PROPOSAL – CONTRIBUTION TO THE IMPROVEMENT OF THE FATF-GAFI MUTUAL EVALUATION REPORT – IVLP Alumni Network of the Americas (IANA)

PROPOSAL – CONTRIBUTION TO THE IMPROVEMENT OF THE FATF-GAFI MUTUAL EVALUATION REPORT

Prof. Dr. Juan Félix Marteau.

Coordinator, Democracy and Governance Committee, IANA.

Senior Partner of Marteau – Attorneys-at-Laws. President of the Foundation of Research on Financial Intelligence (FININT), Professor of Criminology (University of Buenos Aires) and Former National Representative of Argentina to the FATF.

ANALYSIS OF SERIOUS CRIMES LINKED TO MONEY LAUNDERING AND TERRORIST FINANCING AND THE EFFECTIVENESS OF NATIONAL CONTROLS

Modifications to specific standards and to the contents of the Mutual Evaluation Report

1. The Financial Action Task Force (FATF) is preparing to initiate its 4^th Round of Mutual Evaluations, in 2012, to be undertaken by the 180 countries and jurisdictions which have accepted its mandate. In this new phase this inter-governmental body will give a higher emphasis to the effective implementation of global policy to combat money laundering and terrorist financing.

2. At this stage, a review of a series of standards, which comprises the body of the FATF’s 40+9 Recommendations, will be undertaken. The modifications will relate to the adoption of the following criteria:

Application of the Risk Based Approach by financial and designated non-financial institutions.
Inclusion of tax evasion in the list of crimes preceding money laundering.
Clarification of requirements for due diligence over legal persons, in particular, over the final beneficiaries of transactions.
Improvement of the identification of Politically Exposed Persons (PEPs), in keeping with the mandates of the United Nations Convention against Corruption.
Definition of the scope of outsourcing in relation to due diligence policy for clients.
Increased transparency in cross-border wire transfers.
Reinforcement of the measures of cooperation and mutual assistance between countries.

3. With reference to Mutual Evaluation Reports, the FATF is considering changes to its structure in cases where all results from the process of standardization, undertaken by the country being examined, are concentrated in the same report, in order to promote better use of this document by members of the private sector and other interested parties (stakeholders). These modifications broadly relate to:

Determining the point of the evaluation.
Adjusting the content of the executive summary.
Identifying risk factors and how they are mitigated.
Shortening the waiting time for its publication.
Simplifying its structure to facilitate its understanding.
Producing sectoral information for a variety of actors.

4. The FATF initiated a period of consultation so that different sectors could present their views over the proposed alterations. This public consultation finalized in September of this year having produced, as a result, a significant amount of input which will allow the international organization to define, with greater legitimacy, the final extent of the modifications to impact upon the 4^th Round.

5. Input by the various sectors that participated in the consultation process, following FATF’s guidelines, contributed valuable points of view to the understanding and content of the reforms which should be applied to the existing standards. However, there was one issue that remained unacknowledged or upon which hardly any comments were made: this relates to the reference that must be dealt with by the Mutual Evaluation Report, to the concrete risks to which a country is vulnerable to concerning money laundering and terrorist financing and how to mitigate this. On this point the FATF are considering the following proposal.

The Mutual Evaluation Report needs to include a more thorough analysis of the serious crimes linked to money laundering and terrorist financing and the country’s response to prevent, detect and suppress them.

6. In the course of the 3^rd Round of Evaluations, the Mutual Evaluation Report included in point 1. Generalities, the item 1.2 General Situation of money laundering and terrorist financing, where the evaluators dedicated a few paragraphs to the succinct description of that which national authorities describe as a possible source or destination of illicit money, particularly in light of the extent of the Mutual Evaluation Report. Likewise, this point is further developed, in a rather uneven manner, when comparing the FATF’s Mutual Evaluation Report and the FATF-Style Regional Bodies Report.

7. Considering that the evaluation of the implementation of these standards must rest upon a thorough understanding of the criminological context of the risks that threaten the jurisdiction, in this matter, it is necessary to further develop this topic, in the sense that the FATF and the country under evaluation must both start from a more accurate and consistent analysis of the criminological context in which these crimes occur and the response to the same by the State and the private sector.

8. The proposal under consideration here rests upon the following criteria:

It is indispensable that the evaluators comply more efficiently with the analysis of the components established in the AML/CFT Evaluations and Assessments, Handbook for Countries and Assessors, approved in April 2009, in order to arrive at a more complete, defined and verifiable description of those crimes precedent to money laundering and, consequently, to the financing of terrorism; and the effectiveness of the policies carried out by the country. The report should consider the impact of those cross-border crimes which produce the highest economic benefits to organized criminals:

Arms trafficking
Drug trafficking
Human trafficking
Corruption
Smuggling
Cybercrime
Fraud
Tax evasion

It is possible to verify, in each Mutual Evaluation, that countries do alter their perception of the existence of these serious crimes in their jurisdiction, however, no information for these alterations is put forward. Such information would require the evaluators to delve much further into the causes, consequences and typology of these criminal conducts.
On many occasions national authorities put forward factors to the evaluators that hardly – if at all – correspond to the international reports regarding the criminal situation in those countries (such as, for example, those produced by the United Nations, the International Monetary Fund or the World Bank on the subjects of drug trafficking, human trafficking, corruption etc). In light of this fact the Mutual Evaluation Report often presents an inconsistent view of the importance of illicit money in circulation within the jurisdiction. In this case, evaluators should be able to check, with the national authorities, the validity of that information so that the end result regarding the criminological context of these crimes is comparable.
The consolidation of the analysis, in the Report, relating to those crimes preceding from, and as a consequence of, money laundering and terrorist financing is the medium which facilitates a better reception of the Risk Based Approach, not only for financial and designated non-financial institutions, but also at the national level, allowing the evaluators to dictate, from the very beginning, where the AML/CFT system should place greater emphasis when in operation.
In those countries where criminal statistics regarding serious crimes are very weak or non-existant, consequently forming part of the so-called ‘dark figure’, the evaluators should reinforce qualitative analyses in order to compensate for the lacuna of quantitative information (for example, by interviewing key actors in politics, the judiciary, universities, non-governmental organizations etc; or by checking press items which cover the investigation, prosecution or conviction of criminal behaviour which could generate illegal assets.
In an essentially complementary manner, it is indispensable to know to what extent policies tackling anti-money laundering and counter financing of terrorism are oriented towards what national authorities have defined as crimes of precedence or crimes of consequence. Otherwise, countries’ institutional responses will only be reacting to pressure imposed by the FATF rather than to the persecution and elimination of that which allows the circulation of illicit money in the corresponding jurisdiction.

Justification

9. The FATF was created to tackle the circulation of illicit assets generated by the formidable business activity of the great South American cartels, dedicated to the commercialization of illegal drugs in the developed countries. At the time the United Nations Convention against Illicit Traffic in Narcotic Drugs (1988) provided the legal framework used to define the scope of the 40 Recommendations regarding Money Laundering designed to deal with this infliction.

10. Within the last 20 years of normative and institutional standardization, during which there has been an increase in the aggressiveness of new and multifaceted forms of criminal activity, as recorded by the United Nations Conventions for the Suppression of the Financing of Terrorism (1999), Transnational Organized Crimes (2000), Corruption (2003), it is of vital importance that the FATF once again focus their attention, in their Mutual Evaluations, on the modus operandi of relevant criminal enterprises and those able to create them.

11. The International Monetary Fund, with their highly beneficial technical assistance, has paved the way for countries to develop Risk Based National Strategies, allowing them to direct anti-money laundering and counter financing of terrorism institutions towards their real criminal problems.

12. To question, as the FATF will do in their 4^th Round of Evaluations, not about the formal compliance with international standards, but rather about the specific effectiveness of existing national mechanisms to prevent and suppress a criminal attack upon the integrity, transparency and stability of economic systems, goes hand in hand with the task of knowing more about the very real threats experienced by jurisdictions in this matter.

13. If the evaluation of the risks of money laundering and terrorist financing, as well as the evaluation of the focused and effective responses of institutions, are not accordingly strengthened there is a danger that evaluators will overlook or ignore the fact that national authorities assign AML/CFT mechanisms to other types of missions which have little or nothing to do with that which has given legitimacy to the global system set up by the FATF.

14. In conclusion, the Mutual Evaluation Report should set out, from the beginning and in an accurate manner, the effect of money laundering, terrorist financing and its connected crimes, and to what extent the national AML/CFT system effectively addresses the issues of prevention, detection and suppression of the same.

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