body of wealth (i.e., total assets).
This refers to the origin of the particular funds or other assets which are the subject of the business relationship between the PEP and the financial institution (e.g., the amounts being invested, deposited, or wired as part of the business relationship).
The Wolfsberg Frequently Asked Questions on PEPs defines “close family” to encompass a PEP’s direct family members, including spouses, children, parents and siblings.
The Wolfsberg Frequently Asked Questions on PEPs defines “close associate” to encompass a PEP’s widely and publicly known close business colleagues and/or personal advisors to the PEP, in particular personal financial advisors or persons acting in a financial fiduciary capacity. The notion of “close associates” includes persons who are closely connected to a PEP, either socially or professionally.
In the FATF terminology, “beneficial owner” refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement. The expressions “ultimately owns or controls” and “ultimate effective control” refer to situations in which ownership/control is exercised through a chain of ownership or by means of control other than direct control.
Family members and close associates of PEPs (who are to be treated as PEPs themselves), also have family members and close associates who may abuse this relationship (or be abused by it) for illicit purposes. Recommendation 12 does not require that this second layer of persons be treated as PEPs, unless they are PEPs in their own right. Nevertheless, financial institutions will consider the risk of doing business with such persons and, in some cases; those risks may be higher than with other types of customers.
The General Glossary of the FATF Recommendations defines “reasonable measures” to mean appropriate measures which are commensurate with the money laundering or terrorist financing risks.