In “The Money Laundering Challenge” blog we looked at what money laundering was and the challenge that it represents to the authorities and the financial services sector.
In reaction to evolving financial crime, the regulatory response has evolved over the last 30 years. Let’s look at the high-level summary of key events in relation to how regulation has been formed and the principal structures that have emerged to combat money laundering and terrorist financing to shape where we are now.
AML regulation began to be formed in the USA in the 1970’s when the Financial Crimes Enforcement Network (FinCEN) was established to enforce the Bank Secrecy Act (BSA).
BSA was designed to safeguard financial systems by introducing checks and controls on bank accounts for the first time and was the forerunner to the development of ensuing AML regulations.
The 1970’s saw a global challenge in drug trafficking crimes and unprecedented amounts of cash from drug operations has been laundered by smuggling of cash across borders and being deposited in large amounts. Then US President, Nixon declared a ‘war on drugs’ in response to not just the criminal gangs and drug cartels but also the illegal money flows that were increasingly empowering corruption to keep the money flowing into the system.
Fast forward to the 1980’s and then President Reagan passed the Money Laundering Act. Money laundering became a criminal offence giving the authorities powers to confiscate assets and placing the onus on a suspect to prove their legitimacy.
Much of the early AML regulatory activity was centred in the US, however it was increasingly obvious that the drug problem was global and proceeds of crime were threatening the global financial stability. In 1989, the G7 group of nations agreed to establish an intergovernmental group to tackle regulations more widely. This group became known as the Financial Action Task Force (FATF) with its headquarter in Paris. Its mandate was to develop detailed policies and standards in the form of Recommendations, which are written as a guide for governments to formulate their own AML framework in legislation, supervision and international cooperation. This started out as the so-called Forty Recommendations in 1990 and after the terror events in 2001, nine further recommendations were added, dealing with terrorist financing.
FATF has grown since and currently comprises 37 member jurisdictions and 2 regional organisations, representing most major financial centres in all parts of the globe.
Its role also expanded to include audit, which is conducted on member countries every few years, resulting in a Mutual Evaluation Report that gives an in-depth evaluation of the effectiveness of a country’s AML regime. A poor report can have a significant impact on a country’s international standing and directly affects its global trading relationships as trading partners will find it more difficult to do business in the country. FATF’s ‘black’ and ‘grey’ lists of countries, who either refuse to implement proper financial crime controls or whose systems have major failings, are keenly monitored by governments and financial institutions and other businesses with exposure in those countries.
The FATF also produces important guides designed to shape regulation in emerging areas such as crypto-currencies and virtual asset service providers; the role of technology in AML; the risk-based approach and currently in the light of the Panama and Pandora Papers revelations, significant changes to its guidance on transparency and beneficial ownership. All this is intended to be implemented as policy in member countries and where relevant, expected to translate into local AML regulation.
The EU acts as the interface between FATF and most member states and over the last 30 years has issued EU Anti-Money Laundering Directives (AMLD) to EU countries for implementation. Since leaving the EU the UK implemented the 5th AMLD in 2020 but has chosen not to implement the 6 which is now in progress for implementation in the rest of the EU. The UK’s position being that its main requirements are already enshrined in UK Laws, which impact anti-money laundering regulation.
Beyond the FATF there are a few other important international bodies with significant roles in fighting financial crime. These include:
The Egmont Group, whose role is to promote and facilitate information sharing between financial intelligence units (FIUs) of different countries to enable cross border law enforcement and to enable the coordinated approach in ‘following the money’ in cross border crime.
Financial institutions report possible money laundering through a process called Suspicious Activity Reporting. Many of these reports are escalated to a national FIU, which in the case of the UK sits within the National Crime Agency (NCA). The UK’s FIU is part of the Egmont Group.
The Wolfsberg Group is made up of 13 international banks and aims to develop frameworks and guidance for the management of financial crime risks, particularly with reference to Know Your Customer (KYC), Anti-Money Laundering (AML) and Countering Terrorist Financing (CTF) Policies. The group regularly publishes guides on how banks should interpret and implement AML regulation. The guides are also extensively used by non-members of Wolfsberg.
Other bodies who are influential on a global scale include the Basel Institute on Governance that publishes guidance on establishing and enhancing anti-corruption compliance programmes and corporate governance structures. Basel also publishes the annual AML Index, which ranks money laundering and terrorist financing risks by country around the world. This is widely used by financial institutions to evaluate country risk when conducting a risk assessment on an entity based in a given country.
The International Monetary Fund (IMF) also plays an important part in promoting efficient AML practice and sometimes works with FATF on Mutual Evaluation Reports.
There are of course, a large number of other bodies operating on a regional and local basis that promote and influence AML compliance at a local level.
In our next blog, we will look at the UK’s AML regime and the various bodies that play a part in shaping, implementing, regulating and enforcing AML/CTF regulation.