Money laundering prevention faces growing pains

The Financial Action Task Force (FATF) is looking uncomfortably stretched in its fifteenth year. It’s facing up to a myriad of new responsibilities while still grappling with many of the same problems it was set up to tackle in 1989.

The difficulties are easy to enunciate. The Secretariat staff has been doubled to 10 but still looks thin on the ground; FATF’s mandate keeps on being expanded; there has been little progress on fundamental issues such as measuring money laundering and terrorist financing activities; new ways to channel dirty money are evolving at lightning speed; FATF’s inter-governmental structure is cumbersome and impedes greater involvement in the private sector; and bilateral and unilateral initiatives continue to proliferate, compelling financial institutions to comply with multiple different standards. Solutions to these, however, remain elusive and contentious.

It should come as no surprise given the scope of these difficulties that the new President, Jean-Louis Fort, former head of the French banking regulator, has indicated that he will go back to basics. One of the main stated aims Fort included in his draft programme will be to improve the methodology of measuring the extent of global money laundering, a problem that pre-dates the setting up of FATF.

This may prove a tall order. The organisation tried in the mid 1990s, setting up a working group of experts with diverse backgrounds, including academics, economists and statisticians. After two years, the group concluded that it would not be possible to agree on the methodology to measure money laundering, explains Patrick Moulette, the FATF’s Executive Secretary. That’s because measures of what constitutes money laundering prevailing in each jurisdiction are highly diverse and there are significant discrepancies, for example, whether to include tax evasion in the data. A further difficulty is posed by the highly international nature of money laundering and the risk of double counting when dirty money is moved to a second jurisdiction. It is possible that Fort will convene a new working group to look to overcome these difficulties, says Moulette. Fort is also likely to work more closely with other international organisations, such as the International Monetary Fund, to provide more information on money laundering and to start to standardise the underlying methods of calculation.

Even if that initiative is successful, the drafting of a standard methodology is just the first aspect of tackling money laundering. Practical steps, such as persuading countries that fail to comply with the Forty Recommendations, revised last year, to fall in line will remain a priority. The list of Non-Co-operative Countries and Territories, first devised by the FATF in 2000, has now shrunk to six (Nigeria, the Philippines, Indonesia, the Cook Islands, Nauru and Myanmar). Moulette says that this fall shows the enormous progress made, noting that the list started at 15 and rose to 21 before dropping to its current level. “This is the best sign of the effectiveness of the FATF,” he says.

But getting the list down to zero could prove difficult. Critics say that the FATF remains toothless without the power to punish those countries that have made little or no improvements in tackling money laundering, citing laggards Nauru, Indonesia and Myanmar. If one or more of these remains available to money launderers, the FATF will need to turn the screws further to force compliance or risk concentrating business in one or two markets. This could make laundering more lucrative for financial institutions as the number of them falls and they increase market share.

Moulette argues that pressure from the FATF within its current mandate has proved successful, for example, in the Ukraine, which the FATF removed from the non-cooperative list earlier this year after the country enacted comprehensive anti-money laundering legislation. The FATF has two levers at its disposal: Recommendation 21 (of the 40) which stipulates that financial institutions should pay special attention to transactions involving persons or legal entities from countries on the list. The second lever is used where that has not worked and includes a clause that tells financial institutions to presume that all transactions with entities or persons in the country should be reported. This sanction is currently used in the cases of Nauru and Myanmar and is already leading to changes in legislation in the latter, Moulette says.

Still, the difficulties that the organisation faces in applying further punitive measures against recalcitrant countries has prompted critics to suggest that the FATF should also name and shame specific organisations and individuals to bolster its anti-money laundering initiatives. This is not on the cards, says Moulette. The FATF is an inter-governmental organisation, set up to deal with national legislators not individual private companies. Adapting the FATF to monitor individual companies would require an entirely new bureaucracy and possibly a whole new organisation, he says. Nevertheless, Moulette sees the ideas of creating such an organisation as interesting and it is possible that this will be further explored by organisation members.

The difficulties of measuring and combating money laundering pale into insignificance compared to the problems encountered in measuring and stamping out terrorist financing. Figures for the amount of terrorist monies are wildly speculative: one figure often quoted in the battle against terrorists is the estimate of the amounts frozen worldwide since 9/11 to the end of 2003. This stands at a paltry $140 million (versus $125 million at the end of 2002), according to State Department figures from the US. This suggests that the FATF and other organisations have had little success in combatting the financing of terrorist organisations, critics say. Moulette argues that relatively little money is directed to support the financing of terrorist activity, which reflects the low cost of committing terrorist atrocities. But the paucity of available information on terrorist financing makes this exercise purely speculative.

Devising strong measures to combat such financing look especially onerous in part because of the increasing reliance on channels outside the financial system. The abuse of the mostly Muslim hawala remittance system has been widely publicised, but other methods to circumvent normal financial channels abound. They include non-profit organisations, cash couriering, credit card fraud and precious metal and diamond smuggling. The sheer diversity of these methods means that a multi-pronged strategy to combat terrorist financing needs to be elaborated.

Moulette admits that the FATF has only recently woken up to the significance of non-financial channels and is just starting to attempt to create measure to prevent terrorists accessing these channels. The speed of change and the relative unfamiliarity of terrorist methods of financing means that the FATF is having to think on its feet and constantly update provisions.

In the case of money or value transfers through non-profit organisations and hawala, the path looks relatively clear. For now, parties involved are not named and the transactions are not recorded. The FATF is relying on the registration or licensing of these transmission services (Special Recommendation Six) to ensure that the firms make checks on their customers. But in non-financial areas much thinking remains to be done. One of the biggest tests will be in the field of cash couriering, where FATF’s role will be necessary limited as it falls more naturally in the remit of national law enforcement organisations.

The FATF is looking at how it can best work in cooperation with professionals such as lawyers, notaries, real estate agents and gold and precious metal extractors. That is likely to entail working to find the most appropriate partners, for example, international trade associations. Clearly, one of the difficulties is that the most powerful organisations are organised along national lines and international organisations are talk-shops or advisory bodies only.

It is interesting to record the changing methodology used to track and reduce terrorist financing and the speed at which changes are made. FATF issued Eight Special Recommendations in 2001. In October 2003, it issued interpretative notes on the freezing of terrorist assets and a best practices paper on the confiscation of those assets (outlined in Recommendation Three). Further measures are already needed and in October, the Plenary will address this issue.

Critics say this constant patching of the Recommendations make it difficult for interested organisations to keep up. Moulette argues that the nascent nature of the FATF’s work in terrorist financing and the rapid speed with which terrorists adjust to measures to cut financing sources necessitates constant refinements and amendments, especially in the non-banking sector.

The speed, opportunism and audacity of financial villainy is well illustrated by a warning note recently posted on the FATF’s own website. Extortionists claiming to work for the FATF were attempting to charge a fee to clients of money/value transmission services which they claimed was to be used by FATF as payment to verify that the money is clean.

The complexity of the work undertaken by the FATF and the speed of change would be daunting for a large, well resourced institution. The FATF is not that. It has access to only very limited central resources. The Secretariat has a meagre 10 staff in Paris headquarters and a budget of €1.5 million to meet salaries, travel, rental of office space, translation and interpretation services. Although resources have been increased, the bulking up of responsibility for the organisation, with its broader mandate risks overwhelming staff. In fact, the biggest challenge facing the FATF is relatively simple. To tap external resources intelligently and wisely to deploy its very limited central resources to make sure the stretch doesn’t turn into a tear.

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