The Unites States’ report card on anti-money laundering efforts may not be good enough to stick on the refrigerator. Metaphorical As and Bs are mixed alongside a variety of troubling “needs improvement” warnings.
The recently released assessment by the Financial Action Task Force is the fourth “mutual evaluation report” focused on the United States and its latest since 2006. The bottom line: it “has a well-developed and robust anti-money laundering and counter-terrorist financing regime through which it is effectively investigating and prosecuting money laundering and terrorist financing.”
The ominous caveat: “Serious gaps impede timely access to beneficial ownership information.”
FATF is an independent, inter-governmental body that develops and promotes policies to protect the global financial system against money laundering and terrorist financing. Its recommendations are recognized as the global AML and CFT standard
The U.S. dollar’s global dominance and the large volumes of daily transactions through its banks expose it to substantial money laundering risks, the assessment says. Authorities pursue a wide variety of money laundering activity, in particular complex and high-dollar value criminal offenses, resulting in more than 1,200 money laundering convictions per year. The Unites States also has a “substantially effective” system for international cooperation and “provides good quality and constructive mutual legal assistance and extradition.”
Praise aside, the report details where otherwise laudable AML efforts fall short. “Risk mitigation through the regulatory framework is less well-developed and has some significant gaps, including minimal coverage of investment advisers, lawyers, accountants, real estate agents, trust, and company service providers (other than trust companies),” it says. While the United States placed a strong supervisory focus on the casino sector in recent years, the lack of comprehensive AML/CFT supervision for other designated non-financial businesses and professions remains a significant supervisory gap.
“There is also a “fundamental gap” in the lack of timely access to adequate, accurate, and current beneficial ownership information” and a struggle with uncovering the use of complex structures to hide ownership. Fueling the problem is that individual states have a variety of incorporation requirements and no uniform AML efforts.
Recommended actions include:
ensuring that adequate, accurate, and current beneficial information of U.S. legal persons is available to all authorities in a timely manner by requiring that such information is obtained at the Federal level;
applying appropriate AML/CFT obligations to investment advisers, even if they are already indirectly covered through their association with banks, bank holding companies, and broker-dealers;
extending obligations, on the basis of a specific vulnerability analysis, to lawyers, accountants, trust, and company service providers;
issuing guidance to clarify the scope of immediate Suspicious Activity Report filing requirements;
Improving the visibility of AML and state-level activities and statistics, through improved data collection and sharing; and
the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) should continue to expand its use of tools, including Geographic Targeting Orders, and further its pro-active dissemination of strategic and operational intelligence to law enforcement.
FinCEN has already acted to shore up some of the deficiencies that would ultimately be noted in the assessment. Earlier this year, it published a Customer Due Diligence final rule. It adds a new requirement that financial institutions—including banks, brokers, or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities—collect and verify the personal information of the real people (beneficial owners) who own, control, and profit from companies when those companies open accounts. The rule contains three core requirements: identifying and verifying the identity of the beneficial owners of companies opening accounts; understanding the nature and purpose of customer relationships to develop customer risk profiles; and conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.
“Beneficial ownership is going to be a big focus now, and in the future.”
Gary Swiman, Partner, Financial Services Advisory Practice, BDO
Financial institutions will need to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity. The Treasury Department is also championing beneficial ownership legislation that would require companies to know and report adequate and accurate ownership information at the time of a company’s creation, so that the information can be made available to law enforcement.
“Beneficial ownership is going to be a big focus now, and in the future,” says Gary Swiman, partner in the accounting, audit, and consulting services firm BDO’s financial services advisory practice.
Addressing concerns may not be easy and will require greater uniformity among the patchwork of state regulators, each with varying degrees of disclosure requirements.
Swiman applauded the recommendation to review how SARs are conducted, filed, and reviewed. “That’s a glaring issue, whether it is with the Office of the Comptroller of the Currency, Financial Industry Regulatory Authority, or the Securities and Exchange Commission,” he says. “People get dinged for not filing any SARs; they get dinged for filing too many SARs. The report is saying there needs to be more consistency with the process for how the reports are filed.”
“FinCEN is only able to respond to 2-4 percent of all SARs filed and tries to do it with some sort of risk-based approach,” he adds. “Some firms, however, just file everything as a SAR and think that is safe, but what that really does is add a convoluted layer to reviews, creating a manpower drain for the agency that has to go through them.”
Given the current deficiencies related to beneficial ownership, FinCEN’s “25 percent” rule is a good starting point for improvements, says Chuck Pine, managing director for BDO’s financial services, investigations, and consulting practice.
“I think it will help,” he says. “But there needs to be additional requirements placed on the initial set-up of complex financial structures and shell organizations so there is going to be more transparency at that level to flush out who is truly conducting the business and the financial transactions.”
Despite the critique, current requirements inherent in a risk-based anti-money laundering program remain sound. “If a company truly follows all the requirements, tests all of their products through a risk-based assessment, follows policies and procedures that will identify complex customer ownership through these different structures, and follows strong KYC provisions around higher risk areas, you can mitigate the issues that come up with beneficial ownership,” he says. “You can do it, but you need to add tight controls and requirements on higher-risk products and services.”
The following, issued in October, is a public statement from the Financial Action Task Force regarding “high-risk and non-cooperative jurisdictions.”
In order to protect the international financial system from money laundering and financing of terrorism (ML/FT) risks and to encourage greater compliance with the AML/CFT standards, the FATF identified jurisdictions that have strategic deficiencies and works with them to address those deficiencies that pose a risk to the international financial system.
Jurisdiction subject to a FATF call on its members and other jurisdictions to apply counter-measures to protect the international financial system from the on-going and substantial money laundering and terrorist financing (ML/FT) risks
Democratic People's Republic of Korea (DPRK)
The FATF remains concerned by the DPRK’s failure to address the significant deficiencies in its anti-money laundering and combating the financing of terrorism (AML/CFT) regime and the serious threat this poses to the integrity of the international financial system.
The FATF urges the DPRK to immediately and meaningfully address its AML/CFT deficiencies. Further, FATF has serious concerns with the threat posed by DPRK’s illicit activities related to the proliferation of weapons of mass destruction (WMDs) and its financing.
The FATF reaffirms its 25 February 2011 call on its members and urges all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with the DPRK, including DPRK companies, financial institutions and those acting on their behalf.
In addition to enhanced scrutiny, the FATF further calls on its members and urges all jurisdictions to apply effective counter-measures, and targeted financial sanctions in accordance with applicable United Nations Security Council Resolutions, to protect their financial sectors from money laundering, financing of terrorism and WMD proliferation financing (ML/FT/PF) risks emanating from the DPRK.
Jurisdictions should take necessary measures to close existing branches, subsidiaries and representative offices of DPRK banks within their territories and terminate correspondent relationships with DPRK banks, where required by relevant UNSC Resolutions.
Jurisdiction subject to a FATF call on its members and other jurisdictions to apply enhanced due diligence measures proportionate to the risks arising from the jurisdiction
In June 2016, the FATF welcomed Iran’s adoption of, and high-level political commitment to, an Action Plan to address its strategic AML/CFT deficiencies, and its decision to seek technical assistance in the implementation of the Action Plan.
Accordingly, in June 2016, the FATF suspended counter-measures for twelve months in order to monitor Iran’s progress in implementing the Action Plan. If the FATF determines that Iran has not demonstrated sufficient progress in implementing the Action Plan at the end of that period, FATF’s call for counter-measures will be re-imposed. If Iran meets its commitments under the Action Plan in that time period, the FATF will consider next steps in this regard.
Iran will remain on the FATF Public Statement until the full Action Plan has been completed. Until Iran implements the measures required to address the deficiencies identified in the Action Plan, the FATF will remain concerned with the terrorist financing risk emanating from Iran and the threat this poses to the international financial system.
The FATF, therefore, calls on its members and urges all jurisdictions to continue to advise their financial institutions to apply enhanced due diligence to business relationships and transactions with natural and legal persons from Iran, consistent with FATF Recommendation 19. The FATF urges Iran to fully address its AML/CFT deficiencies, in particular those related to terrorist financing.
The FATF will continue to engage with Iran and closely monitor its progress.
The international standards promoted by FATF are “very rigorous,” and it may be difficult to fully achieve all of its recommendations, says Ross Delston, a Washington, D.C.-based independent anti-money laundering expert.
“Full adoption, by every country, would mean that not only are financial institutions turning away clients, but countries as a whole are no longer profiting by hiding dirty money,” he says. “That’s a very tough proposition in practice and as tough for the Unites States as anyone else.”
A global view
Domestic issues aside, a review of FATF’s other national assessments provides a look into the global AML picture. Switzerland, for example, was found to have an “AML/CFT regime that is technically robust and has achieved good results, but would benefit from some improvements in order to be fully effective.” Delston finds that synopsis to be an understatement.
“The FATF mutual evaluation of the Swiss AML/CFT framework confirmed the historical view of Switzerland that it remains a good place for corrupt rulers and tax evaders to keep their money safe,” he says of failings related to customer due diligence, private banking, and the effectiveness of sanctions against firms that fail to comply with laws and regulations. “This is not good news for countries that are victimized by kleptocratic rulers, but very good news for private banking clients who are hiding money, evading taxes, or otherwise trying to keep their funds out of reach.”
The dilemma for the international community in the aftermath of the Panama Papers, numerous enforcement actions against the world’s biggest banks, and a heightened degree of vigilance about terrorist financing is “whether the misdeeds in and by financial centers like Unites States and Switzerland will continue to get the ostrich treatment or whether the international community is ready to upend the status quo,” Delston adds. “It seems to me there has been a bit of impatience of late with the status quo in places like the United Kingdom, Italy, Greece, and perhaps even the Unites States.”
A review of international FATF assessments imparts a few important takeaways, says Henry Balani, global head of strategic affairs at Accuity, a technology provider that specializes in monitoring trade-based money laundering.
Global AML regulations are in flux, with no global attempts to coordinate policy, he says. Relatedly, there are inconsistent AML tactics across the globe and political uncertainty (including the “Brexit” divorce of the United Kingdom and European Union, and, in Unites States, the incoming Trump Administration) is creating confusion in the space. Also, the evolution of differing AML regulations creates additional operational complexity for firms with cross-border operations, potentially increasing risk of non-compliance.
To highlight interesting trends and challenges, Balani directs to FATF assessments of Singapore, Uganda, Honduras, and Canada.
Singapore is known as being a country with a very strict anti-money laundering regime. They are known for strict policies and regulations. But, as FATF points out, enforcement has not always reflected those stringent laws. This is all the more important given the high-risk nature of surrounding countries.
“Singapore will have to demonstrate to the rest of the world that they are really taking this seriously,” Balani says. It is fine that you have a very strict regime, but if you don’t demonstrate enforcement it becomes worthless. Singapore is particularly exposed to some recent corruption scandals, so they need to really demonstrate that they are pulling their weight.”
Uganda’s exposure to neighboring Somalia is its burden. “There is a significant amount of money laundering happening through Somalia using Uganda as a conduit,” Balani says. “In many ways, unfortunately, Somalia is a failed state and the challenge for Uganda is that it is still nascent in terms of its understanding of money laundering risk.” Concerns in Honduras are also geography-based as it faces issues associated with proceeds from drug trafficking in Latin America and dirty money netted from corruption that needs to be laundered.
Generally, Canada received high marks. It does, like the Unites States, however, have a blind spot when it comes to the legal sector. “When you look at European countries there is an obligation for the legal sector to screen their customers and conduct KYC,” Balani says. “It isn’t a strong emphasis in Canada or the Unites States.”
A common thread is that a failure to shore up AML standards will further empower banks to engage in de-risking, the wholesale slicing away of foreign partnerships and correspondent banking relationships. “The year is almost up, and what we have seen in many countries is an acceleration of de-risking,” Balani says. “2017 is going to be a year where the International Monetary Fund, World Trade Organization, and some of the major NGOs out there are really going to be pushing hard on the social and economic impact of de-risking.”
The revelations of tax-evading, corruption enabling firms in leaks of the so-called “Panama Papers” are still having global influence. In response, EU regulators will focus more on beneficial ownership identification in an updated AML Directive—its fifth). The European Union is also considering a centralized bank and payment account depository.
“The idea is to be able to create a centralized register where you can look up an individual and actually see their accounts in all different countries,” Balani says. “The problem they are trying to solve obviously is trying to identify who the beneficial owners are of a particular company or whatever it may be. This is a direct result of the Panama Papers.”
As for the prospect of greater consistency among national AML regimes, Balani is optimistic.
“No one wants to get on FATF’s gray or black list, there are consequences,” he says. “If you are on the gray list, it means that the cost of borrowing goes up because risk increased. It can restrict the ability to borrow from correspondent banks and really affect direct foreign investment and economic development. There is a stick to it.”