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                 Reference Guide to
        Anti-Money Laundering and
Combating the Financing of Terrorism
                                    Second Edition
                                and Supplement on
                       Special Recommendation IX



                           Paul Allan Schott
                                            187




                 Reference Guide to
        Anti-Money Laundering and
Combating the Financing of Terrorism
                           Second Edition
                       and Supplement on
              Special Recommendation IX
                                            189




                 Reference Guide to
        Anti-Money Laundering and
Combating the Financing of Terrorism
                           Second Edition
                       and Supplement on
              Special Recommendation IX
190

           © 2006 The International Bank for Reconstruction and Development/The World Bank/
           The International Monetary Fund
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           Washington DC 20433
           Telephone: 202-473-1000
           Internet: www.worldbank.org
           E-mail: feedback@worldbank.org

           All rights reserved
           First printing of Second Edition and Supplement on Special Recommendation IX, January 2006

           1 2 3 4 5 10 09 08 07 06

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           Development/The World Bank/The International Monetary Fund. The findings, interpretations,
           and conclusions expressed in this paper do not necessarily reflect the views of the World Bank, the
           International Monetary Fund, their Executive Directors, or the governments they represent.

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           ISBN: 0-8213-6513-4
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           DOI: 10.1596/978-0-8213-6513-7

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           Cover and publication design: James E. Quigley, World Bank Institute.
           Cover photos: Comstock.


                                              www.amlcft.org



      iv
                                                                             191




Contents



Foreword                                                               ix

Acknowledgments                                                        xi

Abbreviations and Acronyms                                           xiii

Introduction: How to Use this Reference Guide                         xv



Part A: The Problem and the International Response

Chapter I: Money Laundering and Terrorist Financing:
Definitions and Explanations                                          I-1
    A. What Is Money Laundering?                                      I-2
    B. What Is Terrorist Financing?                                   I-4
    C. The Link Between Money Laundering and Terrorist Financing      I-5
    D.   The Magnitude of the Problem                                 I-6
    E.   The Processes                                                I-7
    F.   Where Do Money Laundering and Terrorist Financing Occur?     I-9
    G.   Methods and Typologies                                       I-9


Chapter II: Money Laundering Impacts Development                     II-1
    A. The Adverse Implications for Developing Countries              II-2
    B. The Benefits of an Effective AML/CFT Framework                 II-7


Chapter III: International Standard Setters                         III-1
    A. The United Nations                                            III-2
    B. The Financial Action Task Force on Money Laundering           III-7
    C. The Basel Committee on Banking Supervision                   III-13
    D. International Association of Insurance Supervisors           III-16


                                            v
192 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                  E. International Organization of Securities Commissioners                III-18
                  F. The Egmont Group of Financial Intelligence Units                      III-19


              Chapter IV: Regional Bodies and Relevant Groups                               IV-1
                  A.   FATF-Style Regional Bodies                                           IV-1
                  B.   Wolfsberg Group of Banks                                             IV-4
                  C.   The Commonwealth Secretariat                                         IV-8
                  D.   Organization of American States–CICAD                                IV-9



              Part B: The Elements of an Effective AML/CFT Framework

              Chapter V: Legal System Requirements                                           V-1
                  A. Criminalization of Money Laundering                                     V-2
                  B. Criminalization of Terrorism and the Financing of Terrorism            V-15
                  C. Seizure, Confiscation, and Forfeiture                                  V-15
                  D.   Types of Covered Entities and Persons                                V-19
                  E.   Supervision and Regulation—Integrity Standards                       V-23
                  F.   Laws Consistent with Implementation of FATF Recommendations          V-26
                  G.   Cooperation Among Competent Authorities                              V-26
                  H.   Investigations                                                       V-27


              Chapter VI: Preventive Measures                                               VI-1
                  A.   Customer Identification and Due Diligence                            VI-2
                  B.   Record Keeping Requirements                                         VI-16
                  C.   Suspicious Transaction Reporting                                    VI-18
                  D.   Cash Transaction Reporting                                          VI-24
                  E.   Balancing Privacy Laws with Reporting and Disclosure Requirements   VI-26
                  F.   Internal Controls, Compliance and Audit                             VI-27
                  G.   Regulation and Supervision—Integrity Standards                      VI-27
                  H.   Legal Entities and Arrangements                                     VI-28


              Chapter VII: The Financial Intelligence Unit                                 VII-1
                  A.   Definition of a Financial Intelligence Unit                          VII-3
                  B.   Core Functions                                                       VII-4
                  C.   Types or Models of FIUs                                              VII-9
                  D.   Possible Additional Functions                                       VII-15
                  E.   Organizing the FIU                                                  VII-17




     vi
                                                                                       Contents    193

    F. Privacy Safeguards                                                    VII-19
    G. Information and Feedback                                              VII-23


Chapter VIII: International Cooperation                                      VIII-1
    A. Prerequisites for Effective International Cooperation                  VIII-2
    B. General Principles of International Cooperation Against
       Money Laundering                                                       VIII-5
    C. International Cooperation Between FIUs                                 VIII-6
    D. International Cooperation Between Financial Supervisory Authorities    VIII-8
    E. International Cooperation Between Law Enforcement and
         Judicial Authorities                                                VIII-11
    F.   Considerations for Fiscal Matter Offenses                           VIII-13


Chapter IX: Combating the Financing of Terrorism                               IX-1
    A. Ratification and Implementation of United Nations Instruments           IX-2
    B. Criminalizing the Financing of Terrorism and Associated
       Money Laundering                                                        IX-4
    C.   Freezing and Confiscating Terrorist Assets                            IX-5
    D.   Reporting Suspicious Transactions Related To Terrorism                IX-7
    E.   International Cooperation                                             IX-8
    F.   Alternative Remittance Systems                                        IX-9
    G.   Wire Transfers                                                       IX-10
    H.   Non-Profit Organizations                                             IX-12
    I.   Cash Couriers                                                        IX-13
    J.   Self-Assessment Questionnaire on Terrorist Financing                 IX-17



Part C: The Role of the World Bank and International Monetary Fund

Chapter X: World Bank and International Monetary Fund
Initiatives to Fight Money Laundering and Terrorist Financing                  X-1
    A.   Awareness Raising                                                      X-3
    B.   Development of a Universal AML/CFT Assessment Methodology              X-5
    C.   Building Institutional Capacity                                        X-6
    D.   Research and Analysis                                                  X-9




                                                                                             vii
194 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              Annexes
                  I.     Websites for Key Organizations, Legal Instruments,
                         and Initiatives                                                   Annex I-1
                  II.    Other Useful Websites and Resources                               Annex II-1
                  III.   United Nations Anti-Terrorist Conventions Referred to in the
                         International Convention for the Suppression of the Financing
                         of Terrorism                                                     Annex III-1
                  IV.   The Financial Action Task Force Forty Recommendations on
                        Money Laundering and Interpretative Notes                         Annex IV-1
                  V. The Financial Action Task Force Special Recommendations
                        on Terrorist Financing                                             Annex V-1
                  VI. The Financial Action Task Force Interpretative Notes
                        and Guidance Notes for the Special Recommendations on
                        Terrorist Financing and the Self-Assessment Questionnaire         Annex VI-1
                  VII. Cross-Reference of The Forty Recommendations to
                        Reference Guide                                                  Annex VII-1
                  VIII. Cross-Reference of the Special Recommendations to
                        Reference Guide                                                  Annex VIII-1



              Diagrams
                  The Processes of Money Laundering and Financing of Terrorism                    I-8




     viii
                                                                                                      195




Foreword



   fforts to launder money and finance terrorism have been evolving rapidly
E  in recent years in response to heightened countermeasures. The internation-
al community has witnessed the use of increasingly sophisticated methods to
move illicit funds through financial systems across the globe and has acknowl-
edged the need for improved multilateral cooperation to fight these criminal
activities.
     The World Bank and International Monetary Fund developed this second
edition of the Reference Guide to Anti-Money Laundering and Combating
the Financing of Terrorism to help countries understand the new international
standards. The Reference Guide will hopefully serve as a single, comprehensive
source of practical information for countries to fight money laundering and
terrorist financing. It discusses the problems caused by these crimes, the spe-
cific actions countries need to take to address them and the role international
organizations, such as the Bank and the Fund, play in the process.
      We offer this new version as a tool for countries to establish and improve
their legal and institutional frameworks and their preventive measures accord-
ing to the new international standards and best practices. This Second Edition
of the Reference Guide and Supplement on Special Recommendation IX will
also be translated into Arabic, Chinese, French, Portuguese, Russian, and
Spanish in order to better serve a broader audience.
     We intend to keep the Reference Guide under review as money launder-
ing and terrorist financing trends and techniques, as well as the international
response, evolve and to update it as necessary. We welcome your feedback and
recommendations on how this resource can be more useful.

              Margery Waxman                R. Barry Johnston           Jean-François Thony
               Program Director and             Assistant Director        Assistant General Counsel
                  Senior Adviser             Monetary and Financial           Legal Department
             Financial Market Integrity        Systems Department       International Monetary Fund
                    World Bank            International Monetary Fund




                                                    ix
                                                                              197




Acknowledgments



   his publication was written by Paul Allan Schott, consultant with the
T  Financial Market Integrity Unit of the Financial Sector of The World
Bank. The author is especially grateful to Margery Waxman, Director,
Financial Market Integrity, World Bank, for her support, encouragement and
patience in producing the first and second edition of this Reference Guide.
     The author is grateful to his Bank and Fund colleagues for their will-
ingness to read multiple drafts of the first edition and provide advice and
insights based on their work in the development and implementation of the
joint Bank/Fund program to combat money laundering and terrorist financ-
ing: John Abbott, Maud Julie Bokkerink, Pierre-Laurent Chatain, Alain
Damais, Ross Delston, Gabriella Ferencz, Ted Greenberg, Raul Hernandez
Coss, Barry Johnston, Nadim Kyriakos-Saad, Samuel Maimbo, John
McDowell, Bess Michael, Michael Moore, Pramita Moni Sengupta, Takashi
Miyahara, Thomas Rose, Heba Shams, Jean-François Thony, and Cari
Votava.
    Most importantly, the author wishes to thank Joseph Halligan for his
work in updating the Reference Guide to reflect the revision of the FATF 40
Recommendations and the methodology. Finally, the author could not have
produced this comprehensive second edition without the work of Bank staff
members who helped organize the material carefully, checked all references
and made this publication a reality: Oriana Bolvaran, Nicolas de la Riva,
Martín Joseffson, Amanda Larson, Annika Lindgren, Maria Orellano, James
Quigley, Dafna Tapiero, Emiko Todoroki, and Tracy Tucker.




                                     xi
                                                                           199




Abbreviations and Acronyms



                   AML anti-money laundering
                   APG Asia/Pacific Group on Money Laundering
                  Bank World Bank Group
        Basel Committee Basel Committee on Bank Supervision
                   BCCI Bank of Credit and Commerce International
                   CAS Country Assistance Strategy
                 CFATF Caribbean Financial Action Task Force
                    CFT combating the financing of terrorism
                   CTC United Nations Security Council Counter
                       Terrorism Committee
           Egmont Group The Egmont Group of Financial Intelligence Units
              ESAAMLG Eastern and Southern Africa Anti-Money
                      Laundering Group
                   FATF Financial Action Task Force on Money
                        Laundering, Group d’action Financière sur le
                         blanchiment de capital (GAFI)
                  FSRB FATF Style Regional Bodies
                    FIU Financial Intelligence Unit
The Forty Recommendations The Forty Recommendations on Money
                          Laundering issued by FATF
                   Fund International Monetary Fund
                   GAFI Group d’action Financière sue le blanchiment
                         de capital (FATF)
               GAFISUD Financial Action Task Force on Money Laundering
                       in South America



                                  xiii
200 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                                     IAIS International Association of Insurance Supervisors
                                     IFTs informal funds transfer systems
                                     IMF International Monetary Fund
                                   IOSCO International Organization of Securities
                                           Commissions
                                     KYC “know-your-customer”
                              MONEYVAL Council of Europe the Select Committee of
                                           Experts on the Evaluation of Anti-Money
                                           Laundering Measures
                                    MOU memorandum of understanding
                                   NCCT Non-Cooperative Countries and Territories
                                     OAS Organization of American States
                                     OFC Offshore Financial Center
                      Palermo Convention United Nations Convention Against Transnational
                                         Organized Crime (2000)
                                 PC-R-EV Now known as MONEYVAL
                                   ROSC Report on Observance of Standards and Codes
                Special Recommendations Nine Special Recommendations on Terrorist
                                        Financing issued by FATF
                   Strasbourg Convention Convention on Laundering, Search, Seizure and
                                           Confiscation of the Proceeds of Crime (1990)
                                     STR suspicious transaction reports
                                      TA Technical Assistance
                                      UN United Nations
                               UNSCCTC United Nations Security Council Counter
                                       Terrorism Committee
                       Vienna Convention United Nations Convention Against Illicit
                                           Traffic in Narcotic Drugs and Psychotropic
                                           Substances (1988)
                         Wolfsberg Group Wolfsberg Group of Banks




     xiv
                                                                                   201




Introduction:
How to Use this Reference Guide

   his Second Edition of the Reference Guide is intended to serve as a single,
T  comprehensive source of information for countries that wish to establish
or improve their legal and institutional frameworks for anti-money launder-
ing (AML) and combating the financing of terrorism (CFT). These issues
have become increasingly important in a global economy where funds can be
easily and immediately transferred from one financial institution to another,
including transfers to institutions in different countries. The international
community is relying upon all countries to establish effective AML/CFT
regimes that are capable of successfully preventing, detecting and prosecut-
ing money laundering and terrorist financing in order to fight the devastating
economic and social consequences of these criminal activities.
    Part A of this Reference Guide describes the problem of money launder-
ing and terrorist financing, their adverse consequences, and the benefits of an
effective regime. It also identifies the relevant international standard-setting
organizations and discusses their specific efforts and instruments that fight
these activities.
     Part B describes the various elements that are part of a comprehensive
legal and institutional AML and CFT framework for any country. Each
of these components has been established by the Financial Action Task on
Money Laundering (FATF) and the other international standard setters and
each element is essential to a comprehensive and effective regime. This part
of the Reference Guide is a step-by-step approach to achieve compliance with
international standards, although it does not dictate the specific methods or
actions to be adopted. Rather, it raises the issues that must be addressed and
discusses the options that a country has to resolve these issues.
     Part C describes the role of the World Bank and International Monetary
Fund (IMF) in the global effort and the coordination of technical assistance



                                       xv
202 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              available to countries in order to help them achieve compliance with interna-
              tional standards.
                   Each chapter is a self-contained discussion of the topics covered in that
              chapter (although references are made to related discussions in other chap-
              ters) with detailed references to background and original source materials.
              Annexes I, II and III provide complete citations to reference materials that
              are used in the Reference Guide or that are otherwise useful to a country in
              dealing with the many difficult issues associated with AML and CFT. For
              convenience, Annexes IV and V restate the international standards set by
              FATF, The Forty Recommendations on Money Laundering (revised in 2003),
              Glossary and Interpretative Notes and the nine Special Recommendations on
              Terrorist Financing, respectively. Annex VI is FATF’s Interpretative Notes and
              Guidance Notes for the Special Recommendations on Terrorist Financing and
              Self-Assessment Questionnaire for countries on terrorist financing. Finally,
              Annexes VII and VIII are cross references for the FATF recommendations to
              discussions in the Reference Guide.
                   As a country reviews its AML and CFT legal and institutional frame-
              works, it may wish to use the Comprehensive Methodology on AML/CFT
              referred to in Chapter X as its own checklist and self-assessment mechanism.
              This is the same Methodology used by FATF, the FATF-style regional bodies,
              the Bank and IMF in making assessments of either their own members or of
              other countries.




     xvi
                                                                                              203


Chapter I

Money Laundering and Terrorist
Financing: Definitions and Explanations


    A. What Is Money Laundering?                 E. The Processes
    B. What is Terrorist Financing?                 1. Placements
                                                    2. Layering
    C. The Link Between Money Laundering            3. Integration
       and Terrorist Financing                   F. Where Do Money Laundering and Terrorist
    D. The Magnitude of the Problem                 Financing Occur?
                                                 G. Methods and Typologies




    or most countries, money laundering and terrorist financing raise sig-
F   nificant issues with regard to prevention, detection and prosecution.
Sophisticated techniques used to launder money and finance terrorism add
to the complexity of these issues. Such sophisticated techniques may involve
different types of financial institutions; multiple financial transactions; the
use of intermediaries, such as financial advisers, accountants, shell corpora-
tions and other service providers; transfers to, through, and from different
countries; and the use of different financial instruments and other kinds of
value-storing assets. Money laundering is, however, a fundamentally simple
concept. It is the process by which proceeds from a criminal activity are dis-
guised to conceal their illicit origins. Basically, money laundering involves the
proceeds of criminally derived property rather than the property itself.
     The financing of terrorism is also a fundamentally simple concept. It
is the financial support, in any form, of terrorism or of those who encour-
age, plan, or engage in terrorism. Less simple, however, is defining terrorism




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              itself, because the term may have significant political, religious, and national
              implications from country to country. Money laundering and terrorist financ-
              ing often display similar transactional features, mostly having to do with
              concealment.
                    Money launderers send illicit funds through legal channels in order to
              conceal their criminal origins, while those who finance terrorism transfer
              funds that may be legal or illicit in origin in such a way as to conceal their
              source and ultimate use, which is the support of terrorism. But the result is
              the same—reward. When money is laundered, criminals profit from their
              actions; they are rewarded by concealing the criminal act that generates the
              illicit proceeds and by disguising the origins of what appears to be legitimate
              proceeds. Similarly, those who finance terrorism are rewarded by concealing
              the origins of their funding and disguising the financial support to carry out
              their terrorist stratagems and attacks.



              A. What Is Money Laundering?


              Money laundering can be defined in a number of ways. Most countries sub-
              scribe to the definition adopted by the United Nations Convention Against
              Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988) (Vienna
              Convention)1 and the United Nations Convention Against Transnational
              Organized Crime (2000) (Palermo Convention):2
                   • The conversion or transfer of property, knowing that such property
                     is derived from any [drug trafficking] offense or offenses or from an
                     act of participation in such offense or offenses, for the purpose of
                     concealing or disguising the illicit origin of the property or of assisting
                     any person who is involved in the commission of such an offense or
                     offenses to evade the legal consequences of his actions;
                   • The concealment or disguise of the true nature, source, location, dis-
                     position, movement, rights with respect to, or ownership of property,
                     knowing that such property is derived from an offense or offenses or
                     from an act of participation in such an offense or offenses, and;

              1.   http://www.incb.org/e/conv/1988/.
              2.   http://www.undcp.org/adhoc/palermo/convmain.html.




     I-2
                             Money Laundering and Terrorist Financing: Definitions and Explanations   205

     • The acquisition, possession or use of property, knowing at the time of
       receipt that such property was derived from an offense or offenses or
       from an act of participation in such offense…or offenses.3


      The Financial Action Task Force on Money Laundering (FATF), which
is recognized as the international standard setter for anti-money launder-
ing (AML) efforts,4 defines the term “money laundering” succinctly as “the
processing of…criminal proceeds to disguise their illegal origin” in order to
“legitimize” the ill-gotten gains of crime.5
      A money laundering predicate offense is the underlying criminal activ-
ity that generated proceeds, which when laundered, results in the offense
of money laundering. By its terms, the Vienna Convention limits predicate
offenses to drug trafficking offenses. As a consequence, crimes unrelated to
drug trafficking, such as, fraud, kidnapping and theft, for example, do not
constitute money laundering offenses under the Vienna Convention. Over
the years, however, the international community has developed the view that
predicate offenses for money laundering should go well beyond drug traf-
ficking. Thus, FATF and other international instruments have expanded the
Vienna Convention’s definition of predicate offenses to include other serious
crimes.6 For example, the Palermo Convention requires all participant coun-
tries to apply that convention’s money laundering offenses to “the widest
range of predicate offenses.”7
      In its 40 recommendations for fighting money laundering (The Forty
Recommendations), FATF specifically incorporates the technical and
legal definitions of money laundering set out in the Vienna and Palermo
Conventions and lists 20 designated categories of offences that must be
included as predicate offences for money laundering.8




3.   See Vienna Convention, articles 3(b) and (c)(i); and Palermo Convention, article 6(i).
4.   See Chapter III, B., FATF.
5.   FATF, What is money laundering?, Basic Facts About Money Laundering, http://www.fatf-
     gafi.org/MLaundering_en.htm.
6.   See discussion at Chapter V, A.,2., The Scope of the Predicate Offenses.
7.   The Palermo Convention, Article 2 (2), http://www.undcp.org/adhoc/palermo/convmain.html.
8.   The Forty Recommendations, Rec. 1; http://www.fatf-gafi.org/pdf/40Recs-2003_en.pdf. See
     also Chapter V, Criminalization of Money Laundering, of this Reference Guide.




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206 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              B. What Is Terrorist Financing?

              The United Nations (UN) has made numerous efforts, largely in the form of
              international treaties, to fight terrorism and the mechanisms used to finance
              it. Even before the September 11th attack on the United States, the UN had
              in place the International Convention for the Suppression of the Financing of
              Terrorism (1999), which provides:


                   1. Any person commits an offense within the meaning of this Convention
                      if that person by any means, directly or indirectly, unlawfully and will-
                      ingly, provides or collects funds with the intention that they should be
                      used or in the knowledge that they are to be used, in full or in part, in
                      order to carry out:
                      a. An act which constitutes an offence within the scope of and as
                         defined in one of the treaties listed in the annex; or
                      b. Any other act intended to cause death or serious bodily injury to
                          a civilian, or to any other person not taking any active part in the
                          hostilities in a situation of armed conflict, when the purpose of
                          such act, by its nature or context, is to intimidate a population, or
                          to compel a government or an international organization to do or
                          to abstain from doing an act.
                   2. ...
                   3. For an act to constitute an offense set forth in paragraph 1, it shall not
                      be necessary that the funds were actually used to carry out an offense
                      referred to in paragraph 1, subparagraph (a) or (b).9


                   The difficult issue for some countries is defining terrorism. Not all of
              the countries that have adopted the convention agree on specifically what
              actions constitute terrorism. The meaning of terrorism is not universally
              accepted due to significant political, religious and national implications that
              differ from country to country.




              9.   International Convention for the Suppression of the Financing of Terrorism (1999), Article 2,
                   http://www.un.org/law/cod/finterr.htm. The conventions referred to in the annex in sub-para-
                   graph 1(a) are listed in Annex III of this Reference Guide.




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                              Money Laundering and Terrorist Financing: Definitions and Explanations   207

      FATF, which is also recognized as the international standard setter for
efforts to combat the financing of terrorism (CFT),10 does not specifically
define the term financing of terrorism in its nine Special Recommendations
on Terrorist Financing (Special Recommendations)11 developed following
the events of September 11, 2001. Nonetheless, FATF urges countries to
ratify and implement the 1999 United Nations International Convention
for Suppression of the Financing of Terrorism.12 Thus, the above definition
is the one most countries have adopted for purposes of defining terrorist
financing.



C. The Link Between Money Laundering and Terrorist Financing


The techniques used to launder money are essentially the same as those used
to conceal the sources of, and uses for, terrorist financing. Funds used to sup-
port terrorism may originate from legitimate sources, criminal activities, or
both. Nonetheless, disguising the source of terrorist financing, regardless of
whether the source is of legitimate or illicit origin, is important. If the source
can be concealed, it remains available for future terrorist financing activities.
Similarly, it is important for terrorists to conceal the use of the funds so that
the financing activity goes undetected.
     For these reasons, FATF has recommended that each country criminalize
the financing of terrorism, terrorist acts and terrorist organizations,13 and
designate such offenses as money laundering predicate offenses.14 Finally,
FATF has stated that the nine Special Recommendations combined with The
Forty Recommendations on money laundering15 constitute the basic frame-
work for preventing, detecting and suppressing both money laundering and
terrorist financing.
     Efforts to combat the financing of terrorism also require countries to
consider expanding the scope of their AML framework to include non-profit
organizations, particularly charities, to make sure such organizations are not


10.   See Chapter III, B., FATF.
11.   The Special Recommendations are reprinted in Annex V of this Reference Guide.
12.   Id., at Spec. Rec. I.
13.   Id., at Spec. Rec. II.
14.   Id.
15.   Id., at introductory paragraph.




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208 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              used, directly or indirectly, to finance or support terrorism.16 CFT efforts
              also require examination of alternative money transmission or remittance
              systems, such as hawalas. This effort includes consideration of what mea-
              sures should be taken to preclude the use of such entities by money launder-
              ers and terrorists.17
                   As noted above, a significant difference between money laundering and
              terrorist financing is that the funds involved may originate from legitimate
              sources as well as criminal activities. Such legitimate sources may include
              donations or gifts of cash or other assets to organizations, such as founda-
              tions or charities that, in turn, are utilized to support terrorist activities or
              terrorist organizations. Consequently, this difference requires special laws to
              deal with terrorist financing. However, to the extent that funds for financing
              terrorism are derived from illegal sources, such funds may already be cov-
              ered by a country’s AML framework, depending upon the scope of predicate
              offenses for money laundering.



              D. The Magnitude of the Problem

              By their very nature, money laundering and terrorist financing are geared
              towards secrecy and do not lend themselves to statistical analysis. Launderers
              do not document the extent of their operations or publicize the amount of
              their profits, nor do those who finance terrorism. Moreover, because these
              activities take place on a global basis, estimates are even more difficult to
              produce. Launderers use various countries to conceal their ill-gotten pro-
              ceeds, taking advantage of differences among countries with regard to AML
              regimes, enforcement efforts and international cooperation. Thus, reliable
              estimates on the size of the money laundering and terrorist financing prob-
              lems on a global basis are not available.
                   With regard to money laundering only, the International Monetary Fund
              has estimated that the aggregate amount of funds laundered in the world
              could range between two and five per cent of the world’s gross domestic
              product. Using 1996 statistics, these percentages would approximate between



              16. Special Recommendations, Spec. Rec. VIII.
              17. Special Recommendations, Spec. Rec. VI.




     I-6
                            Money Laundering and Terrorist Financing: Definitions and Explanations   209

US $590 billion and US $1.5 trillion.18 Thus, by any estimate, the size of the
problem is very substantial and merits the complete attention of every country.



E. The Processes

The initial concern over money laundering began with its early connection
to illegal trafficking in narcotic drugs. The objective of drug traffickers
was to convert typically small denominations of currency into legal bank
accounts, financial instruments, or other assets. Today, ill-gotten gains are
produced by a vast range of criminal activities—among them political cor-
ruption, illegal sales of weapons, and illicit trafficking in and exploitation
of human beings. Regardless of the crime, money launderers resort to place-
ment, layering, and integration in the process of turning illicit proceeds into
apparently legal monies or goods.



1. Placement


The initial stage of the process involves placement of illegally derived
funds into the financial system, usually through a financial institution.
This can be accomplished by depositing cash into a bank account. Large
amounts of cash are broken into smaller, less conspicuous amounts and
deposited over time in different offices of a single financial institution
or in multiple financial institutions. The exchange of one currency into
another, as well as the conversion of smaller notes into larger denomina-
tions, may occur at this stage. Furthermore, illegal funds may be converted
into financial instruments, such as money orders or checks, and com-
mingled with legitimate funds to divert suspicion. Furthermore, placement
may be accomplished by the cash purchase of a security or a form of an
insurance contract.




18. Vito Tanzi, “Money Laundering and the International Finance System,” IMF Working Paper
    No. 96/55 (May 1996), at 3 and 4.




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210 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism



                  The Processes of Money Laundering and Financing of Terrorism
                 The Processes of Money Laundering and Financing of Terrorism


                               Money Laundering                                  Financing of Terrorism


                                                                                              Legitimate Asset
                    Cash from Criminal Act            $$$$$                      $$$$$               or
                                                                                           Cash from Criminal Act



                                                                            Securities
                                                      Bank
                                                                              Firm
                          Placement                                                                 Placement
                        Cash is deposited                                                        Asset deposited
                         into accounts                                                       into the financial system

                                                      Bank                       Bank




                              Layering                                       Non-Bank                 Layering
                                                    Insurance
                       Funds moved to other                                   Financial        Funds moved to other
                                                     Company
                   institutions to obscure origin                            Institution   institutions to obscure origin




                          Integration                         Legitimate Asset                     Integration
                      Funds used to acquire                    or Distribution                  Funds distributed to
                        legitimate assets                                                     fund terrorist activities




              2. Layering


              The second money laundering stage occurs after the ill-gotten gains have
              entered the financial system, at which point the funds, securities or insur-
              ance contracts are converted or moved to other institutions, further sepa-
              rating them from their criminal source. Such funds could then be used to
              purchase other securities, insurance contracts or other easily transferable
              investment instruments and then sold through yet another institution. The
              funds could also be transferred by any form of negotiable instrument such
              as check, money order or bearer bond, or the may be transferred electroni-




     I-8
                         Money Laundering and Terrorist Financing: Definitions and Explanations   211

cally to other accounts in various jurisdictions. The launderer may also
disguise the transfer as a payment for goods or services or transfer the
funds to a shell corporation.



3. Integration


The third stage involves the integration of funds into the legitimate economy.
This is accomplished through the purchase of assets, such as real estate, secu-
rities or other financial assets, or luxury goods.
     These three stages are also seen in terrorist financing schemes, except
that stage three integration involves the distribution of funds to terrorists
and their supporting organizations, while money laundering, as discussed
previously, goes in the opposite direction—integrating criminal funds into the
legitimate economy.



F. Where Do Money Laundering and Terrorist Financing Occur?


Money laundering and the financing of terrorism can, and do, occur in
any country in the world, especially those with complex financial systems.
Countries with lax, ineffective, or corrupt AML and CFT infrastructures are
also likely targets for such activities. No country is exempt.
     Because complex international financial transactions can be abused to
facilitate the laundering of money and terrorist financing, the different stages
of money laundering and terrorist financing occur within a host of different
countries. For example, placement, layering, and integration may each occur
in three separate countries; one or all of the stages may also be removed from
the original scene of the crime.



G. Methods and Typologies


Money can be laundered in a number of ways, ranging from small cash
deposits in unremarkable bank accounts (for subsequent transfer) to the pur-
chase and resale of luxury items such as automobiles, antiques, and jewelry.




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212 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              Illicit funds can also be transferred through a series of complex international
              financial transactions. Launderers are very creative—when overseers detect
              one method, the criminals soon find another.
                   The various techniques used to launder money or finance terrorism are
              generally referred to as methods or typologies. The terms, methods or typol-
              ogies, may be referred to interchangeably, without any distinction between
              the two. At any point in time, it is impossible to describe accurately the
              universe of the different methods criminals use to launder money or finance
              terrorism. Moreover, their methods are likely to differ from country to coun-
              try because of a number of characteristics or factors unique to each coun-
              try, including its economy, complexity of financial markets, AML regime,
              enforcement effort and international cooperation. In addition, the methods
              are constantly changing.
                   Nevertheless, various international organizations have produced excel-
              lent reference works on money laundering methods and techniques. FATF has
              produced reference materials on methods in its annual reports and annual
              typologies report.19 The various FATF-style regional bodies also provide
              information on the various typologies seen in their regions. For the most up
              to-date information on money laundering methods and typologies, please
              consult the websites for these entities.20 In addition, the Egmont Group
              has produced a compilation of one hundred sanitized cases about the fight
              against money laundering from its member financial intelligence units.21




              19. See, for example, 2003–04 FATF Report on Money Laundering Typologies, http://www.fatf-
                  gafi.org/pdf/TY2004_en.pdf, and prior reports, http://www.fatf-gafi.org/FATDocs_en.htm.
              20. See Chapter IV for a discussion of the FATF-style regional bodies.
              21. http://www.fincen.gov/fiuinaction.pdf. See Chapter III, The Egmont Group.




     I-10
                                                                                                                          213


Chapter II

Money Laundering Impacts Development



   A. The Adverse Implications for Developing                       B. The Benefits of an Effective
      Countries                                                        AML/CFT Framework
      1. Increased Crime and Corruption                                1. Fighting Crime and Corruption
      2. International Consequences and Foreign Investment             2. Enhancing Stability of Financial Institutions
      3. Weakened Financial Institutions                               3. Encouraging Economic Development
      4. Compromised Economy and Private Sector
      5. Damaged Privatization Efforts




    riminal enterprises and terrorist financing operations succeed largely to
C   the extent that they are able to conceal the origins or sources of their
funds and sanitize the proceeds by moving them through national and inter-
national financial systems. The absence of, or a lax or corrupt, anti-money
laundering regime in a particular country permits criminals and those who
finance terrorism to operate, using their financial gains to expand their
criminal pursuits and fostering illegal activities such as corruption, drug traf-
ficking, illicit trafficking and exploitation of human beings, arms trafficking,
smuggling, and terrorism.
    While money laundering and the financing of terrorism can occur in any
country, they have particularly significant economic and social consequences
for developing countries, because those markets tend to be small and, there-
fore, more susceptible to disruption from criminal or terrorist influences.
    Money laundering and terrorist financing also have significant economic
and social consequences for countries with fragile financial systems because



                                                             II-1
214 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              they too are susceptible to disruption from such influences. Ultimately, the
              economy, society, and security of countries used as money-laundering or ter-
              rorist financing platforms are all imperiled.1 The magnitude of these adverse
              consequences is difficult to establish, however, since such adverse impacts
              cannot be quantified with precision, either in general for the international
              community, or specifically for an individual country.
                    On the other hand, an effective framework for anti-money launder-
              ing (AML) and combating the financing of terrorism (CFT) have important
              benefits, both domestically and internationally, for a country. These benefits
              include lower levels of crime and corruption, enhanced stability of financial
              institutions and markets, positive impacts on economic development and
              reputation in the world community, enhanced risk management techniques
              for the country’s financial institutions, and increased market integrity.



              A. The Adverse Implications for Developing Countries


              1. Increased Crime and Corruption


              Successful money laundering helps make criminal activities profitable; it
              rewards criminals. Thus, to the extent that a country is viewed as a haven for
              money laundering, it is likely to attract criminals and promote corruption.
              Havens for money laundering and terrorist financing have:


                   • A weak AML/CFT regime;
                   • Some or many types of financial institutions that are not covered by an
                      AML/CFT framework;
                   • Little, weak or selective enforcement of AML/CFT provisions;
                   • Ineffective penalties, including difficult confiscation provisions; and
                   • A limited number of predicate crimes for money laundering.



              1.   For a detailed discussion of negative economic effects of money laundering see Brent L.
                   Bartlett, “Negative Effects of Money Laundering on Economic Development” (an Economic
                   Research Report prepared for the Asian Development Bank, June 2002). See also John
                   McDowell and Gary Novis, “Economic Perspectives,” United States, State Department (May
                   2001).




     II-2
                                                   Money Laundering Impacts Development    215

    If money laundering is prevalent in a country, it generates more crime
and corruption. It also enhances the use of bribery in critical gateways to
make money laundering efforts successful, such as:


   • Employees and management of financial institutions,
   • Lawyers and accountants,
   • Legislatures,
   • Enforcement agencies,
   • Supervisory authorities,
   • Police authorities,
   • Prosecutors, and
   • Courts.


    A comprehensive and effective AML/CFT framework, together with
timely implementation and effective enforcement, on the other hand, sig-
nificantly reduce the profitable aspects of this criminal activity and, in
fact, discourage criminals and terrorists from utilizing a country. This is
especially true when the proceeds from criminal activities are aggressively
confiscated and forfeited as part of a country’s overall AML/CFT legal
framework.



2. International Consequences and Foreign Investment


A reputation as a money laundering or terrorist financing haven, alone, could
cause significant adverse consequences for development in a country. Foreign
financial institutions may decide to limit their transactions with institutions
from money laundering havens; subject these transactions to extra scrutiny,
making them more expensive; or terminate correspondent or lending rela-
tionships altogether. Even legitimate businesses and enterprises from money
laundering havens may suffer from reduced access to world markets or access
at a higher cost due to extra scrutiny of their ownership, organization and
control systems.
    Any country known for lax enforcement of AML/CFT is less likely to
receive foreign private investment. For developing nations, eligibility for for-
eign governmental assistance is also likely to be severely limited.




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216 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                   Finally, the Financial Action Task Force on Money Laundering (FATF)
              maintains a list of countries that do not comply with AML requirements
              or that do not cooperate sufficiently in the fight against money launder-
              ing. Being placed on this list, known as the “non-cooperating countries and
              territories” (NCCT) list,2 gives public notice that the listed country does
              not have in place even minimum standards. Beyond the negative impacts
              referred to here, individual FATF member countries could also impose spe-
              cific counter-measures against a country that does not take action to remedy
              its AML/CFT deficiencies.3



              3. Weakened Financial Institutions


              Money laundering and terrorist financing can harm the soundness of a coun-
              try’s financial sector, as well as the stability of individual financial institutions
              in multiple ways. The following discussion focuses on banking institutions,
              but the same consequences, or similar ones, are also applicable to other types
              of financial institutions, such as securities firms, insurance companies, and
              investment management firms. The adverse consequences generally described
              as reputational, operational, legal and concentration risks are interrelated.
              Each has specific costs:


                  • Loss of profitable business,
                  • Liquidity problems through withdrawal of funds,
                  • Termination of correspondent banking facilities,
                  • Investigation costs and fines,
                  • Asset seizures,
                  • Loan losses and
                  • Declines in the stock value of financial institutions.4


                   Reputational risk is the potential that adverse publicity regarding a
              bank’s business practices and associations, whether accurate or not, will

              2. See Chapter III, FATF, The NCCT List.
              3. Id.
              4. Basel Committee on Bank Supervision, Customer due diligence for banks, (October 2001),
                 paragraphs 8–17, http://www.bis.org/publ/bcbs85.pdf.




     II-4
                                                  Money Laundering Impacts Development    217

cause a loss of confidence in the integrity of the institution.5 Customers, both
borrowers and depositors, as well as investors cease doing business with an
institution whose reputation has been damaged by suspicions or allegations
of money laundering or terrorist financing.6 The loss of high quality borrow-
ers reduces profitable loans and increases the risk of the overall loan portfo-
lio. Depositors may also withdraw their funds, thereby reducing an inexpen-
sive source of funding for the bank.
       Moreover, funds placed on deposit with a bank by money launderers
cannot be relied upon as a stable source of funding. Large amounts of laun-
dered funds are often subject to unanticipated withdrawals from a financial
institution through wire transfers or other transfers, causing potential liquid-
ity problems.
     Operational risk is the potential for loss resulting from inadequate or
failed internal processes, people and systems, or external events.7 As noted
above, such losses occur when institutions incur reduced, terminated, or
increased costs for inter-bank or correspondent banking services. Increased
borrowing or funding costs can also be included in such losses.
     Legal risk is the potential for law suits, adverse judgments, unenforce-
able contracts, fines and penalties generating losses, increased expenses for
an institution, or even closure of such an institution.8 Money laundering
involves criminals in almost every aspect of the money laundering process.
As a consequence, legitimate customers may also be victims of a financial
crime, lose money and sue the institution for reimbursement. There may be
investigations, by banking or other law enforcement authorities resulting in
increased costs, as well as fines and other penalties involved. Also, certain
contracts may be unenforceable due to fraud on the part of the criminal
customer.
     Concentration risk is the potential for loss resulting from too much
credit or loan exposure to one borrower.9 Statutory provisions or regulations
usually restrict a bank’s exposure to a single borrower or group of related
borrowers. Lack of knowledge about a particular customer, the customer’s



5.   Id., paragraph 11.
6.   Id.
7.   Id., paragraph 12.
8.   Id., paragraph 13.
9.   Id., paragraph 14.




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218 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              business, or what the customer’s relationship is to other borrowers, can
              place a bank at risk in this regard. This is particularly a concern where there
              are related counter-parties, connected borrowers, and a common source
              of income or assets for repayment. Loan losses also result, of course, from
              unenforceable contracts and contracts made with fictitious persons.
                  Banks and their account holders are protected when effective due dili-
              gence regimes are in place.10 Identification of the beneficial owners of an
              account is critical to an effective AML/CFT regime. Such identification proce-
              dures protect against business relationships with fictitious persons or corpo-
              rate entities without substantial assets, such as shell corporations, as well as
              known criminals or terrorists. Due diligence procedures also help the finan-
              cial institution to understand the nature of the customer’s business interests
              and underlying financial issues.



              4. Compromised Economy and Private Sector


              Money launderers are known to use “front companies,” i.e., business enter-
              prises that appear legitimate and engage in legitimate business but are, in
              fact, controlled by criminals.
                   These front companies co-mingle the illicit funds with legitimate funds in
              order to hide the ill-gotten proceeds. Front companies’ access to illicit funds,
              allows them to subsidize the front company’s products and services, even at
              below-market prices. As a consequence, legitimate enterprises find it difficult
              to compete with such front companies, the sole purpose of which is to pre-
              serve and protect the illicit funds, not to produce a profit.
                   By using front companies and other investments in legitimate compa-
              nies money laundering proceeds can be utilized to control whole industries
              or sectors of the economy of certain countries. This increases the potential
              for monetary and economic instability due to the misallocation of resources
              from artificial distortions in asset and commodity prices.11 It also provides a
              vehicle for evading taxation, thus depriving the country of revenue.



              10. See Chapter VI, Customer Identification and Due Diligence.
              11. John McDowell and Gary Novis, Economic Perspectives, U.S. State Department, May 2001.




     II-6
                                                             Money Laundering Impacts Development         219

5. Damaged Privatization Efforts


Money launderers threaten the efforts of many countries to reform their
economies through privatization.12 These criminal organizations are capable
of outbidding legitimate purchasers of former state-owned enterprises. When
illicit proceeds are invested in this manner, criminals increase their potential
for more criminal activities and corruption, as well as deprive the country of
what should be a legitimate, market-based, tax paying enterprise.



B. The Benefits of an Effective AML/CFT Framework


1. Fighting Crime and Corruption


A strong AML/CFT institutional framework that includes a broad scope of
predicate offenses for money laundering helps to fight crime and corrup-
tion in general.13 When money laundering itself is made a crime, it provides
another avenue to prosecute criminals, both those who commit the under-
lying criminal acts and those who assist them through laundering illegally
obtained funds. Similarly, an AML/CFT framework that includes bribery as a
predicate offense and is enforced effectively provides fewer opportunities for
criminals to bribe or otherwise corrupt public officials.
     An effective AML regime is a deterrent to criminal activities in and of itself.
Such a regime makes it more difficult for criminals to benefit from their acts. In
this regard, confiscation and forfeiture of money laundering proceeds are crucial
to the success of any AML program. Forfeiture of money laundering proceeds
eliminates those profits altogether, thereby reducing the incentive to commit
criminal acts. Thus, it should go without saying that the broader the scope of
predicate offenses for money laundering, the greater the potential benefit.




12. Id.
13. See Chapter I, What is Money Laundering; see also Chapter V, Scope of the Predicate Offense.




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220 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              2. Enhancing Stability of Financial Institutions


              Public confidence in financial institutions, and hence their stability, is
              enhanced by sound banking practices that reduce financial risks to their
              operations. These risks include the potential that either individuals or finan-
              cial institutions will experience loss as a result of fraud from direct criminal
              activity, lax internal controls, or violations of laws and regulations.
                   Customer identification and due diligence procedures, also known as
              “know your customer” (KYC) rules, are part of an effective AML/CFT
              regime. These rules are not only consistent with, but also enhance, the safe
              and sound operation of banks and other types of financial institutions. These
              policies and procedures are an effective risk management tool. For example,
              in situations where a given individual or corporation may own several busi-
              nesses that are seemingly separate entities and an institution has compre-
              hensive knowledge of that particular customer’s operations by performing
              KYC procedures, that institution can limit its exposure to that borrower and,
              thereby, its lending risk. Because of the risk management benefits of KYC
              procedures, the Basel Committee on Banking Supervision incorporates a
              KYC policy as part of its Core Principles for Effective Banking Supervision,
              aside from the AML reasons.14
                   In addition to the public confidence benefits, an effective AML/CFT
              regime reduces the potential that the institution could experience losses from
              fraud. Proper customer identification procedures and determination of ben-
              eficial ownership provide specific due diligence for higher risk accounts and
              permit monitoring for suspicious activities. Such prudential internal controls
              are consistent with the safe and sound operation of a financial institution.



              3. Encouraging Economic Development


              Money laundering has a direct negative effect on economic growth by divert-
              ing resources to less productive activities. Laundered illegal funds follow
              a different path through the economy than legal funds. Rather than being

              14. See Core Principles for Effective Banking Supervision, Principle 15, Basel Committee on Bank
                  Supervision, www.bis.org/publ/bcbs30.pdf.




     II-8
                                                  Money Laundering Impacts Development    221

placed in productive channels for further investment, laundered funds are
often placed into “sterile” investments to preserve their value or make them
more easily transferable. Such investments include real estate, art, jewelry,
antiques or high-value consumption assets such as luxury automobiles. Such
investments do not generate additional productivity for the broader economy.
     Even worse, criminal organizations may transform productive enterpris-
es into sterile investments by operating them for the primary purpose of laun-
dering illegal proceeds, rather than as profit-generating enterprises. Such an
enterprise does not respond to consumer demand or to other legitimate and
productive uses for capital. Having a country’s resources dedicated to sterile
investments, as opposed to investments that drive other productive purposes,
ultimately reduces the productivity of the overall economy.
     Strong AML/CFT regimes provide a disincentive for the criminal
involvement in the economy. This permits investments to be put into produc-
tive purposes that respond to consumer needs and help the productivity of
the overall economy.




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Chapter III

International Standard Setters



     A. The United Nations                                                            4. The NCCT List
        1. The Vienna Convention                                                      5. Special Recommendations on Terrorist Financing
        2. The Palermo Convention                                                     6. Methodology for AML/CFT Assessments
        3. International Convention for the Suppression of the Financing           C. The Basel Committee on Banking Supervision
           of Terrorism
                                                                                      1. Statement of Principles on Money Laundering
        4. Security Council Resolution 1373
                                                                                      2. Core Principles for Banking
        5. Security Council Resolution 1267 and Successors
                                                                                      3. Customer Due Diligence
        6. Global Programme against Money Laundering
        7. The Counter Terrorism Committee                                         D. International Association of
                                                                                      Insurance Supervisors
     B. The Financial Action Task Force on Money
        Laundering                                                                 E. International Organization of Securities
        1. The Forty Recommendations on Money Laundering                              Commissioners
        2. Monitoring Members’ Progress
                                                                                   F. The Egmont Group of Financial Intelligence
        3. Reporting Money Laundering Trends and Techniques
                                                                                      Units




    n response to the growing concern about money laundering and terror-
I   ist activities, the international community has acted on many fronts. The
international response is, in large part, recognition of the fact that money
laundering and terrorist financing take advantage of high speed interna-
tional transfer mechanisms, such as wire transfers, to accomplish their goals.
Therefore, concerted cross-border cooperation and coordination are needed
to thwart the efforts of criminals and terrorists.
     The international effort began with the recognition that drug trafficking
was an international problem and could only be addressed effectively on a
multilateral basis. Thus, the first international convention concerning money
laundering had drug trafficking offenses as the only predicate offenses. (A
predicate offense is the underlying crime that produces the proceeds that are
the subject of money laundering.) Because many more types of crimes are
now international concerns, most countries now include a wide range of seri-
ous offenses as money laundering predicate offenses.




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                     This chapter discusses the various international organizations that are
               viewed as the international standard setters. It further describes the docu-
               ments and instrumentalities that have been developed for anti-money laun-
               dering (AML) and combating the financing of terrorism (CFT) purposes.



               A. The United Nations


               The United Nations (UN) was the first international organization to under-
               take significant action to fight money laundering on a truly world-wide
               basis.1 The UN is important in this regard for several reasons. First, it is the
               international organization with the broadest range of membership. Founded
               in October of 1945, there are currently 191 member states of the UN from
               throughout the world.2 Second, the UN actively operates a program to
               fight money laundering; the Global Programme Against Money Laundering
               (GPML),3 which is headquartered in Vienna, Austria, is part of the UN Office
               of Drugs and Crime (ODC).4 Third, and perhaps most importantly, the UN
               has the ability to adopt international treaties or conventions that have the
               effect of law in a country once that country has signed, ratified and imple-
               mented the convention, depending upon the country’s constitution and legal
               structure. In certain cases, the UN Security Council has the authority to bind
               all member countries through a Security Council Resolution, regardless of
               other action on the part of an individual country.



               1. The Vienna Convention


               Due to growing concern about increased international drug trafficking and
               the tremendous amounts of related money entering the banking system, the
               UN, through the United Nations Drug Control Program (UNDCP) initiated

                1.   There were other international efforts, e.g., “Measures Against the Transfer and Safekeeping
                     of Funds of Criminal Origin,” adopted by the Committee of the Council of Europe on June
                     27, 1980. It is beyond the purpose of this Reference Guide, however, to discuss in detail the
                     history of the international effort to fight money laundering.
                2.   “List of Member States,” www.un.org/Overview/unmember.html.
                3.   See http://www.imolin.org/imolin/gpml.html.
                4.   The UNDCP was renamed the Office of Drug Control and Crime Prevention (ODCCP) in
                     1997, and renamed the Office of Drugs and Crime (ODC) in October of 2002.




      III-2
                                                                           International Standard Setters   225

an international agreement to combat drug trafficking and money launder-
ing. In 1988, this effort resulted in the adoption of the United Nations
Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic
Substances (1988) (Vienna Convention).5 The Vienna Convention, which
was named for the city in which it was signed, deals primarily with provi-
sions to fight the illicit drug trade and related law enforcement issues; 169
countries are party to the convention.6 Although it does not use the term
money laundering, the convention defines the concept and calls upon coun-
tries to criminalize the activity.7 The Vienna Convention is limited, however,
to drug trafficking offenses as predicate offenses and does not address the
preventive aspects of money laundering. The convention came into force on
November 11, 1990.



2. The Palermo Convention


In order to expand the effort to fight international organized crime, the UN
adopted The International Convention Against Transnational Organized
Crime (2000) (Palermo Convention).8 This convention, also named for the
city in which it was signed, contains a broad range of provisions to fight orga-
nized crime and commits countries that ratify this convention to implement its
provisions through passage of domestic laws. With respect to money launder-
ing, the Palermo Convention specifically obligates each ratifying country to:


      • Criminalize money laundering and include all serious crimes as predi-
         cate offenses of money laundering, whether committed in or outside of
         the country, and permit the required criminal knowledge or intent to
         be inferred from objective facts;9
      • Establish regulatory regimes to deter and detect all forms of money
         laundering, including customer identification, record-keeping and
         reporting of suspicious transactions;10

5.    http://www.incb.org/e/conv/1988/.
6.    As of August 1, 2004. See, http://www.unodc.org/unodc/treaty_adherence.html.
7.    The Vienna Convention, Article 3 (b) and (c) (i).
8.    http://www.undcp.org/adhoc/palermo/convmain.html.
9.    The Palermo Convention, Article 6.
10.   Id., Article 7 (1) (a).




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226   Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism


                    • Authorize the cooperation and exchange of information among admin-
                       istrative, regulatory, law enforcement and other authorities, both
                       domestically and internationally, and consider the establishment of a
                       financial intelligence unit to collect, analyze and disseminate informa-
                       tion;11 and
                    • Promote international cooperation.12


                   This convention went into force on the 29th of September 2003, having
               been signed by 147 countries and ratified by 82 countries.13 The Palermo
               Convention is important because its AML provisions adopt the same
               approach previously adopted by the Financial Action Task Force on Money
               Laundering (FATF) in its Forty Recommendations on Money Laundering.14



               3. International Convention for the Suppression of the Financing of Terrorism


               The financing of terrorism was an international concern prior to the attacks
               on the United States of September 11, 2001. In response to this concern,
               the UN adopted the International Convention for the Suppression of the
               Financing of Terrorism (1999).15 This convention came into force on April
               10, 2002, with 132 countries signing the convention and 112 countries rati-
               fying it.16 (See Annex III of this Reference Guide for a listing of specified
               conventions.)
                     This convention requires ratifying states to criminalize terrorism, terror-
               ist organizations and terrorist acts. Under the convention, it is unlawful for
               any person to provide or collect funds with the (1) intent that the funds be
               used for, or (2) knowledge that the funds be used to, carry out any of the acts
               of terrorism defined in the other specified conventions that are annexed to
               this convention.



                11. Id., Article 7 (1) (b).
                12. Id., Article 7 (3) and (4).
                13. As of August 1, 2004. See, http://www.unodc.org/unodc/crime_cicp_signatures_convention.
                    html.
                14. See Discussion in this Chapter, FATF.
                15. http://www.un.org/law/cod/finterr.htm.
                16. As of March 2004. See, http://www.unausa.org/newindex.asp?place=http://www.unausa.org/
                    policy/newsactionalerts/advocacy/fin_terr.asp.




      III-4
                                                               International Standard Setters   227

4. Security Council Resolution 1373

Unlike an international convention, which requires signing, ratification, and
implementation by the UN member country to have the effect of law within
that country, a Security Council Resolution passed in response to a threat
to international peace and security under Chapter VII of the UN Charter, is
binding upon all UN member countries.17 On September 28, 2001, the UN
Security Council adopted Resolution 1373,18 which obligates countries to
criminalize actions to finance terrorism. It further obligates countries to:


      • deny all forms of support for terrorist groups;
      • suppress the provision of safe haven or support for terrorists, including
        freezing funds or assets of persons, organizations or entities involved
        in terrorist acts;
      • prohibit active or passive assistance to terrorists; and
      • cooperate with other countries in criminal investigations and sharing
         information about planned terrorist acts.



5. Security Council Resolution 1267 and Successors


The UN Security Council has also acted under Chapter VII of the UN
Charter to require member States to freeze the assets of the Taliban, Osama
Bin Laden and Al-Qaeda and entities owned or controlled by them, as des-
ignated by the “Sanctions Committee” (now called the 1267 Committee).
The initial Resolution 1267 of October 15, 1999,19 dealt with the Taliban
and was followed by 1333 of December 19, 2000,20 on Osama Bin Laden
and Al-Qaeda. Later Resolutions established monitoring arrangements (1363
of July 30, 200121), merged the earlier lists (1390 of January 16, 200222),




17.   http://www.un.org/aboutun/charter/index.html.
18.   http://www.state.gov/p/io/rls/othr/2001/5108.htm.
19.   http://www.un.org/Docs/scres/1999/sc99.htm.
20.   http://www.un.org/Docs/scres/2000/sc2000.htm.
21.   http://www.un.org/Docs/scres/2001/sc2001.htm.
22.   http://www.un.org/Docs/scres/2002/sc2002.htm.




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228 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

               provided some exclusions (1452 of December 20, 200223), and measures to
               improve implementation (1455 of January 17, 200324).
                      The 1267 Committee issues the list of individuals and entities whose
               assets are to be frozen and has procedures in place to make additions or dele-
               tions to the list on the basis of representations by member States. The most
               recent list is available on the website of the 1267 Committee.25



               6. Global Programme against Money Laundering


               The UN Global Programme against Money Laundering (GPML) is within
               the UN Office of Drugs and Crime (ODC).26 The GPML is a research and
               assistance project with the goal of increasing the effectiveness of international
               action against money laundering by offering technical expertise, training and
               advice to member countries upon request. It focuses its efforts in the follow-
               ing areas:


                     • Raise the awareness level among key persons in UN member states;
                     • Help create legal frameworks with the support of model legislation for
                       both common and civil law countries;
                     • Develop institutional capacity, in particular with the creation of finan-
                       cial intelligence units;
                     • Provide training for legal, judicial, law enforcement regulators and the
                       private financial sectors;
                     • Promote a regional approach to addressing problems; develop and
                       maintain strategic relationships with other organizations; and
                     • Maintain a database of information and undertake analysis of relevant
                       information.
                      Thus, the GPML is a resource for information, expertise and technical
               assistance in establishing or improving a country’s AML infrastructure.




               23.   http://www.un.org/Docs/scres/2002/sc2002.htm.
               24.   http://www.un.org/Docs/sc/unsc_resolutions03.html.
               25.   http://ods-dds-ny.un.org/doc/UNDOC/GEN/N99/300/44/PDF/N9930044.pdf?OpenElement.
               26.   “Global Programme against Money Laundering,” http://www.imolin.org/imolin/gpml.html.




     III-6
                                                                           International Standard Setters   229

7. The Counter-Terrorism Committee


As noted above, on September 28, 2001, the UN Security Council adopted
a resolution (Resolution 1373) in direct response to the events of September
11, 2001.27 That resolution obligated all member countries to take specific
actions to combat terrorism. The resolution, which is binding upon all mem-
ber countries, also established the Counter Terrorism Committee (CTC) to
monitor the performance of the member countries in building a global capac-
ity against terrorism. The CTC, which is comprised of the 15 members of
the Security Council, is not a law enforcement agency; it does not issue sanc-
tions, nor does it prosecute or condemn individual countries.28 Rather, the
Committee seeks to establish a dialogue between the Security Council and
member countries on how to achieve the objectives of Resolution 1373.
      Resolution 1373 calls upon all countries to submit a report to the CTC
on the steps taken to implement the resolution’s measures and report regular-
ly on progress. In this regard, the CTC has asked each country to perform a
self-assessment of its existing legislation and mechanism to combat terrorism
in relation to the requirements of Resolution 1373. The CTC identifies the
areas where a country needs to strengthen its statutory base and infrastruc-
ture, and facilitate assistance for countries, although the CTC does not, itself,
provide direct assistance.
     The CTC maintains a website with a directory for countries seeking help
in improving their counter-terrorism infrastructures.29 It contains copies of
model legislation and other helpful information.



B. The Financial Action Task Force on Money Laundering


Formed in 1989 by the G-7 countries,30 the Financial Action Task Force on
Money Laundering (FATF) is an intergovernmental body whose purpose is
to develop and promote an international response to combat money launder-

27.   UN Security Council Resolution 1373.
28.   See http://www.un.org/sc/ctc.
29.   Id.
30.   Id. The G-7 countries are Canada, France, Germany, Italy, Japan, United Kingdom, and
      United States.




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230 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

               ing.31 In October of 2001, FATF expanded its mission to include combating
               the financing of terrorism.32
                    FATF is a policy-making body, which brings together legal, financial and
               law enforcement experts to achieve national legislation and regulatory AML
               and CFT reforms. Currently, its membership consists of 31 countries and terri-
               tories and two regional organizations.33 In addition, FATF works in collabora-
               tion with a number of international bodies34 and organizations.35 These enti-
               ties have observer status with FATF, which does not entitle them to vote, but
               otherwise permits full participation in plenary sessions and working groups.
                    FATF’s three primary functions with regard to money laundering are:


                   1. monitoring members’ progress in implementing anti-money laundering
                       measures;
                   2. reviewing and reporting on laundering trends, techniques and counter-
                       measures; and
                   3. promoting the adoption and implementation of FATF anti-money
                       laundering standards globally.

               31. About FATF, and Terrorist Financing at http://www.fatf-gafi.org/.
               32. Id. at Terrorist Financing.
               33. The 31 member countries and territories are: Argentina, Australia, Austria, Belgium, Brazil,
                   Canada, Denmark, Finland, France, Germany, Greece, Hong Kong-China, Iceland, Ireland,
                   Italy, Japan, Luxemburg, Mexico, Kingdom of the Netherlands, New Zealand, Norway,
                   Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United
                   Kingdom, and United States. The two regional organizations are the European Commission
                   and the Gulf Co-operation Council.
               34. The international bodies are regional FATF-style regional bodies (FSRBs) that have similar
                   form and functions to those of FATF. Some FATF members also participate in the FSRBs.
                   These bodies are: Asia/Pacific Group on Money Laundering (APG), Caribbean Financial
                   Action Task Force (CFATF), Council of Europe MONEYVAL (previously PC-R-EV)
                   Committee, Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) and
                   Financial Action Task Force on Money Laundering in South America (GAFISUD). For a dis-
                   cussion of these organizations, See Chapter IV, Regional Bodies and Relevant Groups, FATF-
                   Style Regional Bodies. FATF also works with the Egmont Group.
               35. Each of the international organizations, which have, among other functions, a specific anti-
                   money laundering mission or function, are: African Development Bank, Asia Development
                   Bank, The Commonwealth Secretariat, European Bank for Reconstruction and Development,
                   European Central Bank (ECB), Europol, Inter-American Development Bank (IDB),
                   Intergovernmental Action Group Against Money-Laundering in Africa (GIABA), International
                   Association of Insurance Supervisors (IAIS), International Monetary Fund (IMF), Interpol,
                   International Organization of Securities Commissions (IOSCO), Organization of American
                   States/Inter-American Committee Against Terrorism (OAS/CICTE), Organization of American
                   States/Inter-American Drug Abuse Control Commission (OAS/CICAD), Organization for
                   Economic Co-operation and Development (OECD), Offshore Group of Banking Supervisors
                   (OGBS), United Nations Office on Drugs and Crime (UNODC), World Bank and World
                   Customs Organization (WCO).




     III-8
                                                                        International Standard Setters   231

1. The Forty Recommendations

FATF has adopted a set of 40 recommendations, The Forty
Recommendations on Money Laundering (The Forty Recommendations),
which constitute a comprehensive framework for AML and are designed
for universal application by countries throughout the world.36 The Forty
Recommendations set out principles for action; they permit a country flex-
ibility in implementing the principles according to the country’s own particu-
lar circumstances and constitutional requirements. Although not binding as
law upon a country, The Forty Recommendations have been widely endorsed
by the international community and relevant organizations as the interna-
tional standard for AML.
     The Forty Recommendations are actually mandates for action by a
country if that country wants to be viewed by the international commu-
nity as meeting international standards. The individual recommendations
are discussed in detail throughout this Reference Guide and, particularly in
Chapters V, VI, VII, and VIII.
     The Forty Recommendations were initially issued in 1990 and have been
revised in 1996 and 2003 to take account of new developments in money
laundering and to reflect developing best practices internationally.


2. Monitoring Members Progress
Monitoring the progress of members to comply with the requirements of The
Forty Recommendations is facilitated by a two-stage process: self assessments
and mutual evaluations. In the self-assessment stage, each member responds
to a standard questionnaire, on an annual basis, regarding its implementation
of The Forty Recommendations. In the mutual evaluation stage, each mem-
ber is examined and assessed by experts from other member countries.
     In the event that a country is unwilling to take appropriate steps to
achieve compliance with The Forty Recommendations, FATF recommends
that all financial institutions give special attention to business relations and
transactions with persons, including companies and financial institutions,
from such non-compliant countries and, where appropriate, report question-
able transactions, i.e., those that have no apparent economic or visible lawful


36. The Forty Recommendations, http://www.fatf-gafi.org/pdf/40Recs-2003_en.pdf.




                                                                                                 III-9
232   Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism


               purpose, to competent authorities.37 Ultimately, if a member country does
               not take steps to achieve compliance, membership in the organization can be
               suspended. There is, however, the process of peer pressure before these sanc-
               tions are enforced.



               3. Reporting on Money Laundering Trends and Techniques


               One of FATF’s functions is to review and report on money laundering trends,
               techniques and methods (also referred to as typologies). To accomplish this
               aspect of its mission, FATF issues annual reports on developments in money
               laundering through its Typologies Report.38 These reports are very useful for
               all countries, not just FATF members, to keep current with new techniques or
               trends to launder money and for other developments in this area.



               4. The NCCT List


               One of FATF’s objectives is to promote the adoption of international AML/
               CFT standards for all countries. Thus, its mission extends beyond its own
               membership, although FATF can only sanction its member countries and
               territories. Thus, in order to encourage all countries to adopt measures to
               prevent, detect and prosecute money launderers, i.e., to implement The
               Forty Recommendations, FATF has adopted a process of identifying those
               jurisdictions that serve as obstacles to international cooperation in this
               area. The process uses 25 criteria, which are consistent with The Forty
               Recommendations, to identify such non-cooperative countries and territories
               (NCCT’s) and place them on a publicly available list.39
                    An NCCT country is encouraged to make rapid progress in remedying
               its deficiencies. In the event an NCCT country does not make sufficient prog-
               ress, counter-measures may be imposed. Counter measures consist of specific
               actions by FATF member countries taken against an NCCT-listed country.

               37. Id., Rec. 21.
               38. See FATF Documents, Money Laundering Trends and Techniques at http://www.fatf-gafi.org/
                   pdf/TY2004_en.PDF.
               39. NCCT Initiative, http://www.fatf-gafi.org/NCCT_en.htm.




      III-10
                                                                       International Standard Setters   233

     In addition to the application of applying special attention to business
relationships and transactions from such countries,40 the FATF can also
impose further counter-measures, which are to be applied in a gradual, pro-
portionate and flexible manner; these include:


    • Stringent requirements for identifying clients and enhancement of
       advisories, including jurisdiction-specific financial advisories, to finan-
       cial institutions for identification of the beneficial owners before busi-
       ness relationships are established with individuals or companies from
       these countries;
    • Enhanced relevant reporting mechanisms or systematic reporting of
       financial transactions on the basis that financial transactions with such
       countries are more likely to be suspicious;
    • In considering requests for approving the establishment in FATF
       member countries of subsidiaries or branches or representative offices
       of banks, taking into account the fact that the relevant bank is from
       an NCCT;
    • Warning non-financial sector businesses that transactions with entities
      within the NCCTs might run the risk of money laundering.41


     Finally, these counter measures may include FATF-member countries ter-
minating transactions with financial institutions from such a country.
     Most countries make a concerted effort to be taken off the NCCT list
because it causes significant problems for their financial institutions and busi-
nesses with respect to international transactions, as well as their reputation
internationally.



5. Terrorist Financing


FATF also focuses its expertise on the world-wide effort to combat ter-
rorist financing. To accomplish this expanded mission FATF has
adopted nine Special Recommendations on Terrorist Financing (Special

40. The Forty Recommendations, Rec. 21.
41. FATF, FATF statements and documents on NCCT. See, for example, Press Release, December
    20, 2002, http://www.fatf-gafi.org/pdf/PR-20021220_en.pdf.




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               Recommendations).42 As part of this effort, FATF members use a self-assess-
               ment questionnaire43 of their country’s actions to come into compliance with
               the Special Recommendations. FATF is continuing to develop guidance on
               techniques and mechanisms used in the financing of terrorism. Chapter IX
               of this Reference Guide contains a more detailed discussion of the Special
               Recommendations and the Questionnaire.



               6. Methodology for AML/CFT Assessments


               In 2002, following lengthy consultations, the FATF, International Monetary
               Fund (IMF), and World Bank adopted a single assessment methodology to
               be used both by FATF in its mutual evaluations and by the IMF and World
               Bank in their assessments under their financial sector assessment and offshore
               financial center programs. The FATF-style regional bodies (FSRBs), geograph-
               ical sector organizations, which had been involved in the development of the
               methodology, subsequently agreed to use it for their mutual evaluations.
                    The methodology was revised in 2004, following the 2003 revision of
               The Forty Recommendations. The methodology sets out over 200 “essen-
               tial criteria” that assessors should examine when carrying out assessments
               of an AML and CFT regime. It covers the legal and institutional AML/CFT
               framework for a country, including financial intelligence units. The meth-
               odology also includes relevant elements from United Nations Security
               Council resolutions and international conventions, as well as supervisory
               and regulatory standards for the banking, insurance and securities sectors.
               Those essential criteria describe the mandatory elements that need to be pres-
               ent to comply fully with each of The Forty Recommendations and Special
               Recommendations. The methodology includes guidance on how to rate com-
               pliance and is based on performance against the essential criteria.
                    The methodology also includes a number of “additional elements,”
               which are options for further strengthening AML/CFT systems. Although
               performance against these elements is reviewed as part of the overall assess-
               ment, they are not mandatory and are not assessed for compliance purposes.

               42. See Special Recommendations. These Special Recommendations are set out in Annex V, http://
                   www.fatf-gafi.org/pdf/SRecTF_en.pdf.
               43. http://www.fatf-gafi.org/SAQTF_en.htm.




      III-12
                                                                         International Standard Setters   235

     The adoption of this single, comprehensive assessment methodology by
the FATF, IMF, World Bank, and the FSRBs means a more uniform approach
worldwide to the conduct of assessments and the ratings of country perfor-
mance. A country undergoing an assessment will be required, at the first
stage of the assessment, to prepare a self-assessment of its AML/CFT system
according to the methodology document. The document is also a useful
detailed guide to a country on measures that need to be in place to comply
with the international standards.44



C. The Basel Committee on Banking Supervision


The Basel Committee on Banking Supervision (Basel Committee)45 was
formed in 1974 by the central bank governors of the Group of 10 coun-
tries.46 Individual countries are represented by their central bank, or by the
relevant authority with formal responsibility for prudential supervision of
banking where that authority is not the central bank. The committee has no
formal international supervisory authority or force of law. Rather, it formu-
lates broad supervisory standards and guidelines and recommends statements
of best practices on a wide range of bank supervisory issues. These standards
and guidelines are adopted with the expectation that the appropriate authori-
ties within each country will take all necessary steps to implement them
through detailed measures, statutory, regulatory or otherwise, that best suit
that country’s national system. Three of the Basel Committee’s supervisory
standards and guidelines concern money laundering issues.




44. The methdology may be found at Methodology on AML/CFT, http://www.fatf-gafi.org/pdf/
    Meth_2002_en.pdf. See also Chapter X, Development of a Universal AML/CFT Assessment
    Methodology, for a more detailed discussion of the methodology and its use by the World
    Bank and the IMF.
45. http://www.bis.org/index.htm.
46. The Group of 10 countries is a misnomer, since there are actually 13 member countries.
    The Basel Committee members, (as well as the Group of 10) are: Belgium, Canada, France,
    Germany, Italy, Japan, Luxemburg, the Netherlands, Spain, Sweden, Switzerland, United
    Kingdom and United States.




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236   Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism


               1. Statement of Principles on Money Laundering


               In 1988, the Basel Committee issued its Statement on Prevention of Criminal
               Use of the Banking System for the Purpose of Money Laundering (Statement
               on Prevention).47 The Statement on Prevention outlines basic policies and
               procedures that bank managements should ensure are in place within their
               institutions to assist in suppressing money laundering through the bank-
               ing system, both domestically and internationally. The statement notes that
               banks can be used “unwittingly” as intermediaries by criminals. Thus, the
               committee considers the first and most important safeguard against money
               laundering to be “the integrity of banks own managements and their vigilant
               determination to prevent their institutions from becoming associated with
               criminals or being used as a channel for money laundering.”48
                     There are essentially four principles contained in the Statement on
               Prevention:


                     • Proper customer identification;
                     • High ethical standards and compliance with laws;
                     • Cooperation with law enforcement authorities; and
                     • Policies and procedures to adhere to the statement.


                    First, banks should make reasonable efforts to determine the true identity
               of all customers requesting the institution’s services.49 It should be a bank’s
               explicit policy that significant business transactions are not conducted with
               customers who fail to provide evidence of their identity.
                     Second, banks should ensure that business is conducted in conformity
               with high ethical standards and that banks should adhere to laws and regu-
               lations pertaining to financial transactions.50 Here, banks should not offer
               services or provide active assistance in transactions where the bank has good
               reason to believe they are associated with money laundering.
                     Third, banks should cooperate fully with national law enforcement
               authorities to the extent permitted by local laws or regulations relating to

               47.   http://www.bis.org/publ/bcbsc137.pdf.
               48.   Id., at Preamble paragraph 6.
               49.   Id., at Customers identification.
               50.   Id., at Compliance with laws.




      III-14
                                                               International Standard Setters   237

customer confidentiality.51 No support or assistance should be provided to
customers seeking to deceive law enforcement authorities through altered,
incomplete or misleading information. Where a bank has a reasonable pre-
sumption that funds on deposit are from criminal activity or that transactions
entered into are for a criminal purpose, the bank should take appropriate
measures, including denial of assistance, severing of the customer relation-
ship, and closing or freezing the account.
      Fourth, banks should adopt formal policies consistent with the
Statement on Prevention.52 Furthermore, banks should assure that all staff
members are aware of the bank’s policies and given proper training in mat-
ters covered by the bank’s policies. As part of a bank’s policies, specific pro-
cedures for customer identification should be adopted. Finally, the internal
audit function within the institution should establish an effective means of
testing for compliance.



2. Core Principles for Banking


In 1997, the Basel Committee issued its Core Principles for Effective Banking
Supervision (Core Principles),53 which provides a comprehensive blueprint
for an effective bank supervisory system and covers a wide range of topics.
Of the total 25 Core Principles, one of them, Core Principle 15, deals with
money laundering; it provides:


          Banking supervisors must determine that banks have adequate poli-
          cies, practices and procedures in place, including strict “know your
          customer” rules, that promote high ethical and professional standards
          in the financial sector and prevent the bank from being used; inten-
          tionally or unintentionally, by criminal elements.54


      These “know your customer” or “KYC” policies and procedures are a cru-
cial part of an effective AML/CFT institutional framework for every country.

51.   Id., at Cooperation with law enforcement authorities.
52.   Id., at Adherence to the Statement.
53.   http://www.bis.org/publ/bcbs30.pdf.
54.   Id. Core Principle 15.




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238 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                     In addition to the Core Principles, the Basel Committee issued a “Core
               Principles Methodology” in 1999, which contains 11 specific criteria and
               five additional criteria to help assess the adequacy of KYC policies and pro-
               cedures.55 These, additional criteria include specific reference to compliance
               with The Forty Recommendations.56



               3. Customer Due Diligence


               In October of 2001, the Basel Committee issued an extensive paper on
               KYC principles entitled, Customer due diligence for banks (Customer Due
               Diligence).57 This paper was issued in response to noted deficiencies in KYC
               procedures on a world-wide basis. These KYC standards build upon and
               provide more specific information on the Statement on Prevention and Core
               Principle 15. The essential elements of KYC standards are set out in detail in
               this document.
                     It is worth noting that these KYC standards set out in Customer Due
               Diligence are intended to benefit banks beyond the fight against money laun-
               dering by protecting the safety and soundness of banks and the integrity of
               banking systems. In addition, the Basel Committee, in this document, strongly
               supports the “adoption and implementation of the FATF recommendations,
               particularly those relating to banks,” and intends that the standards of
               Customer Due Diligence “be consistent with the FATF recommendations.”58



               D. International Association of Insurance Supervisors


               The International Association of Insurance Supervisors (IAIS), established in
               1994, is an organization of insurance supervisors from more than 100 differ-
               ent countries and jurisdictions.59

               55.   Core Principles Methodology at http://www.bis.org/publ/bcbs61.pdf.
               56.   Id., Annex 2, Excerpts from FATF recommendations.
               57.   Id.
               58.   Id., at paragraph 3.
               59.   For a list of member countries and jurisdictions, see Members at http://www.iaisweb.org/132_
                     176_ENU_HTML.asp. The listing of members contains hyperlinks to individual member web-
                     sites.




     III-16
                                                                        International Standard Setters   239

     Its primary objectives are to:


    • Promote cooperation among insurance regulators,
    • Set international standards for insurance supervision,
    • Provide training to members, and
    • Coordinate work with regulators in the other financial sectors and
      international financial institutions.60


     In addition to member regulators, the IAIS has more than 60 observer
members, representing industry associations, professional associations, insur-
ance and reinsurance companies, consultants and international financial insti-
tutions.61
     While the IAIS covers a wide range of topics including virtually all areas
of insurance supervision, it specifically deals with money laundering in one
of its papers. In January 2002,62 the association issued Guidance Paper No.
5, Anti-Money Laundering Guidance Notes for Insurance Supervisors and
Insurance Entities (AML Guidance Notes). It is a comprehensive discussion
on money laundering in the context of the insurance industry. Like other
international documents of its type, the AML Guidance Notes are intended
to be implemented by individual countries taking into account the particular
insurance companies involved, the products offered within the country, and
the country’s own financial system, economy, constitution and legal system.
     The AML Guidance Notes contain four principles for insurance entities:


    • Comply with anti-money laundering laws,
    • Have “know your customer” procedures,
    • Cooperate with all law enforcement authorities, and
    • Have internal AML policies, procedures and training programs for
       employees.


     These four principles parallel the four principles in the Basel Committee’s
Statement on Prevention. The AML Guidance Notes are entirely consistent

60. Id., at Home page.
61. Id., at Observers, for a listing of observer organizations.
62. Id., at Guidance Paper No.5, Anti-Money Laundering Guidance Notes for Insurance
    Supervisors & Insurance Entities, January 2002.




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240 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

               with The Forty Recommendations, including suspicious activity reporting and
               other requirements. In fact, The Forty Recommendations are included in an
               appendix to the IAIS’s AML Guidance Notes.



               E. International Organization of Securities Commissioners


               The International Organization of Securities Commissioners (IOSCO)63 is an
               organization of securities commissioners and administrators that have day-to-
               day responsibilities for securities regulation and the administration of securi-
               ties laws in their respective countries. The current membership of IOSCO is
               comprised of regulatory bodies from 105 countries.64 In the event that there
               is no governmental authority charged with administration of securities laws
               in a given country, a self-regulatory body, such as a stock exchange, from that
               country is eligible for voting membership. There are also associate members,
               which are international organizations, and affiliate members, which are self
               regulatory organizations; neither of these two types of membership has voting
               privileges.
                    IOSCO has three core objectives for securities regulation:


                   • The protection of investors;
                   • Ensuring that markets are fair, efficient and transparent; and
                   • The reduction of systematic risk.65


                    With regard to money laundering, IOSCO passed a “Resolution on
               Money Laundering” in 1992. Like other international organizations of
               this type, IOSCO does not have law-making authority. Similar to the Basel
               Committee and IAIS, it relies on its members to implement its recommenda-
               tions within their respective countries. The resolution provides as follows:
                    Each IOSCO member should consider:


                   1. The extent to which customer identifying information is gathered and
                      recorded by financial institutions under its supervision, with a view to

               63. http://www.iosco.org/iosco.html.
               64. See Membership Lists, http://www.iosco.org/iosco.html.
               65. http://www.iosco.org/pubdocs/pdf/IOSCOPD125.pdf.




     III-18
                                                                   International Standard Setters   241

       enhancing the ability of relevant authorities to identify and prosecute
       money launderers;
    2. The extent and adequacy of record-keeping requirements, from the per-
       spective of providing tools to reconstruct financial transactions in the
       securities and future markets;
    3. Together with their national regulators charged with prosecuting
       money laundering offenses, the appropriate manner in which to address
       the identification and reporting of suspicious transactions;
    4. The procedures in place to prevent criminals from obtaining control of
       securities and futures businesses, with a view to working together with
       foreign counterparts to share such information as needed;
    5. The appropriate means to ensure that securities and futures firms
       maintain monitoring and compliance procedures designed to deter and
       detect money laundering;
    6. The use of cash and cash equivalents in securities and futures trans-
       actions, including the adequacy of documentation and the ability to
       reconstruct any such transactions;
    7. The most appropriate means, given their particular national authorities
       and powers, to share information in order to combat money laundering.66



F. The Egmont Group of Financial Intelligence Units


As part of the effort to fight money laundering, governments have created
agencies to analyze information submitted by covered entities and persons
pursuant to money laundering reporting requirements. Such agencies are
commonly referred to as financial intelligent units (FIUs). These units serve
as the focal point for national AML programs, because they provide for the
exchange of information between financial institutions and law enforcement.
Because money laundering is practiced on a worldwide scale, there has also
been the need to share information on a cross-border basis.67
     In 1995, a number of governmental units known today as FIUs began
working together and formed the Egmont Group of Financial Intelligence

66. http://www.iosco.org/library/index.cfm?whereami=resolutions.
67. See discussion in Chapter VII of this Reference Guide.




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242   Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism


               Units (Egmont Group) (named for the location of its first meeting at the
               Egmont-Arenberg Palace in Brussels).68 The purpose of the group is to pro-
               vide a forum for FIUs to improve support for each of their national AML
               programs and to coordinate AML initiatives. This support includes expanding
               and systematizing the exchange of financial intelligence information, improv-
               ing expertise and capabilities of personnel, and fostering better communica-
               tion among FIUs through technology, and helping to develop FIUs world-
               wide.69
                    The mission of the Egmont Group was expanded in 2004 to include
               specifically financial intelligence on terrorist financing.70 To be a member of
               the Egmont Group,71 a country’s FIU must first meet the Egmont FIU defini-
               tion, which is “a central, national agency responsible for receiving (and, as
               permitted, requesting), analyzing and disseminating to the competent authori-
               ties, disclosures of financial information: (i) concerning suspected proceeds
               of crime and potential financing of terrorism, or (ii) required by national
               regulation, in order to counter money laundering and terrorist financing.”72
               A member must also commit to act in accordance with the Egmont Group’s
               Principles for Information Exchange Between Financial Intelligence Units
               for Money Laundering Cases.73 These principles include conditions for the
               exchange of information, limitation on permitted uses of information, and
               confidentiality.
                    Membership of the Egmont Group is currently comprised of 94 juris-
               dictions.74 Members of the Egmont Group have access to a secure website,
               which is not available to the public, to exchange information.
                   The Egmont Group is an informal body without a secretariat or a perma-
               nent location. The Egmont Group meets in a plenary session once a year, and
               in working group sessions three times a year. Within the Egmont Group, the
               FIU heads make all the policy decisions, including membership. The group



               68. http://www.egmontgroup.org/.
               69. See Statement of Purpose, Egmont Group. http://www.egmontgroup.org/statement_of_purpose.
                   pdf.
               70. Id.
               71. For discussion on membership, see Egmont paper on its website with the procedures for join-
                   ing the Egmont Group, http://www.egmontgroup.org/procedure_for_being_recognised.pdf.
               72. http://www.egmontgroup.org/info_paper_final_092003.pdf.
               73. See Statement of Purpose, Egmont Group. http://www.egmontgroup.org/statement_of_purpose.
                   pdf.
               74. As of June 2, 2004. See http://www.egmontgroup.org/list_of_fius_062304.pdf.




      III-20
                                                              International Standard Setters   243

established the Egmont Committee to help coordinate with the Working
Groups and the FIU heads in between the annual plenary sessions.
   Finally, the Egmont Group has produced training material with access
for the public. The group compiled sanitized cases about the fight against
money laundering from its member FIUs.75 It has also produced a video and
Egmont-related documents that are available on its website.




75. http://www.fincen.gov/fiuinaction.pdf.




                                                                                      III-21
                                                                                                                                                        245


Chapter IV

Regional Bodies and Relevant Groups



     A. FATF-Style Regional Bodies                                                   B. Wolfsberg Group of Banks
        1. Asia/Pacific Groups on Money Laundering                                      1. Anti-Money Laundering Principles for Private Banking
        2. Caribbean Financial Action Task Force                                        2. Statement on the Suppression of the Financing of Terrorism
        3. Council on Europe–MONEYVAL                                                   3. Anti-Money Laundering Principles for Correspondent Banking
        4. Eastern and Southern Africa Anti-Money Laundering Group                   C. The Commonwealth Secretariat
        5. Financial Action Task Force on Money Laundering in South America
                                                                                     D. Organization of American States–CICAD




    n addition to the International Standard Setters discussed in Chapter III,
I   there are other international organizations that play crucial roles in the
fight against money laundering and terrorist financing. These groups tend to
be organized according to geographic region or by the special purpose of the
organization.



A. FATF-Style Regional Bodies


Financial Action Task Force on Money Laundering (FATF) regional groups
or FATF-Style Regional Bodies (FSRBs) are very important in the promotion
and implementation of anti-money laundering (AML) and combating the
financing of terrorism (CFT) standards within their respective regions. FSRBs
are to their regions what FATF is to the world.
       They are modeled after FATF and, like FATF, have AML and CFT
efforts as their sole objectives. They encourage implementation and enforce-


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246 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              ment of FATF’s The Forty Recommendations on Money Laundering (The
              Forty Recommendations) and the nine Special Recommendations on Terrorist
              Financing (Special Recommendations).1 They also administer mutual evalua-
              tions of their members, which are intended to identify weaknesses so that the
              member may take remedial action. Finally, the FSRBs provide information to
              their members about trends, techniques and other developments for money
              laundering in their Typology Reports, which are usually produced on an
              annual basis.
                   The FSRBs are voluntary and cooperative organizations. Membership is
              open to any country or jurisdiction within the given geographic region that is
              willing to abide by the rules and objectives of the organization. Some mem-
              bers of FATF are also members of the FSRBs. In addition to voting members,
              non-voting observer status is available to jurisdictions and organizations that
              wish to participate in the activities of the organization.
                   The FSRBs that are currently recognized by FATF are:


                  1. Asia/Pacific Group on Money Laundering (APG)2
                  2. Caribbean Financial Action Task Force (CFATF)3

              1. The Forty Recommendations, http://www.fatf-gafi.org/pdf/40Recs-2003_en.pdf , reprinted in
                 Annex IV of this Reference Guide; and Special Recommendations, http://www.fatf-gafi.org/
                 pdf/SRecTF_en.pdf. reprinted in Annex V of this Reference Guide.
              2. Member jurisdictions are: Australia, Bangladesh, Brunei Darussalam, Cambodia, Chinese
                 Taipei, Cook Islands, Fiji, Hong Kong-China, India, Indonesia, Japan, Macau-China, Malaysia,
                 Marshall Islands, Mongolia, Nepal, New Zealand, Niue, Pakistan, Republic of Korea, Palau,
                 Philippines, Samoa, Singapore, Sri Lanka, Thailand, United States and Vanuatu. Observer
                 jurisdictions are: Canada, France, Lao People’s Democratic Republic, Papua New Guinea,
                 Republic of Kiribati, Republic of the Maldives, Republic of Nauru, Tonga, Union of Myanmar,
                 United Kingdom and Vietnam. Observer organizations are: Asian Development Bank (ADB),
                 Asia Pacific Economic Cooperation (APEC), Association of South East Asian nations (ASEAN),
                 Caribbean Financial Action Task Force (CFATF), Commonwealth Secretariat, Egmont
                 Group, FATF, International Monetary Fund (IMF), INTERPOL, Offshore Group of Banking
                 Supervisors (OGBS), Pacific Financial Technical Assistance Centre (PFTAC), Pacific Islands
                 Forum Secretariat (PIFS), The World Bank, World Customs Organization (WCO) and United
                 Nations (UN) International Drug Control Programme (UNDCP) and United Nations Office on
                 Drugs and Crime (ODC). http://www.apgml.org.
              3. Member countries are: Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados, Belize,
                 Bermuda, British Virgin Islands, Cayman Islands, Costa Rica, Dominica, Dominican Republic,
                 El Salvador, Grenada, Guatemala, Guyana, Haiti. Honduras, Jamaica, Montserrat, Netherland
                 Antilles, Nicaragua, Panama, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines,
                 Suriname, Trinidad and Tobago, Turks and Caicos Islands and Venezuela. Co-operating
                 and Supporting Nations are: Canada, France, Mexico, Netherlands, Spain, United Kingdom
                 and United States. Observers are: Asia/Pacific Group Secretariat, Caribbean Customs and
                 Law Enforcement Council (CCLEC), Caribbean Development Bank (CDB), CARICOM,
                 Commonwealth Secretariat, European Commission, FATF Secretariat, UN Global Programme
                 on Money Laundering (GPML), Inter-American Development Bank (IADB), Interpol, Offshore




     IV-2
                                                                   Regional Bodies and Relevant Groups        247

      3. Council of Europe–MONEYVAL4
      4. Eastern and Southern Africa Anti-Money Laundering Group
         (ESAAMLG)5
      5. Financial Action Task Force on Money Laundering in South America
         (GAFISUD).6


       Certain FSRBs have issued their own conventions or instruments on AML.
For example, in 1990, CFATF issued its “Aruba Recommendations,” which are
19 recommendations that address money laundering from the Caribbean region-
al perspective and which complement The Forty Recommendations.7 Further,
in 1992, a Ministerial meeting produced the “Kingston Declaration,” which
affirmed the CFATF respective governments’ commitment to implementing inter-
national AML standards.8 Similarly, the Council of Europe, in 1990, adopted its
“Convention on Laundering, Search, Seizure and Confiscation of the Proceeds
of Crime” (the Strasbourg Convention).9 These are important instruments in the
implementation of AML standards for their respective regions.

     Group of Banking Supervisors (OGBS), Organization of American States/Inter-American Drug
     Abuse Control Commission (OAS/CICAD) and United Nations Office on Drugs and Crime
     (UNODC). http://www.cfatf.org.
4.   Members are: Albania, Andorra, Armenia, Azerbaijan, Bosnia and Herzegovina, Bulgaria,
     Croatia, Cyprus, Czech Republic, Estonia, Georgia, Hungary, Latvia, Liechtenstein, Lithuania,
     Malta, Moldova, Poland, Romania, Russian Federation, San Marino, Serbia and Montnegro,
     Slovakia, Slovenia, ‘Former Yugoslav Republic of Macedonia’ and Ukraine. Observer jurisdic-
     tions are: Canada, Holy See, Japan, Mexico, United States. Observers are: Commission of the
     European Communities, Commonwealth Secretariat, European Bank for Reconstruction and
     Development (EBRD), FATF (Secretariat and Member Countries), International Monetary
     Fund (IMF), Interpol, Offshore Group of Banking Supervisors (OGBS), Secretariat General of
     the Council of the European Union, United Nations Crime Prevention and Criminal Justice
     Division, United Nations Office on Drugs and Crime (UNODC), World Bank and World
     Customs Organisation (WCO). http://www1.oecd.org/fatf/Ctry-orgpages/org-pcrev_en.htm.
5.   Members who have signed the ESAAMLG memorandum of understanding are: Botswana,
     Kenya, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland,
     Tanzania, Uganda. Members who have not signed the ESAAMLG MOU are: Lesotho,
     Zambia, and Zimbabwe Observers are: Commonwealth Secretariat, FATF Secretariat, the UN
     Global Programme Against Money Laundering, Interpol, The World Custom Organization
     (WCO), African Development Bank (ADB), SADC Secretariat, the COMESA Secretariat, EAC
     Secretariat, East African Development Bank, Eastern and Southern Africa Development Bank,
     United Kingdom, United States, the IMF and World Bank. http://www.esaamlg.org.
6.   Members are: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Perú and
     Uruguay. Observers are: France, IDB, World Bank, Egmont, Germany, IMF, the United
     Nations, Mexico, Portugal, Spain, and United States. http://www.gafisud.org/english/index.html.
7.   http://www.cfatf.org/eng/recommendations/cfatf/.
8.   http://www.cfatf.org/eng/kingdec/.
9.   http://conventions.coe.int/Treaty/en/Treaties/Html/141.htm.




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248 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                   In addition, the establishment of three other FSRBs is either under con-
              sideration or actively underway.10 The three new geographic areas would be
              for:


                     • The Middle East and North Africa11 (MENA);
                     • Central and Western Africa (GIABA); and
                     • Eurasia


              Membership and other organizational issues need to be resolved, as well as
              mutual; evaluation procedures, before any of these organizations will be rec-
              ognized by FATF.



              B. Wolfsberg Group of Banks


              The Wolfsberg Group is an association of 12 global banks, representing
              primarily international private banking concerns.12 The group, which was
              named after the Château Wolfsberg in north-eastern Switzerland where the
              group was formed, has established four sets of principles for private banking.



              1. Anti-Money Laundering Principles for Private Banking


              These principles represent the group’s view of appropriate AML guidelines
              when dealing with the high net worth individuals and the private banking
              departments of financial institutions. They deal with customer identification,
              including establishing beneficial ownership for all accounts, and situations
              involving extra due diligence, such as unusual or suspicious transactions.



              10. FATF, Annual Report 2003-2004, p. 15, http://www1.oecd.org/fatf/pdf/AR2004_en.PDF.
              11. Id.; Preparatory meetings involved representations from the following countries: Algeria,
                  Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocoo, Oman, Qatar, Saudi Arabia, Syria,
                  Tunisia, United Arab Emirates and Yemen.
              12. The Wolfsberg Group consists of the following international banks: ABN Amro N.V., Santander
                  Central Hispano S.A., Bank of Tokyo-Mitsubishi Ltd., Barclays Bank, Citigroup, Credit Suisse
                  Group, Deutsche Bank A.G., Goldman Sachs, HSBC, J.P. Morgan Chase, Société Générale,
                  UBS AG. http://www.wolfsberg-principles.com/index.html.




     IV-4
                                                                    Regional Bodies and Relevant Groups   249

     The eleven principles involve:

    1. Client acceptance: general guidelines
    2. Client acceptance: situations requiring additional diligence/attention
    3. Updating client files
    4. Practices when identifying unusual or suspicious activities
    5. Monitoring
    6. Control responsibilities
    7. Reporting
    8. Education, training and information
    9. Record retention requirements
    10. Exceptions and deviations
    11. Anti-money-laundering organization.13



2. Statement on the Suppression of the Financing of Terrorism


The Wolfsberg Statement on the Suppression of the Financing of Terrorism
describes the role that financial institutions should play in combating terror-
ist financing, with a view toward enhancing the contribution financial institu-
tions can make toward this international problem.14 The statement empha-
sizes that financial institutions need to assist competent authorities in fighting
terrorist financing through prevention, detection and information sharing.
     This statement provides that “know your customer” (KYC) policies
and procedures should be enhanced with searches of lists of known or sus-
pected terrorists. In addition, banks should play an active role in helping
governments by applying extra due diligence whenever they see suspicious or
irregular activities. Extra due diligence is especially important when custom-
ers are engaged in sectors or activities that have been identified by competent
authorities as being used for the financing of terrorism.15 The statement goes
on to endorse the need for enhanced global cooperation and adoption of the
FATF Special Recommendations.16


13. http://www.wolfsberg-principles.com/privat-banking.html.
14. http://www.wolfsberg-principles.com/financing-terrorism.html.
15. Id., principles 4 and 5.
16. Id., principle 7.




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250 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              3. Anti-Money Laundering Principles for Correspondent Banking


              The Wolfsberg Group has adopted a set of 14 principles to govern the estab-
              lishment and maintenance of correspondent banking relationships on a glob-
              al basis.17 The principles prohibit international banks from doing business
              with “shell banks.”18 In addition, the principles use a risk-based approach
              to correspondent banking that is designed to ascertain the appropriate level
              of due diligence that a bank should adopt with regard to its correspondent
              banking clients.


                   In evaluating prospective risks, the Wolfsberg principles require a corre-
              spondent bank to consider the client bank’s:


                  • Domicile;
                  • Ownership and management structure;
                  • Business portfolio, and
                  • Client base.19


                   This risk profile is intended to assist the banks in the application of
              KYC procedures when providing correspondent banking services. The prin-
              ciples also specify the identification and follow-up of unusual or suspicious
              transactions or activities.
                   The principles for correspondent banking cover the following topics:


                  1. Preamble
                  2. Correspondent Banking
                  3. Responsibility and Oversight
                  4. Risk-Based Due Diligence
                  5. Due Diligence Standards
                  6. Enhanced Due Diligence
                  7. Shell Banks
                  8. Central Banks and Supra-National Organizations
                  9. Branches, Subsidiaries and Affiliates

              17. http://www.wolfsberg-principles.com/corresp-banking.html.
              18. Id., principle 7.
              19. Id., principle 5.




     IV-6
                                                           Regional Bodies and Relevant Groups   251

    10. Application to Client Base
    11. Updating Client Files
    12. Monitoring and Reporting of Suspicious Activities
    13. Integration with Anti-Money Laundering Programme
    14. Recommendation for an International Registry.20



4. Monitoring Screening and Searching


This set of principles identifies issues that should be addressed in order for
financial institutions to develop suitable monitoring, screening and searching
processes,21 using a risk-based profile approach. The principles recognize
that the risk profile may be different for a financial institution, as a whole,
than for its individual units, depending on the business conducted in a
particular unit (e.g., retail, private banking, correspondent banking, broker-
dealer). The principles further recognize that any process for monitoring,
screening or searching is limited to detecting those clients and transactions
that have identifiable characteristics that are distinguishable from apparently
legitimate behavior.
     Under these principles, financial institutions should have appropriate
processes in place that provide for the identification of unusual activity and
unusual patterns of activity or transactions. Since unusual transactions, pat-
terns or activity need not be suspicious in all cases, financial institutions must
have the ability to analyze and determine if particular activity, patterns and
transactions are suspicious in nature with regard to, among other things,
potential money laundering.22
     The principles encourage the use of a risk-based approach to monitor-
ing activities.23 Further, the principles encourage the use of real-time screen-
ing or filtering, which involves the examination of the transaction prior
to actual execution, whenever there is an embargo or sanction in place.24

20. Id., Introduction Index.
21. http://www.wolfsberg-principles.com/monitoring.html.
22. Id., principle 3.
23. Id., principle 4.
24. Id., principle 4.1.




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              Retroactive searches are encouraged based upon the institution’s risk-based
              approach.
                  The majority of ongoing monitoring for unusual and potentially suspi-
              cious activity should be accomplished by transaction monitoring.25 Risk-
              based transaction monitoring for potential money laundering requires the
              development of risk models that identify the potential risks to money laun-
              dering and provide a means of ranking the risks in order to compare the risks
              to completed transactions. An appropriate transaction monitoring process
              should compare the transaction information against the identified risks (such
              as geographic location of transaction, the type of products and services being
              offered and the type of client engaging in the transaction) with the different
              typologies for money laundering and other illicit activities to determine if
              transaction is unusual or suspicious.



              C. The Commonwealth Secretariat


              The Commonwealth Secretariat is a voluntary association of 53 sovereign
              states that consult and cooperate in the common interest of their peoples on
              a broad range of topics, including the promotion of international understand-
              ing and world peace.26 All of the member states, except for Mozambique,
              have experienced direct or indirect British rule or have been linked adminis-
              tratively to another Commonwealth country.
                   With regard to AML and CFT, the Commonwealth Secretariat pro-
              vides assistance to countries to implement The Forty Recommendations and
              Special Recommendations. It works with national and international organiza-
              tions and assists governments in the implementation of the FATF recommen-
              dations. It is an observer of FATF, CFATF, APG and ESAAMLG.

              25. Id., principle 5.
              26. Commonwealth countries are: Antigua and Barbuda, Australia, Bangladesh, Barbados, Belize,
                  Botswana, Brunei Darussalam, Cameron, Canada, Cyprus, Dominica, Fiji Islands, Ghana,
                  Grenada, Guyana, India, Jamaica, Kenya, Kiribati, Lesotho, Malawi, Malaysia, Maldives,
                  Malta, Mauritius, Mozambique, Namibia, Nauru, New Zealand, Nigeria, Pakistan, Papua New
                  Guinea, Samoa, Seychelles, Sierra Leone, Singapore, Solomon Islands, South Africa, Sri Lanka,
                  St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Swaziland, The Bahamas, The
                  Gambia, Tonga, Trinidad and Tobago, Tuvalu, Uganda, United Kingdom, United Republic of
                  Tanzania, Vanuatu and Zambia. http://www.thecommonwealth.org/.




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                                                                  Regional Bodies and Relevant Groups     253

     The Commonwealth Secretariat has published “A Manual of Best
Practices for Combating Money Laundering in the Financial Sector.”27 The
manual is for government policy-makers, regulators and financial institutions.



D. Organization of American States–CICAD

The Organization of American States (OAS) is the regional body for secu-
rity and diplomacy in the Western Hemisphere. All 35 countries of the
Americas have ratified the OAS charter.28 In 1986, the OAS created the
Inter-American Drug Abuse Control Commission (known by its Spanish
acronym CICAD) to confront the growing problem of drug-trafficking in the
hemisphere. By 1994, the Heads of State and Government of the Western
Hemisphere endorsed the role of CICAD to include regional AML efforts.
CICAD has developed comprehensive regional strategies and model regula-
tions to combat drug trafficking and use, the proliferation of precursor chem-
icals and arms trafficking, as well as money laundering.29




27. The manual is only available directly from the Commonwealth Secretariat; it is not currently
    available online.
28. OAS nations are: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican
    Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama,
    Paraguay, Peru, United States, Uruguay, Venezuela, Barbados, Trinidad and Tobago, Jamaica,
    Grenada, Suriname, Dominica, Saint Lucia, Antigua and Barbuda, Saint Vincent and the
    Grenadines, The Bahamas, St. Kitts and Nevis, Canada, Belize and Guyana. http://www.oas.
    org/main/english/.
29. http://www.cicad.oas.org/Desarrollo_Juridico/eng/legal-regulations-money.htm.




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Chapter V

Legal System Requirements



    A. Criminalization of Money Laundering                                  D. Types of Covered Entities and Persons
       1. Defining the Crime                                                   1. Financial Institutions
       2. Scope of the Predicate Offense                                       2. Designated Non-Financial Businesses and Professions
       3. Cross Border Considerations for International Cooperation            3. Other Potential Covered Persons and Entities
       4. State of Mind—Knowledge or Intent                                 E. Supervision and Regulation—Integrity
       5. Corporate Liability                                                  Standards
       6. Predicate Offense Perpetrator Liability
       7. Lawyers’ Fees                                                        1. Financial Institutions
                                                                               2. Designated Non-Financial Businesses and Professions
    B. Criminalization of Terrorism and the
       Financing of Terrorism                                               F. Laws Consistent with Implementation of
                                                                               FATF Recommendations
    C. Seizure, Confiscation and Forfeiture
                                                                            G. Cooperation Among Competent Authorities
       1. Confiscation of Direct and Indirect Proceeds of Crime
       2. Enforcement of Confiscated Property                               H. Investigations
       3. Third Party Liability
       4. International Aspects of Confiscation




   here are a number of steps that each country needs to take to assure that
T  its anti-money laundering (AML) institutional framework meets interna-
tional standards. International standard setters recognize that countries have
diverse legal systems and, therefore, no country is in a position to adopt spe-
cific laws that are identical to those of another country. Specific requirements
for combating the financing of terrorism (CFT) are discussed in Chapter IX.
Consequently, this chapter discusses eight legal system requirements that con-
cern primarily AML.
      These eight requirements are categorized as legal system requirements
for purposes of convenient discussion within the context of this Reference
Guide. Some of the requirements could, however, just as easily be discussed
under different categories. For example, “Supervision and Regulation—
Integrity Standards” could be discussed in Chapter VI, “Preventative
Measures.” Regardless of how they are categorized, each of these eight legal
system requirements is necessary for a country’s legal framework against




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256 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              money laundering. Under these principles, each country is permitted to adopt
              laws that are consistent with its own cultural circumstances, legal precepts
              and constitution, as well as international standards. They are:


                  • Criminalization of money laundering in accordance with the Vienna
                     and Palermo Conventions;
                  • Criminalization of terrorism and terrorist financing;
                  • Laws for seizure, confiscation and forfeiture and illegal proceeds;
                  • The types of entities and persons to be covered by AML laws;
                  • Integrity standards for financial institutions; and
                  • Consistent laws for implementation of FATF recommendations.
                  • Cooperation among competent authorities
                  • Investigations


                   The legal system requirements for AML, and the other interna-
              tional standards in this Reference Guide, are based upon The Forty
              Recommendations on Money Laundering (The Forty Recommendations)
              issued by the Financial Action Task Force on Money Laundering (FATF);
              countries may also wish to consult the Methodology for AML/CFT for fur-
              ther explanations of these requirements and how they are evaluated.1 The
              Forty Recommendations are phrased as recommendations, but are much
              more than mere suggestions or recommendations. They are mandates for
              action by every country, not just FATF members, if that country is to be
              viewed as compliant with international standards. Thus, each FATF recom-
              mendation should be considered very carefully by a country in crafting the
              language of its laws.



              A. Criminalization of Money Laundering


              The starting place for a country to establish or improve its AML framework
              is by making money laundering a crime within that country. Criminalization
              serves three principal objectives. First, it compels compliance with AML preven-

              1. The Forty Recommendations, http://www.fatf-gafi.org/pdf/40Recs-2003_en.pdf are reprinted
                 in Annex IV of this Reference Guide, together with the Glossary and Interpretive Notes.
                 Methodology on AML/CFT, http://www.fatf-gafi.org/pdf/Meth-2004_en.pdf.




     V-2
                                                                           Legal System Requirements   257

tive measures. Second, it ties acts that may appear innocent to outright criminal
activity, i.e., the actions of the party processing illegal proceeds are made a
criminal act. Third, criminalization establishes a specific basis for greater inter-
national cooperation in this critical law enforcement function. Because of the
criminal nature and the international aspects of money laundering offenses,
competent authorities within a country have recourse to powerful international
tools, especially mutual legal assistance mechanisms and, thereby, can more
effectively track, enforce, and prosecute international money laundering.



1. Defining the Crime


The criminalization of money laundering should be done in accordance
with the United Nations Convention against Illicit Traffic in Narcotic
Drugs and Psychotropic Substances (1988) (Vienna Convention)2 and the
United Nations Convention against Transnational Organized Crime (2000)
(Palermo Convention).3 The relevant provisions of these conventions are
Articles 3 (1) (b) and (c) of the Vienna Convention and Article (6) (1) of
the Palermo Convention. Criminalization of money laundering according to
those articles is the first recommendation of FATF.4 Many countries have
signed and ratified these conventions, but this is not sufficient to comply with
Recommendation 1. Countries must implement domestically the requirements
of the relevant Articles.
     Although the Vienna Convention is limited in scope to drug traffick-
ing and does not use the term “money laundering,” the three categories of
offenses specified in the Vienna Convention form the basis of the money
laundering offense. The categories are:


    i. the conversion or transfer of property with the knowledge that such
       property is derived from a drug-trafficking offense for the purpose
       of concealing and disguising its illicit origin or assisting any person

2. Vienna Convention, http://www.incb.org/e/conv/1988/.
3. Palermo Convention, http://www.undcp.org/adhoc/palermo/convmain.html.
4. The Forty Recommendations, Rec. 1.




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258 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                       involved in a drug-trafficking offense to evade the legal consequences
                       of his or her actions;5
                    ii. the concealment or disguise of the true nature, source, location, dis-
                       position, movement, rights with respect to, or ownership of property
                       with the knowledge that the property was derived from a drug-traf-
                       ficking offense;6
                    iii. the acquisition, possession, or use of property with the knowledge that
                         the property is derived from a drug-trafficking offense.7


                     According to the Vienna Convention, the first two categories must be
              incorporated into domestic law; the third offense is not mandatory, but
              subject to each country’s “constitutional principles and basic concepts of its
              legal system.”8
                     The Vienna Convention’s definition of money laundering offenses is the
              most widely accepted and is used in all current international legal instru-
              ments on this topic.9 Using the Vienna Convention’s definition, the Palermo
              Convention expands the money laundering definition to:


                    a. when committed intentionally:
                       i. the conversion or transfer of property, knowing that such property
                           is the proceeds of crime, for the purpose of concealing or disguis-
                           ing the illicit origin of the property or of helping any person who
                           is involved in the commission of the predicate offense to evade the
                           legal consequences of his or her action;
                       ii. the concealment or disguise of the true nature, source, location,
                           disposition, movement or ownership of or rights with respect to
                           property, knowing that such property is the proceeds of crime;


                    b. subject to the basic concepts of its legal system:
                       i. the acquisition, possession or use of property, knowing, at the time
                           of receipt, that such property is the proceeds of crime;

              5.   Vienna Convention, article 3(1)(b)(i).
              6.   Id., article 3(1)(b)(ii).
              7.   Id., article (3)(c)(i).
              8.   Id.
              9.   See also Chapter III, the United Nations, the Vienna Convention.




     V-4
                                                                               Legal System Requirements   259

        ii. Participation in, association with or conspiracy to commit, attempts
            to commit and aiding, abetting, facilitating and counseling the com-
            mission of any of the offenses established in accordance with this
            article.10


     The United Nations (UN) has adopted model legislation using these con-
cepts as set out in the United Nations model legislation on laundering, con-
fiscation and international cooperation in relation to the proceeds of crime
(1999)11 and the United Nations model Money Laundering and Proceeds of
Crime Bill (2000).12
     The Council of Europe adopted elements of the Vienna Convention in
drafting its Convention on Laundering, Search, Seizure, and Confiscation of
the Proceeds from Crime (1990).13 Other international organizations fol-
lowed suit: the Organization of American States, with its Model Regulations
Concerning Laundering Offenses Connected to Illicit Drug Trafficking
and Other Serious Crime (1999) (OAS-Model Regulations),14 the United
Nations Model Legislation on Laundering, Confiscation, and International
Cooperation in Relation to the Proceeds of Crime (1999) (UN Model
Legislation),15 and United Nations Model Money Laundering and Proceeds
of Crime Bill (2000) (UN Model Crime Bill).16



2. Scope of the Predicate Offense


a. Widest Possible Range of Offenses to be Included as Predicate Offenses


A predicate offense for money laundering is the underlying criminal activity
that generates proceeds, which when laundered, leads to the offense of money



10. Palermo Convention, article 6 (1).
11. Article 1.1.1, http://www.imolin.org/imolin/en/ml99eng.html.
12. Section 17, http://www.unodc.org/pdf/lap_money-laundering-proceeds_2000.pdf.
13. Council of Europe, Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds
    from Crime (1990), article 6(1)., http://conventions.coe.int/treaty/en/Treaties/Html/141.htm.
14. Organization of American States, Model Regulations Concerning Laundering Offenses
    Connected to Illicit Drug and other Serious Offenses (1999), article 2(1), (1) & (3)., http://
    www.cicad.oas.org/Desarrollo_Juridico/ebg/legal-regulations-money.htm.
15. Article 1.1.1, http://www.imolin.org/imolin/en/ml99eng.html.
16. Section 17, http://www.unodc.org/pdf/lap_money-laundering-proceeds_2000.pdf.




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              laundering.17 Designating certain criminal activities as predicate offenses for
              money laundering is necessary to comply with international standards. The
              designation of an increasingly wider range of criminal offenses as money laun-
              dering predicates has occurred as international standards have developed.
                   The first international effort against money laundering was contained in
              the Vienna Convention. However, the Vienna Convention is an international
              drug control instrument and the predicate offenses for money laundering
              relate only to drug trafficking offenses.18 The Palermo Convention imposes
              an obligation on all State parties to apply the Convention’s money launder-
              ing offenses to “the widest range of predicate offenses.”19 Recommendation
              4 of the 1996 version of the FATF 40 Recommendations specified that
              predicate offenses should be “based on serious offenses.” However, neither
              the Palermo Convention nor the 1996 version of the 40 Recommendations
              defined in any detail what constituted the “widest range” of predicate
              offenses or “serious offenses.” Thus, the scope of the predicate offense was
              left to the judgment of each country, subject only to the Vienna Convention’s
              requirement that drug trafficking should be a predicate offense.
                  The scope of predicate offenses used in the current version of The Forty
              Recommendations is much more widely based.20 Recommendation 1, which
              is quite lengthy, begins by repeating the previous language of the Palermo
              Convention and the 1996 version of the 40 Recommendations that countries
              should apply the crime of money laundering to all serious offenses, with a
              view to including the widest range of offenses as money laundering predicate
              offenses.21 After setting out the various methods of describing predicate
              offenses (see below) the recommendation states that, (as a minimum), coun-
              tries must include “a range of offenses within each of the designated catego-
              ries of offenses.”22 There are 20 designated categories of offenses:


                  • Participation in an organized criminal group and racketeering;
                  • Terrorism, including terrorism financing;

              17. See Palermo Convention, article 2(h); Council of Europe, Convention on Laundering, Search,
                  Seizure and Confiscation of the Proceeds from Crime (1990), article 1(e).
              18. Vienna Convention, article 3.
              19. Palermo Convention, article 2(a).
              20. The Forty Recommendations, Rec. 1.
              21 Id.
              22 Id., Rec. 1.




     V-6
                                                                                 Legal System Requirements   261

    • 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;
    • Extortion;
    • Forgery;
    • Piracy; and
    • Insider trading and market manipulation.23


     There are two further important points concerning the description of
predicate offenses. First, the requirement is to include “a range of offenses”
within each of the designated categories of offenses. For example, a country
would not comply with this recommendation if under “robbery or theft”
it designated only the proceeds of “vehicle theft” as a money laundering
predicate offense and excluded the proceeds of thefts of other goods. Second,
countries are provided with discretion on how to define the offenses in the
above list and the nature of any particular elements of those offenses that
make them money laundering predicate offenses.
     The essential requirement is to criminalize the proceeds from the type of
conduct described in the above list. Furthermore, it is not necessary to have
an offense in the penal code described in exactly the terms that are used in
the above list. For example, some countries do not have a specific offense
designated as “fraud,” but criminalize fraudulent behavior under some other

23. See the definition of “designated category of offences” in the Glossary of The Forty
    Recommendations.




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              offense, such as “theft.” Provided that it is possible to obtain a conviction for
              laundering the proceeds of fraudulent behavior, the country has discretion in
              terms of how to describe or categorize the conduct of that behavior.
                   The one exception to this discretion is terrorist financing. Under the nine
              Special Recommendations on Terrorist Financing (Special Recommendations)
              FATF specifically requires that the financing of terrorism, terrorist acts and
              terrorist organizations should be designated as money laundering predicate
              offenses.24 It is not acceptable to criminalize these activities solely on the
              basis of legislation against aiding and abetting, attempting or conspiracy.



              b. Methods of Describing Predicate Offenses


              FATF describes the types or categories of criminal conduct that should be
              money laundering predicate offenses, but each individual country has the dis-
              cretion to determine the specific legal method of criminalization. This can be
              accomplished by reference to:


                  • All offenses;
                  • A threshold linked either to a category of serious offenses or to the
                      penalty of imprisonment applicable to the predicate offense (threshold
                      approach);
                  • A list of predicate offenses; or
                  • A combination of these approaches.


                   Where countries apply a threshold approach, predicate offenses must, at
              a minimum, cover all offenses that are designated “serious offenses” under
              national law or offenses punishable by a maximum penalty of more than
              one year’s imprisonment (for countries with minimum penalties, more than
              six months). Examples of categories of serious offenses, include “indict-
              able offenses” (as opposed to summary offenses), “felonies” (as opposed to
              misdemeanors), and “crimes” (as opposed to delits). It should be noted that

              24. Special Recommendations, Spec. Rec. II. http://www.fatf-gafi.org/pdf/SRecTF_en.pdf. The crime
                  of terrorist financing is defined in article 2(1) of the United Nations International Convention
                  for the Suppression of the Financing of Terrorism (1999).




     V-8
                                                                 Legal System Requirements   263

countries using the threshold approach for designated predicate offenses are
subject to two additional minimum requirements, which are not alternatives:

    • The threshold must cover all 20 designated categories of offenses (see
       above); and
    • All serious offenses or all offenses with a maximum period of impris-
      onment exceeding one year (six months for countries applying mini-
       mum thresholds)

     This means that any offense that is not on the designated categories of
offenses list, but that is defined by the country as a “serious offense” or pun-
ished by a maximum prison term exceeding one year would also have to be
designated as a money laundering predicate offense by that country.



3. Cross Border Considerations for International Cooperation


As noted above, the FATF recommendations establish a minimum category of
offenses that must be predicate offenses for money laundering, but encourage
countries to go beyond this.25 How far beyond the minimum and the meth-
od of criminalization is left to the discretion of each country. The extent to
which a country does so, however, has implications for that country’s ability
to cooperate internationally and exchange information with other national
authorities.
     Recommendation 1 provides that predicate offenses should extend to
conduct that occurred in another country, which constitutes an offense in
that country, and which would have constituted an offense if it had occurred
domestically.26 This is the so-called “dual criminality” test, under which the
conduct committed in the other country must be a predicate offense both in
the other country and domestically. This is, however, the minimum standard.
This recommendation also states that countries may provide that the only
condition for prosecuting money laundering is that the conduct committed in
the other country would have constituted a predicate offense had it occurred



25. The Forty Recommendations, Rec. 1.
26. Id.




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              domestically.27 This approach would allow for prosecution where the pro-
              ceeds were generated by conduct that was not a predicate offense in the
              country where the conduct was committed, but was an offense in the country
              where the proceeds were laundered.
                   While FATF does not necessarily encourage countries to adopt this latter
              approach, FATF does encourage countries to provide mutual legal assistance
              even if dual criminality is absent.28
                   FATF also provides that where dual criminality is required for mutual
              legal assistance or extradition, that requirement should be regarded as satis-
              fied regardless of whether the offenses are described under the same category
              in the different countries, provided both countries criminalize the underlying
              conduct. For example, if country A requests assistance from country B with
              respect to laundering the proceeds of fraud and country B has no specific
              offense of fraud, country B should provide assistance if it criminalizes fraudu-
              lent conduct under some other offense (e.g., theft).



              4. State of Mind—Knowledge and Intent


              According to the Vienna Convention, the perpetrator’s state of mind—his or
              her intent or purpose in committing the money laundering offense—means
              “knowing” that the proceeds are the product of the predicate offense.29
              Countries may extend the scope of liability, however, to “negligent money
              laundering,” where the perpetrator should have known that the property was,
              or was obtained with, the proceeds of a criminal act.
                   Countries have various options in determining the “state of mind”
              connected with a money-laundering offense.30 The legislature of a country
              may decide that actual knowledge about the illicit origin of property, or
              that mere suspicion about that illicit origin, constitutes the requisite state
              of mind or mental element for obtaining convictions for money launder-
              ing. The legislature may also accept a “should have known” standard of
              culpability. This latter definition constitutes a form of negligent money

              27. The Forty Recommendations, Rec. 1.
              28. Id., Rec. 37.
              29. Vienna Convention, article 3(b)(i).
              30. UN Model Legislation, http://www.imolin.org/imolin/en/ml99eng.html.




     V-10
                                                                  Legal System Requirements   265

laundering.31 In addition to this general intent requirement, the law might
provide for a specific intent to “conceal or disguise the illicit origin” of the
property, or the intent to help another “evade the legal consequences of his
or her actions.”32
     According to the UN Model Legislation, actual knowledge, or “hav-
ing reason to believe,” that property is derived from criminal acts, consti-
tutes the so-called mental element of money laundering.33 The Model Bill
envisages, however, that specific intent may apply to certain money-laun-
dering offenses, such as concealing or disguising the origin, nature, loca-
tion, disposition, movement, or ownership of the property. Also, certain
money-laundering offenses could require proving the specific intent of an
individual to assist another, for example, in evading the legal consequences
of his or her actions.34
   A broad definition of the “state of mind” was adopted in the OAS
Model Regulations.35 These model regulations address three different states
of mind: (i) the accused had knowledge that the property constitutes proceeds
of a criminal activity as defined in the convention; (ii) the accused should
have known that the property was obtained with the proceeds of criminal
activity; and (iii) the accused was intentionally ignorant of the nature of the
proceeds.36 Under this third category of state of mind, the accused neither
“did not know” nor “should have known” the source of the proceeds, but
nevertheless suspected its criminal provenance and chose not to conduct fur-
ther investigation to verify or dispel this suspicion. In that sense, the accused
intended to remain ignorant of the nature of proceeds or was “willfully
blind” when he or she “could have known” of the criminal offense by inves-
tigation or inquiry. In terms of culpability, this state of mind standard falls
between the negligence and specific knowledge standard of intent. The OAS
Model Regulations further provide that these three culpable states of mind
can be inferred from objective and factual circumstances.37

31. Id., Article 1.1.1.
32. Id., at subparagraph (a).
33. UN Model Crime Bill, at Section 17(a).
34. Id., at subparagraph (b).
35. OAS Model Regulations.
36. OAS Model Regulations, Article 2.
37. Id., at subparagraph (5).




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                   Finally, it may be very difficult to prove the state of mind of a per-
              son engaging in an activity that otherwise appears to be ordinary on its
              face. Thus, the Vienna Convention, the Palermo Convention, the Forty
              Recommendations and many of the other legal instruments provide that the
              law should permit the inference of the required state of mind from objective
              factual circumstances.38 If the objective factual circumstances fit the situa-
              tion, the state of mind requirement is satisfied.



              5. Corporate Liability


              Money laundering often takes place through corporate entities. The concept
              of corporate criminal liability, however, varies greatly among different coun-
              tries. Some countries, mainly those with a common law tradition, subject
              corporations to criminal liability laws. In countries with a tradition of civil
              law, corporations may not be covered by criminal laws. Thus, consideration
              should be given to modifying such a country’s laws to provide for corporate
              criminal liability where permissible.
                   FATF recommends that corporations, not only their employees, be sub-
              ject to criminal liability whenever possible under the general principles of a
              country’s legal system.39 Significant civil or administrative sanctions could
              be a sufficient substitute in cases where the legal or constitutional framework
              does not subject corporations to criminal liability.
                   The UN Model Legislation does not provide for criminal liability for
              corporations. It does provide, however, for applying other sanctions to cor-
              porate entities,40 and for applying them whenever money laundering offenses
              are committed on behalf of, or for the benefit of, a corporation by one of the
              corporation’s agents or representatives. The sanctions envisioned by the UN
              Model Legislation include fines, bans on carrying out certain business activi-
              ties, closure or winding up, and the publication of rulings.41 The UN Model
              Legislation does not categorize these as criminal sanctions and it specifically

              38. Vienna Convention, article 3(3); Palermo Convention, article 6(2)(f); The Forty
                  Recommendations, Rec. 2; Council of Europe Convention on Laundering, Search, Seizure and
                  Confiscation of the Proceeds from Crime (1990), article 6(2)(c).
              39. The Forty Recommendations, Rec. 2; OAS-Model Regulations, article 15.
              40. UN Model Legislation, Article 4.2.3.
              41. Id.




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provides that these should not derogate from the personal liability of the
agent or the employee of the corporation for the acts.42
     Criminal liability is extended to corporate entities on the same basis as
natural persons in the OAS Model Regulations. In fact, one provision specifi-
cally defines a “person” for the purposes of the regulation as meaning “any
entity, natural or juridical, including among others a corporation, partnership,
trust or estate, joint stock company, association, syndicate, joint venture, or
other unincorporated organization or group, capable of acquiring rights or
entering into obligations.”43 In the UN Model Crime Bill, the term, “person”
is defined to include both natural and legal persons.44 While this language
defines “person” more narrowly that that of the OAS, it still acknowledges
the principle of criminal liability for corporations.



6. Predicate Offense Perpetrator Liability for Laundering


An important question is whether money laundering liability extends to the
person who committed the predicate offense, as well as to the person who has
laundered the ill-gotten proceeds. Some countries do not hold the perpetra-
tor of the predicate offense liable for laundering the proceeds of his or her
criminal actions, if he or she is not involved in the laundering activity. The
basic rationale for this approach is that punishing the perpetrator for evading
the legal consequences of his or her criminal activity could amount to double
jeopardy, i.e., multiple punishments for a single criminal offense.
     Other countries hold the perpetrator of the predicate offense liable for
laundering the ill-gotten proceeds on the basis that the conduct and the harm
of evasion are distinct from the predicate offense. There are also practical
reasons for this approach. Exempting perpetrators of predicate offenses from
money-laundering liability could severely penalize third parties for their con-
duct in handling criminal proceeds, while perpetrators remain immune from
liability. This could occur when the predicate offense has been committed
extraterritorially, placing it beyond the jurisdiction of the state prosecuting
third parties for their laundering activities.

42. Id.
43. OAS Model Regulations, Article 1(6).
44. Section 2(l).




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                   Overall, the general international standard in this area provides for a
              broad laundering offense that permits the perpetrator to be liable for laun-
              dering the proceeds of his or her own criminal activities regardless of active
              participation in laundering activities.45 This standard, however, also permits
              national variations to be employed in this regard.



              7. Lawyers’ Fees


              Lawyers are now included in the list of designated non-financial businesses
              and professions that must be considered as covered by AML/CFT regimes.46
              This deserves special attention in the drafting of predicate offenses.
                   Predicate offenses for money laundering can be defined in legislation so
              broadly that, in their totality, they include any transaction involving the use
              of the proceeds derived from a criminal activity. Given such a broad interpre-
              tive construction, these laws could have the effect of criminalizing the mere
              receipt of a fee by a lawyer for the purpose of providing criminal defense.
              This poses unique problems of due process.
                   Considering that the right of the accused to adequate defense in criminal
              trials is now established as one aspect of the right to a fair trial, countries
              should be careful in drafting the scope of the money laundering offenses.
                   Countries may also wish to consider an effective provision excluding
              lawyers from such potential criminal liability for merely rendering their ser-
              vices, provided that the services were limited to, or were rendered only in
              connection with, defending the accused at trial.47
                   Notwithstanding the right of an accused to a fair trial, lawyers also have
              a duty regarding the integrity of the financial system and integrity of their
              profession. If a lawyer has knowledge that his or her fees were derived from
              a criminal activity, the attorney should observe these integrity standards and

              45. United Nations Convention against Transnational Organized Crime (2000), article 6(2)(f);
                  Council of Europe, Convention on Laundering, Search, Seizure and Confiscation of the Proceeds
                  from Crime (1990), article 6(2)(b), UN Model Legislation, Article 1.1.1; UN Model Crime Bill,
                  Sec. 17; OAS-Model Regulations, Article 2.
              46. See this Chapter, Designated Non-Financial Businesses and Professions.
              47. Council of Europe, Convention on Laundering, Search, Seizure and Confiscation of the Proceeds
                  from Crime: Explanatory Report, para. 33. The model laws and regulations in this area are
                  silent on this point. See UN Model Legislation; UN Model Crime Bill; OAS Model Regulations.




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                                                                              Legal System Requirements   269

not blindly accept laundered money, especially if he or she is also rendering
other services to the client besides defending the accused in a trial.



B. Criminalization of Terrorism and the Financing of Terrorism


Those who finance terrorism, like other criminals, may use the national and
international financial systems to hide the funds they need to support their
activities, even if these funds have legitimate sources. Criminalizing all aspects
of terrorism and terrorist financing is a practical way to undermine the capac-
ity of terrorist organizations by preventing their funds from entering the
financial system. In addition, a country needs legislation to help detect when
terrorist funds are within its borders so that the funds can be confiscated and
forfeited. This further helps thwart terrorist efforts.
     In its nine Special Recommendations on Terrorist Financing (Special
Recommendations), FATF urges countries to criminalize the financing of ter-
rorism, terrorist acts and terrorist organizations and to designate these as
predicate offenses of money laundering.48
     As noted above in “Scope of the Predicate Offense,” FATF provides that
one of the designated categories of offenses is terrorism, including terror-
ist financing.49 Thus, taking The Forty Recommendations and the Special
Recommendations together, terrorism, terrorist acts, terrorist organizations
and terrorist financing each should be deemed a predicate offense for a coun-
try’s money laundering laws.



C. Seizure, Confiscation, and Forfeiture


The current approaches to international crime and terrorist financing are
designed to make criminal activities unprofitable and keep terrorists from
accessing funds. These goals cannot be achieved without effective confiscation

48. Special Recommendations, Spec. Rec. II.
49. The Forty Recommendations, Glossary, Designated categories of offenses; and Special
    Recommendations, Spec. Rec. II.




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              laws, whereby authorities may permanently deprive criminals and terrorists of
              their ill-gotten proceeds.50



              1. Confiscation of Direct and Indirect Proceeds of Crime


              FATF encourages countries to adopt laws permitting a broad interpretation
              of the confiscation of proceeds of crime, in accordance with the Vienna and
              Palermo Conventions.51 In the past under most legal systems, confiscation
              has largely been confined to the instruments used in the commission of the
              crime, such as the murder weapon, or the subjects of the crime, such as drugs
              in drug trafficking, as opposed to the proceeds derived from the crime. The
              Vienna Convention and the Palermo Convention define the term, “proceeds
              of crime,” as “any property derived from or obtained, directly or indirectly,
              through the commission of an offense.”52 Many countries have now adopted
              this broader understanding of forfeitable property in response to the profits
              generated by certain criminal activities, particularly in light of the fungibility
              of these profits and the ease with which funds can be moved into, and out of,
              the international financial system.
                   FATF encourages countries to adopt laws that permit the confiscation
              of the laundered property, the proceeds of laundering and predicate offenses,
              the instrumentalities used, or intended for use in, laundering, and property
              of corresponding value.53 This broad definition is useful since criminals are
              likely to convert property to some other form if only specifically-named prop-
              erty is subject to confiscation prior to the issuance of the confiscation order
              or its enforcement. Criminals are also likely to transfer the property beyond
              the reach of authorities or to commingle it with property legitimately derived.
              In order to address these various situations, which under a traditional under-
              standing of confiscation could render confiscation orders useless, governments
              should consider adopting the “value confiscation” approach, which gives

              50. Vienna Convention, article 1(f), Council of Europe Convention, Convention on Laundering,
                  Search, Seizure and Confiscation of the Proceeds from Crime (1990), article 1(d).
              51. The Forty Recommendations, Rec.3.
              52. Vienna Convention, article 1(p); Palermo Convention, article 2(e).
              53. The Forty Recommendations, Rec. 3.




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                                                                              Legal System Requirements    271

the government the power to confiscate any property of the perpetrator of a
value equivalent to the value of the ill-gotten proceeds.54



2. Enforcement of Confiscated Property


The effective enforcement of confiscation orders requires that the relevant
authorities possess the powers necessary to identify, trace and evaluate prop-
erty that could be subject to confiscation.55 This in turn requires that such
authorities have the power to require disclosure or to seize commercial and
financial records.56 FATF specifically recommends that banking secrecy laws,
or other privacy protection statutes, for example, should be designed so that
they do not create barriers to such disclosure or seizure for these purposes.57
     Today, funds can now be transferred out of a national jurisdiction with a
keystroke on a computer. Thus, authorities should also be granted the power
to take preventive measures. For example, they should be able to freeze and
seize assets that might be subject to confiscation. This power is a necessary
condition for an effective law enforcement framework for preventing the
laundering of money.58 (See Chapter IX, Freezing and Confiscating Terrorist
Assets for a detailed discussion of freezing, seizing and confiscating assets.
That discussion is equally applicable to AML-related assets.)



3. Third Party Liability


While international law on confiscation does not preclude the confiscation
of assets in the hands of third parties, FATF and various international agree-
ments qualify the permissibility of such action by requiring countries to take

54. Vienna Convention, article 5; Council of Europe, Convention on Laundering, Search, Seizure
    and Confiscation of the Proceeds from Crime (1990), article 2.
55. The Forty Recommendations, Rec. 3.
56. Vienna Convention, article 5(3); Council of Europe, Convention on Laundering, Search, Seizure
    and Confiscation of the Proceeds from Crime (1990), article 4(1).
57. The Forty Recommendations, Rec. 4, The Vienna Convention, article 5(3); Council of Europe,
    Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime
    (1990), article 4(1).
58. The Forty Recommendations, Rec. 3, Vienna Convention, article 5(2); Council of Europe,
    Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime
    (1990), article 3.




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              measures to protect the rights of bona fide third parties.59 Third parties that
              enter into an agreement, and either know or should know that the contract
              would prejudice the capacity of the state to enforce its confiscation are not
              bona fide. A country’s laws should address specially the issue of validity of
              such agreements under such circumstances.60
                    According to the OAS Model Regulations, the relevant authority is
              required to give notification of the proceedings.61 The notification must
              allow potential third parties to make claims to the property subject to con-
              fiscation. According to the model regulations, the court or other competent
              authority should return the property to the claimant, if it is satisfied that the
              claimant: (1) has proper legal title to the property; (2) did not participate in,
              collude with, or was not in any other way involved in the predicate offense;
              (3) did not have knowledge of the use of property for illegal purposes and did
              not consent freely to this use; (4) did not acquire rights that were specifically
              designed to evade the confiscation proceedings; and (5) did whatever could
              reasonably be expected to prevent the illegal use of the property.
                    In addressing the question of bona fide third parties, the UN Model
              Crime Bill provides that the court can deny the third-party claim to the prop-
              erty in cases where the court finds that the person (1) was involved in the
              commission of the predicate offense; (2) acquired the property for insufficient
              consideration; or (3) acquired the property knowing its illicit origin.62 By
              comparison, the UN Model Legislation uses a more strict standard, which
              does not require involvement in the predicate offense as a basis for denying
              the claim to the property.63



              4. International Aspects of Confiscation


              Establishing an effective confiscation regime for domestic purposes is only the
              first step toward eliminating the profitability at the heart of so many interna-

              59. The Forty Recommendations, Rec. 3; The Vienna Convention, article 5(8); Council of Europe,
                  Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime
                  (1990), article 5; The Palermo Convention, article 12(8).
              60. The Forty Recommendations, Rec. 3.
              61. OAS Model Regulations, Article 6.4.
              62. UN Model Crime Bill, Section 36. This is a model law designed for common law jurisdictions.
              63. See UN Model Legislation , Article 4.2.9 This is a model Law designed for civil law jurisdictions.




     V-18
                                                                               Legal System Requirements   273

tional money laundering activities. The second necessary step, and one vital
to the overall success of this effort, is creating cooperative mechanisms for
enforcing cross-border confiscation orders. Countries may enable the relevant
authorities to implement confiscation requests from other countries, employ-
ing such measures as tracing, identification, freezing, and seizure.
     As an incentive for international cooperation, countries may consider
establishing asset-sharing arrangements. The general principle in the disposal
of confiscated assets is that such disposal be subject to the domestic laws
and regulations of the country that executed the confiscation order.64 The
international legal instruments, however, encourage countries to enter into
mutual arrangements that provide for the sharing of the confiscated property
among all the countries that cooperated in the investigation and confiscation
process.65 The legal instruments also encourage allocating some of the confis-
cated funds to the intergovernmental agencies that are dedicated to the fight
against crime.66



D. Types of Covered Entities and Persons


FATF recommendations impose numerous requirements upon financial institu-
tions and non-financial businesses and professions to prevent money launder-
ing and terrorist financing.67 Moreover, the recommendations provide excep-
tions in applying these preventative measures. Thus, a crucial decision for a
country is to determine which entities and persons should be covered by which
requirements. In this regard, all of the preventative measures apply to “finan-
cial institutions,”68 while certain of the preventive measures apply to certain
“designated non-financial businesses and professions” on a more limited basis.




64. Vienna Convention, article 5(a); Council of Europe, Convention on Laundering, Search, Seizure
    and Confiscation of the Proceeds from Crime (1990), article 15; The Palermo Convention,
    article 14(1).
65. Vienna Convention, article 5(b); The Palermo Convention, article 14(3)(b); OAS-Model
    Regulations, article 7(d).
66. Vienna Convention, article 5(b)(i); The Palermo Convention (2000), article 14(3)(a); OAS
    Model Regulations, article 7(e).
67. The Forty Recommendations, see generally Recs. 5–25.
68. Id.




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              1. Financial Institutions


              It is axiomatic that money launderers and those who finance terrorism must
              have access to financial institutions. These institutions provide the means for
              such individuals to transfer funds among other financial institutions, both
              domestically and internationally. These institutions also provide the means to
              convert currencies and pay for the assets used in the money laundering and
              terrorist financing process. The types of financial institutions and their capa-
              bilities vary greatly among different countries. Under FATF recommendations,
              the term, “financial institutions,” is defined as “any person or entity who
              conducts as a business one or more of the following activities, or operations
              on behalf of a customer”:


                  • Acceptance of deposits and other repayable funds from the public
                      (including private banking);
                  •    Lending (including consumer credit; mortgage credit; factoring, with
                      or without
                       recourse; and finance of commercial transactions (including forfeiting);
                  • Financial leasing (but excluding financial leasing for consumer products);
                  • The transfer of money or value69 (including formal and informal sec-
                      tors, such as alternative remittance activity);
                  • Issuing and managing means of payment (e.g. credit and debit cards,
                      cheques, traveler’s cheques, money orders and banker’s drafts, electron-
                      ic money);
                  • Financial guarantees and commitments;
                  • Trading in:
                      a. money market instruments (cheques, bills, CDs derivatives, etc);
                      b. foreign exchange;
                      c. exchange, interest rate and index instruments;
                      d. transferable securities;
                      e. commodity futures trading;
                  • Participation in securities issues and the provision of financial services
                      related to such issues;
                  • Individual and collective portfolio management;

              69. See also interpretive note to The Special Recommendations, Spec. Rec. VI and VII.




     V-20
                                                                   Legal System Requirements   275

    • Safekeeping and administration of cash or liquid securities on behalf of
        other persons;
    • Otherwise investing, administering or managing funds or money on
        behalf of other persons;
    • Underwriting and placement of life insurance and other investment
        related insurance (this applies to both insurance undertakings and
      intermediaries, such as agents and brokers); and
    • Money and currency changing.70


     This is a functional definition rather than an institutional or designation
one. The test is whether an entity or individual carries out any of the above
functions or activities for customers, not what the business is called or how
the business is designated. For example, any person or business that accepts
deposits and/or makes loans to the public is covered, regardless of whether
the person or business is called a bank. In many cases, law or regulation will
limit the conduct of such activities to licensed financial institutions and, in
those situations, countries that apply AML/CFT controls to licensed financial
institutions would satisfy the standard. On the other hand, if such activi-
ties can be carried out legally by unlicensed entities, the AML/CFT controls
should apply to these entities as well.
     There are two qualifications to this requirement. First, if a financial
activity, described above, is carried out occasionally or on a very limited
basis, such that there is little money laundering risk, a country may decide
not to apply all, or indeed any, money laundering requirements.71 A possible
example of such a case might be a hotel, which offers very limited foreign
currency exchange facilities to its guests on an occasional basis or a travel
agency which can wire money to clients overseas in emergencies.
     A second qualification is that in “strictly limited and justified circum-
stances” and when there is “a proven low risk of money laundering” a coun-
try may decide not to apply some or all of The Forty Recommendations to
the above list of financial activities.72 The FATF does not offer clear guidance
as to what those circumstances might be. However, countries are encour-
aged to adopt a risk-based approach, which may lead to increased measures

70. The Forty Recommendations, Glossary, Financial Institutions.
71. Id.
72. Id.




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              in high-risk areas, or in strictly limited and justified circumstances, may lead
              to lesser measures based on a proven low AML/CFT risk. Financial activity
              should only be excluded or subject to limited controls generally after a proper
              study has established that the money laundering risk is low. The starting pre-
              sumption should be that all of the above financial activities should be subject
              to all of the AML requirements.



              2. Designated Non-Financial Business and Professions


              The FATF recommendations were revised in 2003 to include certain desig-
              nated non-financial businesses and professions within coverage of The Forty
              Recommendations for the first time. The requirements applicable to these
              entities and professionals are more limited and apply in more limited cir-
              cumstances than financial institutions. Details of what requirements apply to
              which non-financial businesses and professions are described in Chapter VI,
              but countries are required to bring the following entities and persons within
              coverage of certain AML/CFT provisions:


                  • Casinos (which also includes internet casinos);
                  • Real estate agents;
                  • Dealers in precious metals;
                  • Dealers in precious stones;
                  • Lawyers, notaries, other independent legal professionals, and accoun-
                     tants which refers to sole practitioners, partners or employed profes-
                     sionals within professional firms. It is not meant to refer to ‘internal’
                     professionals that are employees of other types of businesses, nor to
                     professionals working for government agencies, who may already be
                     subject to measures that would combat money laundering;
                  • Trust and company service providers, which refers to all persons or
                     businesses that are not covered elsewhere under these recommenda-
                     tions, and which as a business, provide any of the following services to
                     third parties:




     V-22
                                                                             Legal System Requirements   277

       a. Acting as a formation agent of legal persons;
       b. Acting as (or arranging for another person to act as) a director or
           secretary of a company, a partner of a partnership, or a similar posi-
           tion in relation to other legal persons;
       c. Providing a registered office; business address or accommodation,
           correspondence or administrative address for a company, a partner-
           ship or any other legal person or arrangement;
       d. Acting as (or arranging for another person to act as) a trustee of an
           express trust; or
       e. Acting as (or arranging for another person to act as) a nominee
          shareholder for another person.73



3. Other Potential Covered Entities and Persons


Finally, in a separate, and all-embracing recommendation, FATF states that
countries should consider applying the recommendations to businesses and
professions, other than those listed above, that pose a money laundering or
terrorist financing risk.74 It is a matter for each country to consider which
businesses or professions would be included and to determine what is the
appropriate response to the risk. Examples could include dealers in high value
and luxury goods (antiques, automobiles, boats, etc.), pawnshops, auction
houses and investment advisers. There is no requirement to cover any or all
of this list of any other but there is a requirement to consider the risks and
appropriate response to such risks.



E. Supervision and Regulation—Integrity Standards


Money cannot be laundered, nor terrorism financed, without the involvement
of financial institutions, certain business entities and certain persons. When
criminals control financial institutions or hold senior management positions
in financial institutions, countries find it exceedingly difficult to prevent and

73. The Forty Recommendations, Glossary, Designated Non-Financial Businesses and Professions.
74. Id., Rec. 20.




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              detect money laundering. Similarly, when certain persons are involved with
              money laundering actions, countries find prevention and detection more dif-
              ficult. Integrity and licensing requirements help prevent such entities and indi-
              viduals from participation in money laundering and terrorist financing efforts.



              1. Financial Institutions

              a. Core Principles Institutions


              These institutions, i.e., banks, insurance companies, securities industry, are
              subject to comprehensive supervisory regimes as set out in the standards issued
              by the Basle Committee on Banking Supervision, International Association
              of Insurance Supervisors, and International Organization of Securities
              Commissions, respectively.75 The provisions include requirements for:


                  • Licensing and authorization to engage in business;
                  • Evaluation (fit and proper determination) of directors and senior man-
                     agers, with regard to integrity, expertise and experience;
                  • Prohibitions against participation by directors and managers with
                    criminal records or adverse regulatory findings; and
                  • Prohibitions against ownership or control by those with criminal
                     records.

                   These requirements should apply both for prudential purposes and for
              purposes of AML/CFT controls, and supervision includes the authority to
              compel the production of records and information for determining compli-
              ance.76


              b. Other Financial Institutions

              These institutions are not normally subject to the same stringent requirements
              as Core Principles Institutions (largely because the same prudential issues do
              not arise). For example, directors and senior management are not evaluated


              75. See Chapter IV.
              76. The Forty Recommendations, Rec. 23.




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                                                                  Legal System Requirements   279

as to their “fit and proper” standing in relation to their integrity, expertise
and experience. For AML/CFT purposes, the minimum requirements for these
other financial institutions are as follows:


     • Such institutions should be licensed or registered;
     • They should be subject to supervision or oversight for AML purposes
          according to the risk of money laundering and terrorist financing in the
          that sector.77

      This imposes a licensing or registration requirement with respect to all
of those “other financial institutions,” but allows each country discretion
over the extent to which there should be oversight of their implementation
of AML/CFT measures. In some cases, the oversight could be limited to law
enforcement action against institutions that do not comply with applicable
regulations, but no proactive inspection or oversight of compliance.
      However, for money transfer and exchange businesses, the FATF requires
that, as well, as licensing or registration, there should be “effective systems”
for monitoring and ensuring compliance.78 What constitutes an effective sys-
tem in practice is not described further in the recommendation, but the impli-
cation is that the requirement goes beyond law enforcement action against
non-compliant institutions.



2. Designated Non-Financial Businesses and Professions


Non-financial businesses and professions fall into two categories: casinos and
all other non-financial businesses and professions (other NFBPs).
     For casinos, there are strict requirements involving:


     • Licensing;
     • Measures to prevent casinos being owned, controlled or operated by
       criminals; and
     • Supervision of their compliance with AML/CFT requirements.



77. Id.
78. Id.




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                   For all other NFBPs, the requirement is that effective systems for moni-
              toring and ensuring compliance on a risk-sensitive basis are in place. The
              monitoring may be carried out either by a government agency or a self-regu-
              latory organization. Unlike other financial institutions (see above), there is no
              licensing or registration system.



              F. Laws Consistent with Implementation of FATF Recommendations

              A crucial aspect of any legal system is to have laws and regulations that are
              internally consistent and work in coordination with each other. Thus, it is
              important that one law not conflict with another law, unless there is a basis
              in policy for making an exception, and that the two laws can be read as
              working together without contradiction.
                 One area where there is potential for conflict is with secrecy laws. Often,
              countries have general laws protecting the privacy of financial information
              from disclosure. Such laws may conflict with the specific requirement, for
              example, that financial institutions report suspicious transactions.79
                   In order to effectuate AML/CFT requirements, FATF provides that each
              country should make sure that its financial institution secrecy laws do not
              inhibit implementation of the FATF recommendations.80



              G. Cooperation Among Competent Authorities


              Each country needs to provide that there are effective mechanisms in place
              to enable its policy makers, FIU, law enforcement authorities (including cus-
              toms where appropriate), financial institution supervisors and other relevant
              authorities to cooperate with each other.81 If appropriate under the country’s
              laws and enforcement system, this requirement extends to coordinating the
              development and implementation of policies and activities to combat money
              laundering and terrorist financing.



              79. See The Forty Recommendations, Rec. 13.
              80. Id., Rec. 4.
              81. Id., Rec. 31.




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                                                                    Legal System Requirements   281

      Ideally, this recommendations means that a country’s laws and mecha-
nisms should be viewed as facilitating cooperation among the various compe-
tent authorities, as well as facilitating coordination among such authorities,
involved in AML and CFT efforts. Most importantly, a country’s laws and
mechanisms should not be viewed as prohibiting or restricting such coopera-
tive efforts.



H. Investigations


Each country should assure that designated law enforcement authorities are
responsible for money laundering and terrorist financing investigations.82
In the effort to utilize investigations to the fullest extent in the fight against
money laundering and terrorist financing, FATF encourages countries to
authorize, support and develop special investigative techniques and mecha-
nisms, such as undercover operations, specialized asset investigations and
cooperative investigations with other countries.83
      Investigative endeavors, as with all competent authorities involved in the
fight against money laundering and terrorist financing in a country, should
receive adequate financial, staffing and technical resources, including staff
that meet high integrity standards.84
      Finally, the effectiveness of a country’s AML/CFT regime depends upon
useful information. Thus, each country should maintain statistics on the effec-
tiveness and efficiency of its investigations and other aspects of its regime.85




82. Id., Rec. 27.
83. Id.
84. Id., Rec. 30.
85. Id., Rec. 32.




                                                                                        V-27
                                                                                                                                                283


Chapter VI

Preventive Measures



    A. Customer Identification and Due Diligence                                    C. Suspicious Transaction Reporting
       1. Scope of Customer Identification and Due Diligence                           1. Suspicious Transactions: What is involved
       2. Who Is a Customer?                                                           2. “Safe Harbor” Provisions for Reporting
       3. Customer Acceptance and Identification Procedures                            3. Scope of Reporting Obligation
       4. Low and High Risk Accounts and Transactions                                  4. Fiscal Crimes
       5. Circumstances Requiring Increased Due Diligence                              5. Insurance Sector
       6. Extending Due Diligence to Vendors and Others                                6. Securities Sector
       7. Insurance Sector Measures                                                    7. Designated Non-Financial Businesses and Professions
       8. Security Sector Measures                                                  D. Cash Transaction Reporting
       9. Measures for Designated Non-Financial Businesses and Professions
                                                                                       1. Multiple Cash Transactions
    B. Record Keeping Requirements                                                     2. Cross-Border Movements
       1. Financial Institutions                                                       3. Modern Money Management Techniques
       2. Insurance Sector                                                          E. Balancing Privacy Laws with Reporting and
       3. Securities Sector                                                            Disclosure Requirements
       4. Designated Non-Financial Businesses and Professions
                                                                                    F. Internal Controls
                                                                                    G. Regulation and Supervision




         oney launderers and those who finance terrorism use various types of
M        financial institutions and certain non-financial businesses and profes-
sionals to help in their criminal activities. In fact, access to such entities and
persons is crucial if criminals are to succeed because financial institutions,
and other, provide the means to transfer funds to other financial institutions,
both domestically and internationally; to exchange currencies, and to convert
proceeds of crime into different financial instruments and other assets.
    In The Forty Recommendations on Money Laundering (The Forty
Recommendations),1 the Financial Action Task Force on Money Laundering
(FATF) has established a number of preventative measures that a country
should adopt in the anti-money laundering (AML) area. These preventative

1. http://www.fatf-gafi.org/pdf/40Recs-2003_en.pdf.




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284 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              measures are applicable to all financial institutions and, on a more limited
              basis, to designated non-financial businesses and professions. Furthermore,
              these preventative AML measures are equally applicable in combating the
              financing of terrorism (CFT) under FATF’s Special Recommendations on
              Terrorist Financing (Special Recommendations).2
                   Like all of The Forty Recommendations, the preventative measures, gen-
              erally recommendations 5–25, are not recommendations, but mandates for
              action by a country if that country wishes to be viewed as compliant with
              international standards in AML and CFT. These mandates for action are
              also flexible, however, to permit a country to adopt requirements that are
              consistent with its own economic circumstances, legal system and constitu-
              tion. Countries may also wish to examine the Methodology for Assessing
              Compliance with The Forty and Special Recommendations for further expla-
              nation of the requirements.3



              A. Customer Identification and Due Diligence


              In accordance with international standards set by the Basel Committee on
              Banking Supervision (Basel Committee)4 and by FATF,5 countries must
              assure that their financial institutions have appropriate customer identifica-
              tion and due diligence procedures in place. These procedures apply to a
              financial institution’s individual and corporate customers alike. These rules
              or procedures ensure that financial institutions maintain adequate knowledge
              about their customers and their customers’ financial activities. Customer




              2. http://www.fatf-gafi.org/pdf/SRecTF_en.pdf.
              3. http://www.fatf-gafi.org/pdf/Meth-2004_en.PDF.
              4. Basel Core Principles for Effective Banking Supervision and Customer Due Diligence for Banks,
                 principle 15, at http://www.bis.org/publ/bcbs30.pdf.
              5. The Forty Recommendations, Rec. 5, http://www.fatf-gafi.org/pdf/40Recs-2003_en.pdf. The
                 Forty Recommendations are reprinted in Annex IV and the Special Recommendations in Annex
                 V of this Reference Guide.




     VI-2
                                                                                      Preventive Measures     285

identification requirements are also known as “know your customer” (KYC)
rules,6 a term employed by the Basel Committee.7
       KYC policies not only help financial institutions detect, deter, and pre-
vent money laundering and terrorist financing, they also confer tangible ben-
efits on the financial institution, its law-abiding customers, and the financial
system as a whole. In particular, KYC practices:


   •    Promote good business, governance, and risk management among
        financial institutions;
   •    Help maintain the integrity of the financial system and enable develop-
        ment efforts in emerging markets;
   •    Reduce the incidence of fraud and other financial crime; and
   •    Protect the reputation of the financial organization against the detri-
        mental effect of association with criminals.8



1. Scope of Customer Identification and Due Diligence


The customer identification and due diligence procedures employed by a
financial institution must also apply to its branches and majority-owned
subsidiaries—both domestically and internationally—provided local law is
not in conflict.9 Where local law prohibits implementation, relevant authori-
ties in the home country should be informed that these procedures cannot be
applied by their host country institutions. Host country supervisors should
make efforts to change such laws and regulations in the local jurisdiction.10
Absent any legal restrictions in the host country, when two different levels of

6. Basel Committee, Core Principle for Effective Banking Supervision, Principle 15 states,
  “Banking supervisors must determine that banks have adequate policies, practices and proce-
    dures in place, including strict “know-your-customer” rules, that promote high ethical and
    professional standards in the financial sector and prevent the bank being used, intentionally or
    unintentionally, by criminal elements.”
7. Basel Customer Due Diligence for Banks states: “Supervisors around the world are increasingly
    recognizing the importance of ensuring that their banks have adequate controls and procedures
    in place so that they know the customers with whom they are dealing. Adequate due diligence
    on new and existing customers is a key part of these controls.” http://www.bis.org/publ/bcbs85.
    pdf.
8. Basel Customer Due Diligence for Banks (provision 9).
9. The Forty Recommendations, Rec. 22.
10. Id.




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              regulatory standards exist between the home and host country, the higher or
              more comprehensive, of the two standards should be applied.11



              2. Who Is a Customer


              The Basel Committee defines a customer as:


                 •     A person or entity who maintains an account with a financial institu-
                       tion or on whose behalf an account is maintained (i.e., beneficial own-
                       ers);
                 •     Beneficiaries of transactions conducted by professional
                       intermediaries(e.g., agents, accountants, lawyers); and
                 •     A person or entity connected with a financial transaction who can
                       pose a significant risk to the bank.12


                     A crucial aspect of customer identification is establishing whether the
              customer is acting on his, her or its own behalf, or whether there is a ben-
              eficial owner of the account that may not be identified in the documents
              maintained by the financial institution. If there is any reason to suspect that
              the customer is acting on behalf of another person or entity, appropriate due
              diligence measures should be instituted.
                     Beneficial ownership is also difficult in the case of legal entities or
              corporations where there is tiered ownership involved. Tiered ownership
              involves one corporation owning or controlling one or more other corporate
              entities. In some cases, there can be numerous corporations each, in turn,
              owned by another corporation and, ultimately, owned or controlled by a par-
              ent corporation. When corporations or legal entities are involved, appropri-
              ate due diligence measures should be employed to determine the identity of
              the actual parent or controlling entity.




              11. Basel Customer Due Diligence for Banks (provision 66).
              12. Id. (provision 21).




     VI-4
                                                                                 Preventive Measures   287

3. Customer Acceptance and Identification Procedures

Financial institutions should develop and enforce clear customer acceptance
and identification procedures for clients and those acting on behalf of cli-
ents.13 These procedures should include the development of high-risk-cus-
tomer profiles. Such profiles would include standard risk indicators such
as personal background, country of origin, possession of a public or high-
profile position, linked accounts, and type and nature of business activity.14
When crafting customer acceptance polices, financial institutions must take
great care to strike the appropriate balance between risk aversion regarding
criminal activities and the willingness to take on new clients. As a general
rule, the rigidity of the acceptance standards should be commensurate with
the risk profile of a potential customer. It is strongly recommended that only
senior management should render decisions on customers whose profiles sug-
gest they pose a high risk of money-laundering activities.15
     Financial institutions should design their customer acceptance policies so
that the socially disadvantaged are not excluded. Nor should these customer
acceptance policies in any way restrict the general public’s access to financial
services.16 This is particularly important for countries moving toward a
broader use of financial instruments, including the use of checks, credit or
debit cards, electronic and other payment mechanisms, and shifting away
from a cash-based economy.
    Accounts should be opened only after the new customer’s identity has
been satisfactorily verified.17 No customer should be permitted to open or
maintain an account using an anonymous or fictitious name.18 This prohibi-
tion also applies to a numbered account if that account is accessed by use of
a number or code once the account does not require the customer identifica-
tion procedures using official documentation.19 Numbered accounts are only
permitted when the same customer identification procedures and supporting
documentation (with record keeping) are employed. Under these guidelines,

13. Id. (provision 20).
14. Id.
15. Id.
16. Id.
17. Id. (provision 22). The Forty Recommendations, Rec. 5.
18. The Forty Recommendations, Rec.5, and Basel Customer Due Diligence for Banks, (provi-
    sion30).
19. Id.




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288 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              financial institutions must check and verify their customers’ official identify-
              ing document. The best documents for verifying the identity of potential or
              actual customers are those that are the most difficult to reproduce.20 In this
              regard, countries should require the use of “official” documents issued by
              appropriate authorities such as a passport, driver’s license, personal identifi-
              cation or tax identification document.
                     In those instances where an agent is representing a beneficiary (e.g.,
              through trusts, nominees, fiduciary accounts, corporations, and other inter-
              mediaries), financial institutions need to take reasonable measures to verify
              the identity and nature of the persons or organizations on whose behalf an
              account is being opened or for whom a transaction is being completed.21
              Financial institutions need to verify the legality of such entities by collecting
              the following information from potential customers:


                 •     Name and legal form of customer’s organization;
                 •     Address;
                 •     Names of the directors;
                 •     Principal owners or beneficiaries;
                 •     Provisions regulating the power to bind the organization;
                 •     Agent(s) acting on behalf of organization; and
                 •     Account number (if applicable).22


                     In cases of fund transfers, such as money remittances, financial institu-
              tions should include accurate and meaningful originator information (name,
              address, and account number) and pass this information along the payment
              chain with the fund transfer.23
                     A client’s identity should be confirmed through due diligence procedures
              in cases where he or she is an occasional customer who has exceeded the
              designated threshold or when there is any doubt of that customer’s actual
              identity.24 The same would apply in the event of the occasional corporate
              customer.

              20. Basel Customer Due Diligence for Banks (provision 23).
              21. The Forty Recommendations, Rec. 5.
              22. Id., Rec. 5.
              23. Special Recommendations, Spec. Rec. VII.
              24. Basel Customer Due Diligence for Banks, provision 53; and FATF, The Forty Recommendations,
                  Rec. 11.




     VI-6
                                                                                  Preventive Measures   289

     Customer identification is an ongoing process that requires, as a general
rule, financial institutions to keep up-to-date records on all relevant client
information. Records should be updated in the event, for example, of signifi-
cant transactions, changes in customer documentation standards, material
changes in an account’s operation, and the realization that current records
are insufficient.25 A country’s financial institution supervisors are strongly
encouraged to assist financial institutions in developing their own customer
acceptance and identification procedures.



4. Low and High Risk Accounts and Transactions


The customer due diligence measures described above should be applied in
accordance with the risk attached to the type of customer and transaction.
This general principle is central to both the FATF Recommendations and
the Basle Committee paper on Customer Due Diligence. For higher risk cat-
egories, enhanced measures should be taken and some particular cases are
discussed below. For lower risk categories, a country may allow its financial
institutions to apply reduced or simplified measures. FATF and the Basel
Committee have identified some examples of such customers or transac-
tions, but this is not exhaustive and it is a matter for a country’s discretion.
Examples of such lower risk customers are financial institutions, public
companies and government enterprises.26 Examples of such transactions are
pooled accounts, pension schemes, and small scale insurance policies.27
     Nevertheless, there is an expectation that customers should always be
identified and some basic steps taken to verify identity. The reduced or sim-
plified measures might apply to the extent of the verification process and/or
the amount of information collected about the purpose and nature of the
business relationship and transactions.28
     A particular issue on which risk is a factor concerns establishing the
identity of customers who already had accounts before verification of iden-
tity for new customers became a requirement. Neither the Basel Committee

25. Basel Customer Due Diligence for Bank (provision 24).
26. See The Forty Recommendations, Interpretive Notes to Rec. 5, paragraphs 9 and 10.
27. See The Forty Recommendations, Interpretive Notes to Rec. 5, paragraphs 11 and 12.
28. See The Forty Recommendations, Interpretive Notes to Rec. 5, paragraph 9.




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290 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              nor FATF requires a comprehensive program to be instituted to verify the
              identity of existing customers or conduct other due diligence measures.29
              However, it is required that financial institutions should verify identity and
              carry out further due diligence on existing customers depending on material-
              ity and risk.



              5. Circumstances Requiring Increased Due Diligence


              In certain cases, The Forty Recommendations provide that certain enhanced
              due diligence measures should be taken in addition to those performed in the
              normal course by financial institutions. The following discusses those cases
              requiring additional due diligence procedures.



              a. Politically Exposed Persons


              FATF defines Politically Exposed Persons (PEPs) as:


                       Individuals who are or have been entrusted with prominent public
                       functions in a foreign country, for example Heads of State or of gov-
                       ernment, senior politicians, senior government, judicial or military
                       officials, senior executives of State owned corporations, important
                       political party officials. Business relationships with family members
                       or close associates of PEPs involve reputational risks similar to those
                       with PEPs themselves. The definition is not intended to cover middle
                       ranking or more junior officials in the forgoing categories.30


                   This definition covers only those customers who have public functions
              in a “foreign” country. Thus, it does not apply to “domestic” PEPs. However,
              FATF encourages countries to extend extra due diligence to domestic PEPs,
              but requires that extra due diligence be applied to foreign PEPs.31



              29. See The Forty Recommendations, Interpretive Notes to Rec. 5, paragraph 8.
              30. The Forty Recommendations, Glossary, Politically Exposed Persons.
              31. The Forty Recommendations, Interpretive Notes to Rec. 6.




     VI-8
                                                                       Preventive Measures   291

       The additional due diligence measures consist of the following:

   •     Identifying PEPs;
   •     Approval at senior management level to account opening;
   •     Establishing the source of wealth and funds;
   •     Enhanced ongoing monitoring.

       Actually finding out whether a customer is a PEP is often the biggest
challenge for a financial institution given the definition of the term. No
official organization issues a list of such individuals, but various commercial
entities maintain and regularly update such lists.



b. Cross-Border Correspondent Banking Relationships

Cross-border correspondent banking relationships are another source of
potentially high risk accounts for financial institutions. Such relationships
could be a way for entities or persons from countries with lax arrangements
to gain access to the global financial system without undergoing proper due
diligence procedures. Before entering into correspondent banking relation-
ships with a cross-border institution, a bank should:

   •     Establish the nature of the respondent bank’s business, its reputation,
         and the quality of its supervision;
   •     Assess the AML/CFT controls of the respondent bank;
   •     Obtain senior management approval for the relationship;
   •     Document respective responsibilities;
   •     If “payable-through-accounts” are to be a feature of the business
         relationship, assure that the respondent bank verifies the identity and
         conducts ongoing due diligence of its customers.32


     Correspondent banking relationship with institutions located in coun-
tries classified by FATF as “non-cooperative countries and territories”




32. The Forty Recommendations, Rec. 7.




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              (NCCTs) should be avoided.33 No transactions should be undertaken with
             “shell banks” (i.e., a bank that is incorporated in a jurisdiction in which it
              has no physical presence and that is not affiliated with a regulated financial
              group).34



              c. Non Face-to-Face Customers


              As technology develops, the phenomenon of “non face-to-face” customers
              and business relationships is growing as customers use the telephone and
              internet to obtain financial services without necessarily visiting the provider.
              There is no intention on the part of the international standard setters to
              obstruct such developments, which give customers greater choice and services
              as well as benefit the economy. Financial institutions and others providing
              such services need to be aware that the AML/CFT risks are rather different
              with respect to such customers and need to take appropriate steps to deal
              with them.35
                   While FATF raises the issue of increased risk with such accounts, it does
              not provide any guidance on which steps should be taken to address such
              increased risks. Thus, it is left to each country’s discretion to establish appro-
              priate policies and procedures.



              d. Introduced Business


              In some countries, financial businesses have customers “introduced” to them
              by intermediaries or third parties and will not have carried out any due dili-
              gence on these customers. In such circumstances, financial institutions should
              do three things.36 First, the institution should make sure that the introducer
              is subject to customer due diligence requirements and that its compliance
              with such due diligence requirements is subject to supervision. Second, the

              33. For the complete list of FATF’s “no cooperative” jurisdictions, see http://www.fatf-gafi.org/
                  NCCT_en.htm.
              34. The Forty Recommendations, Rec. 18. See also Basel Customer Due Diligence for Banks
                  (Provision 51).
              35. Id., Rec. 8.
              36. Id., Rec. 9.




     VI-10
                                                                      Preventive Measures   293

institution should make certain that the introducer has collected sufficient
information about identity and other relevant due diligence documentation
about the customer. Third, the institutions should make sure that the intro-
ducer can make that information available on request without delay.
      The introducer can be domestic or international. Where it is an inter-
national party that is the introducer, the financial institution needs to be
especially vigilant that the above requirements are met. Several countries,
which permit introduced business, require that the introducer should be an
individual or an institution that is subject to AML controls, is supervised by a
regulatory body with responsibility for compliance with AML controls, and is
located in a country that complies with FATF standards.



e. Other High Risk Business


FATF also draws attention to two other categories of transactions that
require special attention. First, there are complex, unusual large transactions
and unusual patterns of transactions which have no apparent economic or
visible lawful purpose.37 The background and purpose of such transactions
should, as far as possible, be examined and the findings recorded. Where the
financial institution cannot discover such information and/or is uneasy about
the business, it should consider declining the business and/or making a suspi-
cious transaction report.
      Second, there are countries that have been identified as non-compliant
with FATF recommendations that merit special attention. While transactions
with such countries are not prohibited, financial institutions should pay spe-
cial attention to them and, when there is doubt about their purpose, investi-
gate further and record the outcome.38 If the financial institution is not satis-
fied that the transaction is bona fide it should consider declining the business
and/or making a suspicious transaction report.




37. Id., Rec. 11.
38. Id., Rec. 21.




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294 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              6. Extending Due Diligence to Vendors and Others


              The supply-chain structure of many businesses has become increasingly com-
              plex and interconnected with the advance in global commerce. Consequently,
              many financial institutions have found it necessary to exercise greater dili-
              gence over the vendors, suppliers, and agents of organizations as well as with
              employees and correspondent banks of financial institutions. Each country’s
              financial institution supervisors may wish to consider implementing policies
              that incorporate these trends in due diligence, especially when such relation-
              ships may be considered higher risk as described above.



              7. Insurance Sector Measures


              The International Association of Insurance Supervisors (IAIS) maintains its
              own guidelines for customer identification and due diligence; the insurance
              industry must adhere to these in addition to the relevant requirements of The
              Forty Recommendations discussed above. The IAIS guidelines recommend
              that insurance companies:


                 •   Establish to their “reasonable satisfaction” that every party relevant to
                     the insurance application actually exists. For large numbers of subjects
                     (e.g., group life policies and pensions), it may be sufficient to use a lim-
                     ited group such as the principal shareholders or main directors;
                 •   Verify all underlying principals as well as their relationship with the
                     policyholders—the principals and not the policyholders should be ques-
                     tioned regarding the nature of the relationship;
                 •   Prohibit anonymous and fictitious accounts;
                 •   Verify claims, commissions, and other money administered to no poli-
                     cyholders (e.g., partnerships, companies);
                 •   Increase due diligence when the policyholder’s financial flows or trans-
                     action patterns change in significant, unexpected, or unexplained ways;
                 •   Increase due diligence regarding the purchase and sale of second-hand
                     endowment policies and the use of single-unit-linked policies; and




     VI-12
                                                                                 Preventive Measures    295

   •   Monitor reinsurance or retrocession on a regular basis as a way to
       ensure payments to bona fide reinsurance entities at rates justified by
       the risk level.39



8. Security Sector Measures


The International Organization of Securities Commissions (IOSCO) has not
established separate customer identification or due diligence requirements for
securities firms, brokers, or collective investment entities. Although IOSCO
has not established such specific requirements, the customer identification
requirements of The Forty Recommendations (as described more fully in the
Methodology40) do apply to the securities sector.



9. Measures for Designated Non-Financial Businesses and Professions

These requirements for customer due diligence, as well as those relating to
record keeping, apply to designated non-financial businesses and professions
in a more limited manner than to financial institutions. The following discus-
sion outlines the applicable circumstances where due diligence procedures
apply to these entities and persons.



a. Casinos


Due diligence procedures for financial institutions apply when casino custom-
ers engage in financial transactions equal to or exceeding USD/EUR 3000.
Examples of such transactions include buying or cashing-in casino chips,
opening accounts, wire transfers, and currency exchange. This does not
mean that every gambling transaction has to be monitored or recorded for 5
years.41


39. See IAIS, Anti–Money Laundering Guidance Notes, http://www.iaisweb.org/02money.pdf.
40. http://www.fatf-gafi.org/pdf/Meth-2004_en.PDF.
41. The Forty Recommendations, Rec. 12, paragraph a. The applicable recommendations are Recs.
    5, 6, and 8–11.




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              b. Real Estate Agents


              Transactions for a client concerning the buying and selling of real estate
              require due diligence procedures. However, identification and other customer
              due diligence need only be conducted when a transaction takes place and
              only with respect to the party who is the client of the estate agent.42 In many
              countries, the client will be the seller, rather than the buyer.



              c. Dealers in Precious Metals and Stones


              Cash transactions, equal to or exceeding USD/EUR 15,000, are to be covered
              by the due diligence requirements.43



              d. Lawyers, Notaries, Other Independent Legal Professional, and Accountants


              Identification and due diligence requirements apply to transactions prepared
              or carried out for a client with respect to the following specific activities:


                 •    Buying and selling of real estate;
                 •    Managing of client money, securities or other assets;
                 •    Management of bank, savings or securities accounts;
                 •    Organization of contributions for the creation, operation or manage-
                      ment of companies;
                 •    Creation, operation or management of legal persons or arrangements,
                      buying and selling of business entities.44


                     The key phase is “prepare for or carry out transactions.” This means
              that merely providing advice on how to undertake such a transaction is not
              covered. Identification and customer due diligence (and record keeping) are
              required after the professional becomes involved in carrying out the transac-
              tion, which includes the preliminary work on drawing up the transaction as

              42. Id., Rec. 12, paragraph b.
              43. Id., Rec. 12, paragraph c.
              44. Id., Rec. 12, paragraph d.




     VI-14
                                                                        Preventive Measures   297

well as its execution. These are situations in which lawyers and accountants
are functioning as “gatekeepers” to the financial system by providing services
that would permit clients to engage in potential money laundering or terrorist
financing transactions.



e. Trust and Company Service Providers

Due diligence procedures are applicable to transactions for a client prepared
for and carried out in relation to the following specific activities:

   •    Acting as a formation agent of legal persons;
   •    Acting as (or arranging for anchor person to act as) a director or sec-
        retary of a company, a partner of a partnership of a similar position in
        relation to other legal persons;
   •    Providing a registered office; business address or accommodation, cor-
        respondence or administrative address for a company, a partnership or
        any other legal person or arrangement;
   •    Acting as (or arranging for another person to act as) a trustee or an
        express trust; or
   •    Acting as (or arranging for another person to act as) a nominee share-
        holder for another person.45


    In some countries the above-described transactions are performed by
lawyers. To be consistent with the criteria for lawyers set out above, the
relevant test is again “prepare for and carry out,” which excludes merely
providing advice, but includes preliminary work on carrying out a specific
transaction.




45. Id., Rec. 12, paragraph e.




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              B. Record Keeping Requirements

              1. Financial Institutions

              Financial institutions should keep customer identity and transaction records
              for a minimum of five years following the termination of an account.46
              Institutions may be required to retain records for longer than five years if
              required by their regulators. Contents of the records should be made readily
              available to authorities upon request and, further, be of sufficient detail to
              permit the prosecution for criminal behavior.47
                     Maintaining records is important for both prevention and detection of
              money laundering and terrorist financing purposes. If a potential customer
              knows that records are being maintained, the customer may not be as likely
              to try to use the institution for these illegal purposes. Record maintenance
              also helps detect those involved and provides a financial trail to help compe-
              tent authorities pursue those involved.
                   The following information should be included when recording a custom-
              er’s transaction:
                 •    Name of the customer and/or beneficiary;
                 •    Address;
                 •    Date and nature of the transaction;
                 •    Type and amount of currency involved in the transaction;
                 •    Type and identifying number of account; and
                 •    Other relevant information typically recorded by the financial institu-
                      tion.48



              2. Insurance Sector

              The IAIS maintains its own set of record keeping requirements; the insurance
              entities must adhere to these, in addition to the relevant guidelines of The
              Forty Recommendations. The insurance entity must also obtain the following
              information (where applicable) when recording a customer’s transaction:


              46. The Forty Recommendations, Rec. 10.
              47. Id.
              48. Id.




     VI-16
                                                                                    Preventive Measures   299

   •    Location completed;
   •    Client’s financial assessment;
   •    Client’s need analysis;
   •    Payment method details;
   •    Benefits description;
   •    Copy of documentation used to verify customer identity;
   •    Post-sale records associated with the contract through its maturity; and
   •    Details of maturity processing and claim settlement (including “dis-
        charge documentation”).49


     Financial institution supervisors must verify that all representatives for
insurance companies are licensed under appropriate insurance law and juris-
diction.50 Representatives may retain documents on behalf of an insurance
entity, but the integrity of the records rests on the insurance entity as the
product provider.51 In such cases, a clear division of responsibility between
the insurance entity and its representative is necessary.52



3. Securities Sector

The IOSCO has established its own set of record keeping requirements, which
securities firms should follow in addition to adhering to the applicable gen-
eral requirements of The Forty Recommendations discussed above. IOSCO
requires that the national centralized authority on financial crime or other
competent authority ensure that intermediaries maintain records as needed
demonstrating their adherence to the regulatory rules.53 These records
should be legible, understandable, and comprehensive, and should include all
transactions involving collective investment assets and transactions.54




49. See IAIS Anti–Money Laundering Guidance Notes.
50. Id.
51. Id.
52. Id.
53. See IOSCO Principles for the Supervision of Operators of Collective Investment Schemes (CIS
    Sept. 1997), available at http://www.iosco.org/pubdocs/pdf/IOSCOPD69.pdf.
54. Id.




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              4. Designated Non-Financial Businesses and Professions

              Record keeping requirements for designated non-financial businesses and
              professions apply in the same circumstances as are applicable to customer
              identification and customer due diligence requirements.55 See section A.9,
              above, Customer Due Diligence and Identification, Measures for Designated
              Non-Financial Businesses and Professions.



              C. Suspicious Transactions Reporting


              If a financial institution suspects or has reasonable grounds to suspect that
              funds are the proceeds of a criminal activity, or are related to terrorist financ-
              ing, it should report its suspicions to the applicable financial intelligence
              unit.56 Moreover, banks should be required to report suspicious activities
              and significant incidents of fraud to the supervisors, and supervisors do need
              to ensure that appropriate authorities have been alerted.57 Financial institu-
              tions, when filing suspicious activity reports (STRs), should not, under any
              circumstances, notify a customer that his/her behavior has been reported as
              suspect to authorities.58 From that point on—which is to say, upon notifica-
              tion—financial institutions should comply fully with instructions from gov-
              ernment authorities, including the production of records.59



              1. Suspicious Transactions: What Is Involved


              Suspicious transactions have certain broad characteristics, including, most
              obviously, transactions that depart from normal patterns of account activ-
              ity. Any complex or unusually large transactions—in addition to any unusual
              patterns of transactions absent an apparent economic, commercial, or lawful
              purpose—are suspect and, therefore, merit further investigation by the finan-



              55. The Forty Recommendations, Rec. 12.
              56. The Forty Recommendations, Rec. 13.
              57. Basel Core Principle 15, Description 31.
              58. The Forty Recommendations, Rec.14.
              59. Id., Recs.10 and 28.




     VI-18
                                                                                     Preventive Measures   301

cial institution and, if necessary, by the appropriate authorities.60 To assist
financial institutions in screening for suspicious transactions, these financial
institutions should establish risk-sensitive limits to monitor particular classes
or categories of accounts. Specific examples of suspicious activity (e.g., very
high account turnover inconsistent with balance size) are useful for individual
financial institutions and should be provided to them in some form by super-
visors.61
    Financial institutions and their employees should always be vigilant for
suspicious transactions. While the following are indications of suspicious
transactions, the listing is not exhaustive:

   •    General Signs


       –    Assets withdrawn immediately after they are credited to an account.
       –    A dormant account suddenly becomes active without any plausible
            reason.
       –    The high asset value of a client is not compatible with either the
            information concerning the client or the relevant business.
       –    A client provides false or doctored information or refuses to com-
            municate required information to the bank.
       –    The arrangement of a transaction either insinuates an unlawful pur-
            pose, is economically illogical or unidentifiable.


   •    Signs Regarding Cash Transactions


       –    Frequent deposit of cash incompatible with either the information
            concerning the client or his business.
       –    Deposit of cash immediately followed by the issuance of checks or
            transfers towards accounts opened in other banks located in the
            same country or abroad.
       –    Frequent cash withdrawal without any obvious connection with the
            client’s business.




60. Id., Rec.11.
61. Id., Rec. 25; See also Basel Customer Due Diligence for Banks, (provision 53).




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                     –   Frequent exchange of notes of high denomination for smaller
                         denominations or against another currency.
                     –   Cashing checks, including travelers’ checks, for large amounts.
                     –   Frequent cash transactions for amounts just below the level where
                         identification or reporting by the financial institution is required.

                 •   Signs Regarding Transactions on Deposit Accounts

                     –   Closing of an account followed by the opening of new accounts in
                         the same name or by members of the client’s family.
                     –   Purchase of stocks and shares with funds that have been transferred
                         from abroad or just after cash deposit on the account.
                     –   Illogical structures (numerous accounts, frequent transfers between
                         accounts, etc.).
                     –   Granting of guarantees (pledge, bonds) without any obvious reason.
                     –   Transfers in favor of other banks without any indication of the ben-
                         eficiary.
                     –   Unexpected repayment, without a convincing explanation, of a
                         delinquent loan.
                     –   Deposit of checks of large amounts incompatible with either the
                         information concerning the client or the relevant business.



              2. “Safe Harbor” Provisions for Reporting


             “Safe harbor” laws help to encourage financial institutions to report all suspi-
              cious transactions. Such laws protect financial institutions and employees
              from criminal and civil liability when reporting suspicious transactions to
              competent authorities in good faith. These legal provisions should provide
              financial institutions, and their employees or representatives, protection
              against lawsuits for any alleged violation of confidentiality or secrecy laws
              provided that the suspicious report was filed in good faith (i.e., it was not
              frivolous nor malicious).62




              62. The Forty Recommendations, Rec. 14.




     VI-20
                                                                      Preventive Measures   303

3. Scope of Reporting Obligation


An STR is a way of alerting authorities to the possibility that a particular
transaction could involve money laundering or terrorist financing and should,
therefore, be investigated. In most cases, the reporting financial institution
will not have evidence that the transaction represents the proceeds of crime,
and is less likely to know of what specific crime might be involved. The
financial institution will simply be aware that the transaction is unusual and
not consistent with the normal type of transaction on the account. Most
likely, it will not be aware of the source of the funds or the reason for the
transaction and cannot inquire of the customer without the risk of tipping-off
the customer. In such situations, the institution should submit a suspicious
transaction report and leave it to the authorities to further investigate.
     Because reporting institutions will usually not know the underlying
basis of the transaction, a suspicious transaction reporting system should
base the requirement to report on “suspicion” that funds may be related to
a criminal offense. It is not necessary to require the reporting institution to
investigate the transaction or have actual evidence that the funds relate to
criminal activity.



4. Fiscal Crimes


Some countries do not classify fiscal crimes, such as tax evasion, as a money
laundering predicate offense. Thus, laundering the proceeds of tax evasion is
not necessarily a money laundering offense. However, financial institutions
should still report transactions that they find suspicious and leave it to the
authorities to determine whether money laundering is involved. Otherwise,
there is a risk that customers would attempt to explain away transactions
related to money laundering predicates as the proceeds of tax evasion and
pressure institutions not to file STRs.




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              5. Insurance Sector

              The IAIS has established its own set of guidelines for reporting suspicious
              transactions.63 The insurance industry should follow these, in addition to the
              requirements of The Forty Recommendations noted above. Insurance compa-
              nies should report suspicious activity to the financial intelligence unit or other
              national centralized authority. The following are insurance sector-specific
              cases of suspicious transactions meriting additional investigation:


                 •   Unusual or disadvantageous early redemption of an insurance policy;
                 •   Unusual employment of an intermediary in the course of some usual
                     transaction or financial activity (e.g., payment of claims or high com-
                     mission to an unusual intermediary);
                 •   Unusual payment method; and
                 •   Transactions involving jurisdictions with lax regulatory instruments
                     regarding money laundering and/or terrorist financing.64



              6. Securities Sector

              The IOSCO has not established separate suspicious activity reporting require-
              ments for securities firms, brokers, or collective investment entities. Although
              IOSCO has not established separate or additional requirements in this area,
              the suspicious activity reporting requirements of The Forty Recommendations
              do apply to the securities sector.



              7. Designated Non-Financial Businesses and Professions

              Under the 2003 revision of The Forty Recommendations, designated non-
              financial businesses and professionals are now required to file suspicious
              transactions reports, but on a more limited basis than their obligation to
              identify customers and carry out due diligence.65


              63. See IAIS Anti-Money Laundering Guidance Notes.
              64. Id.
              65. The Forty Recommendations, Rec. 16.




     VI-22
                                                                         Preventive Measures   305

        For lawyers, notaries, other independent legal professionals and accoun-
tants, there is only an obligation to file an STR only when they engage in a
financial transaction for, or on behalf of, a client. This is narrower than the
obligation to identify clients and conduct due diligence upon them in two
respects:

    •      The reporting obligation covers only “financial transactions,” not all
           transactions; and
    •      There is a reporting obligation only at the point at which the profes-
           sional engages in a financial transaction for his or her client.66

        There is no obligation to report in legally privileged circumstances.
Individual countries determine when such reporting obligations arise, but the
privilege normally covers information obtained either in ascertaining the legal
position of a client or representing the client in proceedings. Countries may
provide that members of this group may report to their respective self-regula-
tory organizations (SRO), rather than the FIU, provided the SRO cooperates
with the FIU.67
        Dealers in precious metals and precious stones are required to file STRs
only when they engage in a cash transaction with a customer equal to or
exceeding the USD/EUR 15,000 threshold.68
        Trust and company service providers are required to file STRs only in
circumstances where they engage in transactions on behalf of a client.69 As
a consequence, any transaction, not just a financial transaction, that is sus-
picious should be reported. The reporting is limited, however, to situations
where the trust or company service provider actually carries out the transac-
tion; mere providing advice or preparing a transaction is not reportable.




66. Id.,   Rec. 16, paragraph a.
67. Id.,   Interpretive Note to Rec. 16.
68. Id.,   Rec. 16, paragraph b.
69. Id.,   Rec. 16, paragraph c.




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              D. Cash Transaction Reporting

              Countries should consider the possible benefits of requiring all cash transac-
              tions that exceed a fixed threshold amount to be reported.70 It is not man-
              datory, however, that a country have such a requirement. Cash transaction
              reporting has significant resource and privacy implications, which countries
              need to take into account in considering the issue. Each country or jurisdic-
              tion establishes its own reporting threshold based upon its own circumstances.
              For example, the United States requires that financial institutions record and
              report to designated authorities all transactions involving currency or bearer
              instruments in excess of $10,000.71
                   Other countries require reporting at similar levels. Such thresholds may
              be established by statute, or by regulation under the authority of the appro-
              priate government supervisory agency. Depending on circumstances in a coun-
              try, such requirements may also apply to non-financial businesses and profes-
              sionals, such as casinos, antique or automobile dealers, lawyers, accountants
              or other situations where large purchases are paid for in cash.
                   Relevant authorities should take great care in designating a country’s
              threshold level; it must be high enough to screen out insignificant transac-
              tions yet low enough to detect transactions potentially connected with finan-
              cial crime. In addition, countries may wish to add exemptions to reporting
              requirements for transactions where reporting is burdensome to the system
              and not particularly productive for enforcement purposes.
                  In addition, certain entities can represent a low risk for engaging in
              money laundering, and, therefore, may be eligible for exemption. These
              entities include governments, certain financial institutions or corporations
              that are reasonably assumed to be corruption-free, and customers that make
              frequent, large cash transactions due to the nature of their businesses. Such
              exceptions should be reviewed on a regular basis to determine if the excep-
              tion remains appropriate, both as a general rule and for specific entities,
              under relevant circumstances.




              70. The Forty Recommendations, Rec. 19.
              71. See, for example, U.S. Bank Secrecy Act of 1970.




     VI-24
                                                                         Preventive Measures     307

1. Multiple Cash Transactions

Cash reporting requirements also apply to same-day multiple transactions, a
practice called “smurfing.” If the consolidated transaction amount exceeds the
designated reporting threshold, financial institutions need to report the entire
series of transactions.72 This safeguard against smurfing—whereby many indi-
vidual transactions involving multiple accounts at a financial institution man-
age to take place just below the country’s reporting threshold—is a vital part of
the effort to prevent money laundering and terrorist financing. Criminals and
terrorists obviously resort to their own countermeasures to avoid detection by
software programs. This is why it is absolutely crucial for the relevant authori-
ties to use proactive analysis in detecting criminal and terrorist financial activity.
      Of course, a transaction can also be reported as a suspicious transaction
that does not meet the threshold or multiple transactions test. For example, a
single deposit of 9,900 may be considered suspicious, under various circum-
stances when the country has a reporting threshold of 10,000 because it sug-
gests structuring of transactions by a customer in order to evade the reporting
requirements.



2. Cross Border Movements

Money launderers engage in cross-border transfers of cash, bearer negotiable
instruments and high-value commodities as a scheme for laundering funds. It
is important that countries have a mechanism in place to detect when such
transfers may be used for money laundering or terrorist financing purposes.
     Authorities should consider establishing a minimum reporting limit for
cross-border movements of currency, other negotiable instruments, and high-
value commodities (i.e., precious metals or gems). Unusual or suspicious
international movement of such goods, their point of origin and destination
should be reported to the country’s customs service or other appropriate
authorities.73




72. Basel Customer Due Diligence for Banks, (provision 16).
73. The Forty Recommendations, Rec. 19.




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              3. Modern Money Management Techniques

              The monitoring capabilities of financial institutions and government officials
              have benefited from the movement away from cash and currency transfers
              toward checks, payment cards, direct deposit, and book-entry recording of
              securities. These transactions leave a helpful paper trail when wrongdoing is
              suspected and permit competent authorities to make investigations. Success in
              investigations depends upon accurate and complete record keeping. For this
              reason, the use of these modern money management and payment transfer
              methods is highly encouraged.74


              E. Balancing Privacy Laws with Reporting and Disclosure Requirements

              The reporting of information, e.g., suspicious transactions and cash transac-
              tions, or the disclosure of records by a financial institution to a competent
              authority, necessarily involves information that is normally treated confiden-
              tially under a country’s bank secrecy or privacy laws.
                    In requiring the reporting or disclosure of such information for AML
              and CFT purposes, a country needs to make appropriate exceptions in its pri-
              vacy laws or otherwise specifically authorize the reporting and disclosure for
              those limited purposes. FATF specifically provides that financial institution
              privacy laws should be drafted so as not to inhibit the implementation of any
              of its recommendations.75 At the same time, a country needs to build in pro-
              tections to assure that confidentiality will be observed, except where public
              policy needs, such as prosecution for money laundering, outweigh the overall
              need to protect privacy of financial information. By assuring confidentiality
              and privacy in the overall scheme, a country protects reporting and disclosure
              from abuse. In doing so, a country encourages maximum cooperation and
              proper reporting and disclosure by those entities and persons subject to such
              requirements.




              74. Id., Recs. 20 and 28.
              75. Id., Recs. 4 and 28.




     VI-26
                                                                      Preventive Measures   309

F. Internal Controls, Compliance, and Audit

Countries should require all financial institutions covered by their AML and
CFT laws to establish and maintain internal policies and procedures to pre-
vent their institutions from being used for purposes of money laundering and
terrorist financing.76 Internal policies and procedures will vary among differ-
ent institutions and different types of institutions, but they should neverthe-
less all consider the size, scope, and nature of that institution’s operation.
      Internal procedures include ongoing training that keeps employees
informed and up-to-date about developments on AML and CFT. Employee
training needs to (1) describe the nature and processes of money laundering
and terrorist financing; (2) explain AML/CFT laws and regulatory require-
ments; and (3) explain an institution’s policies and systems with regard to
reporting requirements regarding suspicious activity, with emphasis on cus-
tomer identification, due diligence and reporting requirement.
     In addition, financial institutions should screen job applicants for pos-
sible intent to use their institutions to launder money and/or to finance terror-
ism.77
     The designation of an AML/CFT compliance officer at the management
level, by each financial institution, is recommended.78 Such a compliance
officer helps to ensure that appropriate management attention is devoted to
the institution’s compliance efforts.
     An audit function is also a required internal policy and procedure that
needs to be established; the audit function should be separate from the com-
pliance administration function, in order to test and assure the adequacy of
the overall compliance function.79



G. Regulation and Supervision—Integrity Standards

The foregoing discussions deal with AML and CFT preventative measures that
should be applied by national authorities to financial institutions and certain


76. Id., Rec. 15..
77. Id.
78. Id., Interpretive Note to Rec. 15.
79. Id.




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              designated non-financial businesses and professions. It is not sufficient for
              national authorities to impose those requirements in legislation. Countries also
              need to take measures to ensure that they are implemented in practice. Like
              many other elements of the international standards, the extent of regulation
              and supervision should be based on the money laundering and terrorist financ-
              ing risk to the institution in question. The framework established by the stan-
              dard setters envisages different types of regulation and supervision for:


                 •    Core Principle Institutions,
                 •    Other Financial Institutions, and
                 •    Designated Non Financial Businesses and Professions.

                     The regulations and supervision recommendations regarding integrity
              standards of The Forty Recommendations are discussed in detail in Chapter
              V, under Supervision and Regulation—Integrity Standards.


              H. Legal Entities and Arrangements


              Each country should take appropriate measures to prevent the unlawful use
              of corporations and other forms of legal entities by money launderers and
              those who finance terrorism.80 Such measures should include accurate and
              timely information about the beneficial ownership and control of legal enti-
              ties; such information should be accessed in an expeditious manner by com-
              petent authorities. In addition, in countries where bearer shares of securities
              are permissible, appropriate measures should be taken to assure that such
              bearer instruments are not abused for money laundering or terrorist financing
              purposes.81
                   A country should also take appropriate measures to assure that trust and
              similar legal arrangements are not misused by those involved in money laun-
              dering or terrorist financing.82 Such preventative measures should include
              access to details about the settler, trustee and beneficiaries of these types of
              legal arrangements.83


              80. Id., Rec. 33.
              81. Id.
              82. Id., Rec. 34.
              83. Id.




     VI-28
                                                                                                                          311


Chapter VII

The Financial Intelligence Unit



    A. Definition of a Financial Intelligence Unit                 3. Enforcement and Blocking of Assets
                                                                   4. Training
    B. Core Functions
                                                                   5. Research
       1. Centralized Repository of Reported Information
       2. Analysis                                             E. Organizing the FIU
       3. Dissemination of Information                            1. Choosing the Right Model
                                                                  2. Capacity Considerations
    C. Types or Models of FIUs
                                                                  3. Staffing Considerations
       1. Administrative
       2. Law Enforcement                                      F. Privacy Safeguards
       3. Judicial or Prosecutorial                               1. The Main Policy Tension: Privacy versus Efficiency
       4. Hybrid                                                  2. Confidentiality Principle
                                                                  3. Speciality Principle
    D. Possible Additional Functions
                                                                  4. Independence and Accountability
       1. Supervisory or Regulatory Responsibilities
       2. Investigations                                       G. Information and Feedback




    hose involved in the fight against money laundering and terrorist financ-
T   ing must have access to certain kinds of financially related information in
order to conduct financial investigations. In this regard, the financial intelli-
gence unit (FIU) plays an increasingly important role in this process.1
      Money launderers manipulate their illicit proceeds in an endeavor to
conceal or disguise their true nature, source, location, disposition, and move-
ment, with the ultimate objective of integrating these proceeds into, and
through, the legitimate economy.2 Those who finance terrorism seek to con-
ceal the source of the funds and disguise the illicit use of funds in support of
terrorism. Financial investigations are assisted greatly by a country’s compre-

1. For a comprehensive discussion on FIUs, see Financial Intelligence Units, An Overview 2004,
   (FIUs Overview) by the International Monetary Fund and World Bank, available (read-only) at
   www.amlcft.org.
2. United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic
   Substances (1988) (Vienna Convention), art. 3(b)(i) & (ii). http://www.incb.org/e/conv/1988/.




                                                           VII-1
312 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              hensive regime that requires the reporting of certain information and record
              keeping, and that facilitates information sharing among competent authori-
              ties, both domestically and internationally. The primary goals of financial
              investigations are to identify, trace, and document the movement of funds; to
              identify and locate assets that are subject to law enforcement measures; and
              to support the prosecution of criminal activity.
                   Financial investigations seek to discover the financial trail left by
              criminals. As part of this process, investigators analyze financial institution
              account records, real estate records, documents on liens and judgments, cor-
              porate registries, brokerage and mutual fund accounts, insurance contracts
              and a full spectrum of other financial and business relations records. Illicit
              financial operations have recently grown more sophisticated and complex,
              requiring traditional investigators to acquire new and specialized financial
              intelligence tools.
                   The Financial Action Task Force on Money Laundering (FATF), which
              is recognized as the international standard setter for anti-money laundering
              (AML) and combating the financing of terrorism (CFT), provides in The Forty
              Recommendations on Money Laundering (The Forty Recommendations),
              that each country should establish an FIU.3 Further, FATF urges countries to
              impose measures on financial institutions and certain non-financial businesses
              and professions requiring them to maintain records on the identities of their
              clients and their transactions, and to report any suspicious transactions.4
              Information generated by these reporting and record keeping requirements is
              to be reported to the country’s FIU and is used to reconstruct transactions,
              to establish the link between individual clients and a particular business, to
              prove the “state of mind” of an individual, and finally, to identify the role of
              an individual in a criminal or terrorist financing activity.
                   Information reporting and record keeping requirements generate sub-
              stantial financial data, much of which is not easily useable by competent
              authorities without further analysis. If a country’s AML and CFT institu-
              tional frameworks are to be at all effective, the country must institute a
              reliable, efficient system for processing, analyzing, and disseminating this
              information. Without such a system in place, law enforcement has a much

              3. The Forty Recommendations, Rec. 26., http://www.fatf-gafi.org/pdf/40Recs-2003_en.pdf.
              4. Id., Recs. 10–22.




     VII-2
                                                                           The Financial Intelligence Unit   313

more difficult time detecting criminal or terrorist financial dealings. The
pressing need for effective data analysis of possible financial crime explains,
in part, the proliferation of FIUs and the growing importance of their roles
in the international effort to prevent, detect and prosecute money laundering
and terrorist financing.5



A. Definition of a Financial Intelligence Unit


The Egmont Group of Financial Intelligence Units (Egmont Group), which is
the international standard setter for FIUs, adopted the following definition of
an FIU in November 1996:


         A central, national agency responsible for receiving (and, as per-
         mitted, requesting), analyzing, and disseminating to the competent
         authorities, disclosures of financial information (i) concerning sus-
         pected proceeds of crime, or (ii) required by national legislation or
         regulation, in order to counter money laundering.6


     The United Nations Convention against Transnational Organised Crime
(2000) (Palermo Convention) adopted this definition, stating, “Each state
Party…shall…consider the establishment of a financial intelligence unit to
serve as a national center for the collection, analysis and dissemination of
information regarding potential money laundering.”7
     Expanding on this definition, FATF requires countries to establish an
FIU, which has these three essential functions, i.e., the collector or “reposito-
ry” of reported information, analysis and financial information sharing,8 for
detecting and countering money laundering and terrorist financing. The FATF

5. As of June 2004, 94 countries have established financial intelligence units that are members of
   the Egmont Group. The Egmont Group, Financial Intelligence Units of the World, available at
   http://www.egmontgroup.org/.
6. The Egmont Group is an informal organization of financial intelligence units named after the
   location of the group’s first meeting at the Egmont-Arenberg Palace in Brussels. The goal of
   the group is to provide a forum for FIUs to improve support to their respective national anti–
   money laundering programs. See Egmont Group, “Information Paper on Financial Intelligence
   Units and the Egmont Group,” available at http://www.egmontgroup.org/info_paper_final_
   092003.pdf. See also Chapter III, the Egmont Group.
7. The Palermo Convention, Article 7(1)(b).
8. The Forty Recommendations, Recs. 36, 37 and 40.




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              also has a general requirement that all national authorities exchange informa-
              tion and co-operate with their domestic and international counterparts.9
                   In 2004, the Egmont Group revised its definition of an FIU to include
              specifically the combating of terrorist financing.10 The current definition of
              an FIU as follows:


                      A central, national agency responsible for receiving (and as permitted,
                      requesting), analyzing and disseminating to competent authorities,
                      disclosures of financial information:
                          i. concerning suspected proceeds of crime and potential financing
                             of terrorism, or
                          ii. required by national legislation or regulation, in order to com-
                              bat money laundering and terrorist financing.11


                   As a result, the Egmont Group’s definition of an FIU is entirely consis-
              tent with The Forty Recommendations.



              B. Core Functions


              FIUs vary from country to country, but all of them share three core func-
              tions; they receive, analyze and disseminate information to combat money
              laundering and terrorist financing. The dissemination of financial informa-
              tion should be done on both a domestic and international basis.
                   Because money laundering is often a cross-border activity, it is important
              for FIUs to join forces with other national intelligence units. Thus, even the
              best domestic laws and regulations against money laundering, including those
              for an FIU, need an effective international information sharing mechanism in
              order to combat effectively money laundering and terrorist financing.




              9. Id., Recs. 26 and 31.
              10. The Egmont Group, Revised Statement of Purpose (June 23, 2004), http://www.egmontgroup.
                  org/.
              11. Id.




     VII-4
                                                                   The Financial Intelligence Unit   315

1. Centralized Repository of Reported Information

Financial institutions must report all suspicious activity reports and other
required disclosures (such as cash transaction reports) to their country’s
FIU.12 The centralization of this “repository function”—designating the FIU
as the recipient of financial disclosures—is a prerequisite for an effective pre-
ventive national and international framework against money laundering.13
    The use of a centralized repository for the reporting of information and
required disclosures ensures that all of the relevant information is in one
place, facilitating the processing of information and analysis on a consistent
basis. Centralization also ensures greater efficiency in information gathering.



2. Analytical Function

FIUs are more than mere databases for financial information required to be
submitted by legislation or national regulatory authorities. FIUs must analyze
the data they receive because so many suspicious transaction reports (STRs)
and other financial disclosures often appear to be innocent transactions.
Ordinary deposits, withdrawals, fund transfers, or the purchase of a security
or an insurance policy may, however, be important pieces of information in
detecting and prosecuting money laundering and terrorist financing.
     Only through examination and analysis can FIUs detect criminal finan-
cial transactions. Distinguishing truly suspect transactions from those that
are only benignly unusual requires informed analysis. Without it, the most
sophisticated data gathering in the world will not be productive.
      These analytical functions require countries to vest their FIUs with the
necessary legal authority, proper human resources, and sufficient technical
capacity. In particular, the FIU’s analytical functions require extended powers
to access information. These powers should include: access to certain com-
mercial or government databases; the authority to request additional infor-
mation from reporting entities and other sources as necessary; and access to




12. The Forty Recommendations, Recs. 13 and 19, paragraph 6.
13. See FIUs Overview, Chapter 3, Receiving Transaction Reports.




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316 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              advanced intelligence techniques and apparatus, such as wire tapping and
              covert operations, subject to domestic legal principles.
                   Each country must balance very real privacy concerns against the FIU’s
              need for an effective analytical function. While utilizing publicly available
              commercial databases does not raise privacy concerns, authorizing central-
              ized intelligence units to request additional information does. The same cau-
              tion applies to FIU surveillance and other intelligence techniques. Financial
              institution privacy laws should be drafted so as not to interfere with there
              functions of the FIU, yet protect the privacy of information.14
                  FIUs perform three specialized analytical functions: tactical, opera-
              tional and strategic.15



              a. Tactical Analysis


              Tactical analysis is the process of collecting the data needed to build a case
              and to provide the accompanying facts behind the commission of a criminal
              offense. Although tactical analysis may be performed on all incoming reports,
              it is likely that STRs will provide the most directly useful information.
                   Tactical analysis includes the matching of data received from reporting
              institutions and others with data held by the FIU or accessible to it. Such
              data includes lists of names, addresses, phone numbers, and data in the other
              reports forwarded by reporting institutions. While some reporting institu-
              tions produce the simplest form of tactical information themselves, FIUs add
              to these reports related information on the reported client or transaction that
              they have in their databases.
                   Upon receipt of an STR, staff of the FIU will look for additional infor-
              mation on the subject, the company, the transactions, or other elements
              involved in a particular case to provide the basis for further analysis. The
              main sources of such additional information are:


                  • The FIU’s own data,
                  • Publicly available sources,

              14. The Forty Recommendations, Rec. 4.
              15. Id., Chapter 3, Analyzing Reports.




     VII-6
                                                               The Financial Intelligence Unit   317

     • Governemnt-held databases,
     • Aditional information from reporting entities and other entities, and
     • Other FIUs.16



b. Operational Analysis


Operational analysis uses tactical information to formulate different hypoth-
eses on the possible activities of a suspected criminal. Operational analysis
supports the investigative process. It uses all sources of information available
to the FIU to produce activity patters, new targets, relationships among the
subject and his or her accomplices, investigative leads, criminal profiles, and,
where possible indications of possible future behavior.
      One technique of operations analysis is financial profiling. This provides
the analyst with methods for developing indicators of concealed income of
an individual, a group of individuals, or an organization. It is an effective
indirect method of gathering, organizing, and presenting evidence related to
the financial status of subjects. The relevance of the profile is to show that
the target cannot demonstrate a legitimate source for the difference between
his or her outflow of cash versus the income. The tracing of a person’s assets
may also provide leads linking the subject with predicate offenses.
      Through operational analysis, the information received by the FIU is
developed into operational intelligence, which can be transmitted to law-
enforcement agencies or prosecutors for further action.17



c. Strategic Analysis


Strategic analysis develops knowledge to be used for the future work of the
FIU. The main characteristic of strategic intelligence is that it is not related to
individual cases, but rather to new issues or trends. The scope of any strate-
gic analysis varies greatly depending upon the FIU’s mandate. It may consist
of the identification of evolving criminal patterns in a particular group or

16. Id.
17. Id.




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              the provision of broad insights into emerging patterns of criminality at the
              national level.
                   Strategic analysis is developed after all available information has been
              collected and analyzed. It requires a wider range of data than operational
              analysis, as well as experienced analysts. The data comes from reports pro-
              vided by the reporting entities, the FIU’s own operational intelligence and
              tactical information, public sources, law enforcement and other governmen-
              tal agencies. At a broader level, strategic analysis may suggest the need to
              impose reporting and other AML/CFT obligations on new entities or enhance
              existing reporting requirements.18



              3. Domestic Information Sharing


              If it suspects money laundering or the financing of terrorism, the FIU should
              have the authority to share, or route, financial information and intelligence
              to other domestic authorities for investigation or action. The FIU should also
              be authorized to cooperate and coordinate its actions with the other domestic
              authorities devoted to the detection, prevention and prosecution of money
              laundering and terrorist financing.
                   The importance of timely information sharing with the proper authorities
              cannot be overstated. Effective measures against money laundering rely on
              getting the available information to the appropriate authority. For most FIUs,
              the sharing of information usually follows some analysis of reported financial
              disclosures. For other FIUs, especially those that receive an enormous volume
              of financial disclosures, the financial disclosures are made available to law
              enforcement authorities immediately; these FIUs conduct analysis on financial
              disclosures and other financial information upon request of law enforcement
              as needed at a later time. In either case, the key is for the FIU to provide the
              competent authority with financial intelligence as quickly as possible so that
              the competent authority can pursue the leads provided by the FIU.19
                   Domestic coordination is vital. The FIU has to be an essential partner in
              domestic coordination and could even be empowered to assume the lead role

              18. Id.
              19. Id., Chapter 3, Dissemination Reports.




     VII-8
                                                                           The Financial Intelligence Unit   319

in coordinating the relevant authorities that fight money laundering—which
is to say, the FIU, regulators and supervisors of the financial sector, the police,
the judicial authorities, and other relevant ministries or administrations.20



4. International Information Sharing
Because so much of money laundering and terrorist financing are cross-bor-
der activities, FIUs must be able to share financial intelligence with other
FIUs worldwide in order to be effective partners in the international fight
against these crimes. A core feature of an FIU is its ability to cooperate in an
efficient and rapid manner with all of its foreign counterparts. Information
sharing at the international level should occur through direct and secure
communication with the competent foreign authorities.21



C. Types or Models of FIUs


Countries generally choose one of four basic models in establishing or
improving the operations of an FIU:


    a. The administrative model, which is either attached to a regulatory/
       supervisory authority, such as the central bank or the ministry of
       finance, or as an independent administrative authority;
    b. The law enforcement model, whereby the agency is attached to a
       police agency, whether general or specialized;
    c. The judicial or prosecutorial model, where the agency is affiliated with
       a judicial authority or the prosecutor’s office; or
    d. The hybrid model, which is some combination of the above three.


    These variations arise primarily from different country circumstances
and from the lack of an internationally accepted model, when the first such
units were established in the early 1990s. For example, in some countries,
the function of the FIU as an additional tool for law enforcement organiza-



20. The Forty Recommendations, Rec. 31.
21. See Chapter VIII of this Reference Guide, International Cooperation.




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              tions in combating money laundering and associated crimes was emphasized,
              and this led to the establishment of the FIU in an investigative or prosecuto-
              rial agency. Other countries emphasized the need for a “buffer” between the
              financial institutions and the police and, consequently, their FIUs were estab-
              lished outside of these agencies.
                   It should be emphasized, however, that the four classifications are, to a
              certain degree, arbitrary and that there are other ways of classifying FIUs.
              Discussed below is a description of each model, advantages and disadvantages
              (although this listing is not exhaustive) and examples of countries that use the
              model.



              1. Administrative


              Administrative-type FIUs are usually part of the structure, or under the super-
              vision of, an administration or an agency other than law-enforcement or judi-
              cial authorities.22 Sometimes, the administrative type constitutes a separate
              agency, placed under the supervision of a ministry or administration (autono-
              mous) or not placed under such supervision (independent). The main ratio-
              nale for such an arrangement is to establish an “buffer” between the financial
              sector (and, more generally, non-financial businesses and professionals subject
              to reporting obligations) and the law enforcement authorities in charge of
              financial crime investigations and prosecutions.
                   The advantages of an administrative-type FIU are:


                  • The FIU acts as an interface between the financial and other sectors
                      subject to reporting obligations, on the one hand, and law-enforcement
                      authorities, on the other hand; this avoids the creation of direct insti-
                      tutional links between reporting parties and law enforcement agencies,
                      while bringing disclosures to the attention of law enforcement agencies.
                  • Financial institutions and others are more confident about disclosing
                      information if they know that dissemination will be limited to cases of
                      money laundering and terrorist financing and will be based on the FIU’s
                      own analysis, rather than the reporting institution’s limited information.

              22. FIUs Overview, Establishing an FIU.




     VII-10
                                                                The Financial Intelligence Unit   321

     • The FIU is a “neutral,” technical, and specialized interlocutor for the
          reporting parties.
     • If the FIU is placed in a regulatory agency, it is the natural interlocutor
          of the financial institutions.
     • Information can be easily exchanged with all types of FIUs.


      The disadvantages are:


     • Because the FIU is not part of the law enforcement administration,
          there may be a delay in applying law enforcement measures, such as
          freezing a suspicious transaction or arresting a suspect, on the basis of
          financial disclosures.
     • The FIU usually does not have the range of legal powers that law
          enforcement agencies and judicial authorities have to obtain evidence.
     • The administrative-type FIUs (unless that are truly independent) are
       more subject to the direct supervision of political authorities.23


      Examples of countries with administrative-type FIUs include Andorra,
Aruba, Australia, Belgium, Bolivia, Bulgaria, Canada, Colombia, Croatia,
the Czech Republic, France, Israel, the Republic of Korea, Liechtenstein,
Malta, Monaco, the Netherlands, the Netherlands Antilles, Panama,
Poland, Romania, Russia, Slovenia, Spain, Ukraine, the United States, and
Venezuela.24
      By making an administrative authority a “buffer” between the finan-
cial institution and other reporting sectors and the law enforcement sectors,
authorities can more easily enlist the cooperation of reporting institutions,
which are often conscious of the drawbacks vis-à-vis their clients of having
direct institutionalized links with law enforcement agencies. Administrative-
type FIUs are often preferred by the banking sector. They may also appeal to
other institutions and professionals that have been added to the list of report-
ing entities for the same reasons.




23. Id.
24. Id.




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              2. Law Enforcement


              In some countries, the emphasis on the law-enforcement aspects of the FIU
              led to the creation of the FIU as part of a law enforcement agency, since this
              was the easiest way to establish a body with appropriate law-enforcement
              powers without having to design a new entity and a new legal and adminis-
              trative framework.25
                    Operationally, under this arrangement, the FIU will be close to other law
              enforcement units, such as a financial crimes unit, and will benefit from their
              expertise and sources of information. In return, information received by the
              FIU can be accessed more easily by law enforcement agencies and can be used
              in any investigation, thus increasing its usefulness. Exchanges of information
              may also be expedited through the use of existing national and international
              criminal information exchange networks.
                    The advantages of a law enforcement type of FIU are:


                   • It is built on an existing infrastructure, so there is no need to set up a
                        new agency.
                   • Maximum law enforcement use can be made of financial disclosure
                        information.
                   • There is quick law enforcement reaction to indicators of money laun-
                        dering and other crimes.
                   • Information can be exchanged using the extensive network of interna-
                        tional criminal information exchange networks (such as Interpol).
                   • There is relatively easy access to criminal intelligence and to the intel-
                        ligence community at large.


                    The disadvantages are:


                   • This type of FIU tends to be more focused on investigations than on
                        prevention measures.
                   • Law enforcement agencies are not a natural interlocutor for financial
                        institutions; mutual trust must be established, which may take some

              25. Id.




     VII-12
                                                               The Financial Intelligence Unit   323

          time, and law enforcement agencies may lack the financial expertise
       required to carry out such a dialogue.
     • Gaining access to a financial institutions’ data (other that the reported
          transactions) usually requires the launching of a formal investigation.
     • Reporting institutions may be reluctant to disclose information to law
       enforcement if they know the information could be used in the inves-
          tigation of any crime (not just money laundering and the financing of
       terrorism).
     • Reporting institutions may be reluctant to disclose information to law
          enforcement on transactions that are no more than “suspicions.”

      Examples of law enforcement FIUs include Austria, Estonia, Germany,
Hungary, Iceland, Ireland, Slovakia, Sweden, and the United Kingdom.
     Also, a law enforcement-type of FIU will normally have all the powers of
the law enforcement agency itself, without the need for separate, specific leg-
islative authority. These powers include the power to freeze transactions and
seize assets (with the same degree of judicial supervisions as applies to other
law enforcement powers in the country).



3. Judicial or Prosecutorial

This type of FIU is generally established within the judicial branch of the
country and most frequently under the prosecutor’s jurisdiction. Such an
arrangement is typically found in countries with a continental law tradition,
where the public prosecutors are part of the judicial system and have author-
ity over the investigatory bodies.26
     Judicial or prosecutorial-type FIUs can work well in countries where
banking secrecy laws are so strong that a direct link with the judicial or pros-
ecutorial authorities is needed to ensure the cooperation of financial institu-
tions.
     The advantages of a judicial or prosecutorial-type FIU are:




26. Id.




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324 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                   • They usually possess a high degree of independence from political
                        interference.
                   • The disclosure of information is provided directly to the agency autho-
                        rized to investigate or prosecute the crime.
                   • The judiciary’s powers (e.g., seizing funds, freezing accounts, conduct-
                        ing interrogations, detaining people, conducting searches) are immedi-
                        ately brought into play.


                    The disadvantages are:


                   • Generally, the same disadvantages of law enforcement-type FIUs apply
                        to judicial or prosecutorial-type FIUs except for the reluctance to dis-
                        close information upon “suspicion.”
                   • This type of FIU may have difficulty exchanging information with non-
                     judicial or prosecutorial FIUs.27


                    Examples of judicial or prosecutorial FIUs include Cyprus and
              Luxembourg.28



              4. Hybrid FIUs


              This last category encompasses FIUs that contain different combinations of
              the arrangements described in the other three categories. This hybrid type of
              arrangement is an attempt to obtain the advantages of the different types of
              FIUs put together in one organization. Some FIUs combine the features of
              administrative-type and law enforcement-type of FIUs, while others combine
              the powers of the customs office with those of the police. It may be noted
              that in some FIUs, staff from various regulatory and law enforcement agen-
              cies work in the FIU, while continuing to exercise the powers of their agency
              of origin. Among the countries that have established “hybrid” FIUs are
              Denmark, Jersey, Guernsey, and Norway.29



              27. Id.
              28. Id.
              29. Id.




     VII-14
                                                                The Financial Intelligence Unit   325

D. Possible Additional Functions


In addition to its core function responsibilities, an FIU could be given a num-
ber of other funtions, regardless of which model is utilized.



1. Supervisory and Regulatory Responsibilities


The FIU could be granted the power to supervise financial institutions and
non-financial businesses and professions with regard to their compliance with
record keeping and reporting requirements.30 In such cases, the FIU could
also be authorized to impose sanctions or penalties against such entities and
persons for failing to comply with their reporting or recordkeeping obliga-
tions—for example, meaningful fines and/or license suspensions. Furthermore,
the FIU could be authorized to promulgate regulations necessary for the
implementation of laws against money laundering and terrorist financing.
     Some authority within the country needs to be responsible for these com-
pliance matters. In most countries, this responsibility belongs to the supervi-
sory authority of each financial sector, non-financial business or profession.
But, because the FIU is the unique recipient of financial intelligence, in addi-
tion to which it analyzes financial intelligence, the FIU is well placed to moni-
tor compliance with AML and CFT obligations. Some countries have opted
to give the AML/CFT compliance responsibility to the FIU. In certain coun-
tries, some reporting entities and persons are not subject to any supervision
other than that of the FIU, which makes it the most suitable body to address
the compliance issues raised in this context.
     In addition, the FIU could be authorized to issue regulations for the
financial and other reporting sectors with regard to the implementation of
laws against money laundering. Giving such responsibilities to the FIU, how-
ever, should take into account issues of balancing AML/CFT needs with other
supervisory concerns. To be effective, an FIU must receive adequate resources
and appropriate government support for the FIU to accomplish its core func-
tions and any additional responsibilities. If the FIU’s staffing capacity is lim-

30. Id., Other FIU Functions




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326 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              ited, additional supervisory or regulatory functions could undermine its core
              functions.



              2. Investigations


              Countries may grant their FIUs the function of providing investigative sup-
              port to other law enforcement agencies in the course of ongoing investiga-
              tions on money laundering. In this case, the FIU would be expected to share
              information with investigative authorities upon request. These powers may
              entail the exercise of additional powers that would enable the FIU to request
              additional information from financial institutions or even to carry out inves-
              tigations, including identifying potential assets, to be frozen, seized, or con-
              fiscated.



              3. Enforcement and Blocking of Assets


              Countries may also grant their FIU the power to take provisional measures to
              deal effectively with cases where urgent action is needed. Because the FIU is
              a crucial governmental point for identifying suspicious transactions, it is logi-
              cal to grant the FIU provisional powers to preserve assets that might become
              subject to confiscation. Such measures could include the temporary freezing
              of assets as well as other measures that restrain any legal disposition of these
              assets.
                   Such provisional powers require, however, that the FIU be able to investi-
              gate and identify any assets vulnerable to confiscation under the laws against
              money laundering and terrorist financing. In doing so, however, particular
              care should be taken to assure that the FIU has sufficient resources to per-
              form its core functions—that is, receiving and analyzing the suspicious-trans-
              action reports, as well as sharing information with domestic and international
              counterparts.
                   Where provisional powers of blocking transactions and/or freezing assets
              are authorized, such powers are usually limited in terms of the duration of




     VII-16
                                                              The Financial Intelligence Unit   327

the blocking or freezing. Freezing or seizing assets usually requires judicial
authorities or a government authority outside the FIU.31



4. Training


Because of focused and multidisciplinary expertise of an FIU, it could easily
serve as the governmental unit to advise and train personnel from financial
institutions in measures to fight money laundering and terrorist financing.
      Again, countries must consider resource limitations in deciding whether
to attach this function to the FIU. Capacity, funding and expertise are crucial
concerns in this area, since demand for such services could become extensive.



5. Research


The FIU is in a unique position to provide research to its government based
upon its experience of receiving, analyzing an disseminating financial infor-
mation on money laundering and terrorist financing. This is especially true
if the FIU is given a broad mandate with regard to strategic analysis, as dis-
cussed above in this chapter. Its strategic function could easily be expanded to
authorize separate research and reports on its findings.
      As with so many functions, the addition of research and the scope of that
research depend upon funding, staffing and expertise. Without such resources,
the core functions of the FIU could suffer.



E. Organizing the FIU


There are numerous decisions that have to be made in establishing the FIU or
enhancing the operations of an existing FIU.




31. Id.




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              1. Choosing the Right Model


              Good decisions about the proper model to adopt for an FIU proceed from
              equally sound knowledge about a country’s cultural and economic character-
              istics and its legal and law enforcement traditions. Although no single model
              will work for all countries, some criteria are essential; the discussion below is
              given in the form of questions:
                  • Will or does the FIU possess relevant capacity and expertise in financial
                     operations? If not, what is needed?
                  • What is the relationship between the proposed or existing FIU and the
                     financial industry in the domestic context? What would enhance that
                     relationship?
                  • Will or does the institution possess a culture conducive to protecting
                     the confidentiality of financial information and to mitigating potential
                     harm to individual privacy?
                  • Will or does the proposed FIU possess the actual legal authority, tech-
                     nical capacity, and experience to provide appropriate and timely inter-
                     national cooperation?
                  • Would the legal framework applicable to the proposed or existing FIU
                     allow it to take part in the international administrative type of coop-
                     eration and would the legal framework allow for rapid, efficient, spon-
                     taneous and/or “upon request” international information exchanges
                     relating to suspicious transactions?



              2. Capacity Considerations


              Financial investigations are only as good as the individual investigators and the
              technological infrastructure that supports the financial intelligence efforts. A
              country must make policy determinations on how the FIU can make the best
              use of the financial analytical skills of its staff members. In this regard, the
              country must also determine the best institutional setting for these skills—the
              central bank, ministry of finance, the police, the judiciary. Fashioning an FIU as
              a wholly separate agency from a country’s existing regulatory, administrative,
              or law enforcement agencies could also have serious resource implications.




     VII-18
                                                                         The Financial Intelligence Unit     329

3. Staffing Considerations


Recruitment policies have implications for matters relating to resources,
privacy, and institutional effectiveness. The relative rarity of investigatory
financial expertise means that staffing considerations should be driven by the
multidisciplinary nature of financial investigations in order to make recruit-
ment as diverse as possible.
     Staff background and the terms of employment are both important. On
the one hand, treasury or finance ministry officials, banking supervisors,
and customs officers could bring their respective financial expertise and their
understanding of transactions involving reporting entities. On the other hand,
police or judicial officers bring useful law enforcement experience, particu-
larly if the FIU has been granted law enforcement powers.
     The terms of employment also impact the degree of independence, and
the degree of confidentiality in the work of the FIU. The rarity of the high
level skills/experience required of FIU analysts means that some countries
might opt for staffing their units with experts seconded from other agencies.
Although this is a less-costly staffing option—and probably one that is more
conducive to effective information sharing—governments need to weigh the
privacy and longer term implications of such decisions.



F. Privacy Safeguards


FIUs are repositories, as well as guardians, of highly sensitive information, a
fact that calls for constant vigilance regarding legal and systemic safeguards.



1. The Main Policy Tension: Privacy Versus Efficiency


Certain policy tensions emerge as FIUs take shape; these stem mostly from the
ambitious goals of AML and CFT laws and regulations, which compete with
or erode rival privacy interests.32

32. The Egmont Group’s statement of purpose, in the preamble, provides that it is “mindful of…the
    sensitive nature of disclosures of financial information.” The Group also holds that “FIUs
    should work to encourage that national legal standards and privacy laws are not conceived




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330 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                   Laws against money laundering have emerged, in part, as a response to
              the obstacles that bank secrecy laws posed to supervisory and law enforce-
              ment efforts. In some jurisdictions, strong bank secrecy requirements have fre-
              quently defeated investigative efforts to obtain financial information required
              to detect crimes and regulatory breaches, or for tracing or confiscating assets.
              Such a result is contrary to the FATF recommended structure, which provides
              that financial institution privacy laws should not inhibit any of the FATF rec-
              ommendations.33 Cumbersome procedures also hamper investigative efforts
              to gather information and/or evidence abroad. With financial globalization,
              such concerns have become even more acute. AML/CFT laws can be seen as
              an attempt to ensure efficient information exchange and evidence gathering,
              both domestically and internationally, as prerequisites for effective regulatory
              and criminal law enforcement in today’s globalized economy.
                   The very sensitive and confidential nature of financial information means
              that FIUs need to institute stringent procedural safeguards for their important
              financial evidence gathering and information sharing functions. Effective law
              enforcement rests on efficient and speedy access to financial information. But
              this law enforcement need pushes against the boundaries of financial privacy
              concerns, raising legitimate concerns about the potential for abuse.
                   In its roles as repository, processor, and clearinghouse of financial infor-
              mation relating to the crime of money laundering and terrorist financing,
              FIUs are at the forefront of this debate about efficiency versus privacy. This
              tension is reflected in the choices countries make about the structure, func-
              tions, powers, and procedures of their financial intelligence units. Countries
              need to make realistic assessments of the costs to privacy inherent in each of
              the choices they make about the FIU’s authorities and restrictions.



              2. Confidentiality Principle

              Imposing the confidentiality principle on FIUs is one of the most important
              protections against abuse of financial information privacy. This principle will

                  so as to inhibit the exchange of information, in accordance with these principles, between or
                  among FIUs; see The Egmont Group, Principles for Information Exchange between Financial
                  Intelligence Units for Money Laundering Cases, (June 13, 2001), Principle 7. http://www.egmon-
                  tgroup.org/princ_info_exchange.pdf.
              33. The Forty Recommendations, Rec. 4




     VII-20
                                                                             The Financial Intelligence Unit      331

also enable the FIU to exercise its functions as an intermediary between the
reporting parties and the criminal justice system.
    In cases where the FIU is part of another agency, such as the police or the
office of the public prosecutor, the unit is usually governed by a general duty
of confidentiality. In the absence of such a general duty, however, a specific
duty of confidentiality should be expressed in the legal provisions governing
and creating the FIU, and should be enforced by criminal and/or effective civil
sanctions.34 The duty of confidentiality may also be contained in domestic
privacy laws of general application.
     The FIU’s duty of confidentiality, however, should be drafted so as not to
restrict unduly the possibility of providing feedback to the reporting entities, as
feedback is important both for the relationship between the FIU and the finan-
cial intermediaries and for enabling the reporting institutions to develop effi-
cient reporting mechanisms.35 Confidentiality requirements should be drafted
in a way that does not inhibit international cooperation among FIUs.36



3. Specialty Principle


To complement the duty of confidentiality, FIUs can adopt a “specialty prin-
ciple,” which serves to limit the use of information reported to it by financial
institutions and others, or as requested by the FIU from reporting parties. If
an FIU is prohibited from using information provided to it for any purpose
other than fighting money laundering and terrorist financing (and related
crimes), countries can develop a sense of trust between reporting institutions
and other parties and the FIU.
     The specialty limitation necessarily depends on what it means to “fight
money laundering and terrorist financing.” The restriction could be drafted
to mean the financial information managed by the FIU could be used only
for the performance of the agency’s duties, as described in the law that estab-



34. Guy Stessens, Money Laundering: A New International Law Enforcement Model (Cambridge,
    England, and New York, New York, United States: Cambridge University Press, 2000), 191.
35. See section G, Information and Feedback, of this Chapter. See also FATF, Providing Feedback
    to reporting Financial Institutions and Other Persons: Best Practice Guidelines, ¶ 6, available at
    http://www.fatf-gafi.org/pdf/FEEDB_en.pdf.
36. The Egmont Group, Principles of Information Exchange between Financial Intelligence Units for
    Money Laundering Cases (June 13, 2001), Principle 7.




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              lished the FIU. It could also be expressed in a specific statutory or regulatory
              stipulation regarding the conditions for the dissemination of information by
              the FIU.
                   The specialty principle should be drafted in sufficiently broad language
              so that the FIU is not prevented from enforcing the laws and regulations
              against money laundering and terrorist financing. This should also allow for
              information supplied to the FIU to be used to enforce laws and regulations
              relating to the underlying predicate offense or offenses. In addition, if the spe-
              cialty principle applies to international information exchanges among FIUs,
              it should be drafted so as not to inhibit or damage the efficiency of interna-
              tional cooperation among FIUs.37
                   Breaches of the specialty limitation should be sanctioned by procedural
              laws about inadmissibility of the evidence before the courts, and/or by some
              form of civil or statutory liability for breach of confidentiality.



              4. Independence and Accountability

              Countries must assure the independence of the FIU from political influence,
              as well as independence from the competent or other supervisory authority
              in deciding which transactions to analyze or what information to dissemi-
              nate. Independence provides another measure of protection against the abuse
              or misuse of financial disclosures. Independence is not an absolute concept,
              there will always be some measure of accountability, but the FIU should not
              be subject to abuse or undue influence from other government authorities.
              This sense of independence further supports a sense of trust between the FIU
              and reporting financial entities, which, in turn, promotes the prevention and
              detection of money laundering and terrorist financing.
                   This independence could be guaranteed in several ways. In certain
              instances it could be accomplished by creating the FIU as a separate agency
              with an autonomous budget and staff without accountability to any agencies
              that might be inclined to use the system beyond its proper limits. This inde-




              37. Id., at Principles of Information Exchange between Financial Intelligence Units for Money
                  Laundering Cases (June 13, 2001), Principles 11 and 12.




     VII-22
                                                               The Financial Intelligence Unit   333

pendence should, however, be accompanied by proper accountability mecha-
nisms, such as parliamentary reporting, audits, and/or judicial oversight.



G. Information and Feedback

It is important that the FIU work closely with reporting entities and persons,
as well as a country’s competent authorities, to fight money laundering and
terrorist financing. Consistent with its privacy obligations, the FIU should
provide feedback about money laundering and terrorist financing trends and
typologies that will assist financial institutions and non-financial businesses
and persons to improve their AML/CFT practices and controls and, in par-
ticular, their reporting of suspicious transactions. It is a frequent criticism by
reporting institutions that they receive little or no feedback from their FIUs
about the usefulness of their reports. Thus, reporting entities have no guid-
ance about whether their approach to reporting is helpful in the fight against
money laundering and terrorist financing.
   While there are obviously constraints on what an FIU can tell a report-
ing institution about a particular report (especially if that report involves an
ongoing enquiry), it should be possible for the FIU to give general feedback
to institutions about the quality and usefulness of their reports. FIUs will also
have collected data, which once analyzed, should produce useful information
about developments and trends in money laundering. This should be shared
with reporting entities and persons so that they know what to look out for in
designing their AML/CFT systems. Feedback about particular case histories,
once any investigation and legal proceedings are over, should also prove useful.
     The FATF now provides that all competent authorities, including FIUs,
should establish guidance and provide feedback.38 Authorities can expect this
issue to feature prominently in AML/CFT assessments. FIUs will also need to
maintain comprehensive statistics on STRs received and disseminated.39




38. The Forty Recommendations, Rec. 25.
39. Id., Rec. 32.




                                                                                        VII-23
                                                                                                                                          335


Chapter VIII

International Cooperation



   A. Prerequisites for Effective International                                        D. International Cooperation Between Financial
      Cooperation                                                                         Supervisory Authorities
      1. Prerequisite Conditions for International Cooperation:                           1. Cooperation Between Banking Supervisors
         Building a Comprehensive and Efficient Domestic Capacity                         2. Cooperation Between Securities Supervisors
      2. Ratifying and Implementing the International Conventions                         3. Cooperation Between Insurance Supervisors
      3. Complying with the FATF Recommendations and Other Sector Specific             E. International Cooperation Between Law
         International Standards                                                          Enforcement and Judicial Authorities
   B. General Principles of International                                                 1. Basic Principles
      Cooperation Against Money Laundering                                                2. Additional Principles
   C. International Cooperation Between FIUs                                           F. Considerations for Fiscal Matter Offenses
      1. The Core Features of FIU International Cooperation
      2. Conditioning the FIU’s Ability to Cooperate at the International Level
      3. The Relationship Between Different Organizational Models and
         International Cooperation




    rganized crime and other large and highly profitable criminal activities
O   are increasingly being perpetrated on a cross-border basis. This is par-
ticularly the case for money-laundering operations, where criminals use the
open international financial system to benefit from free movement of capital
throughout the world in order to hide the illicit origins of the proceeds of
their crime and further their illicit activities. In the context of fighting money
laundering from the global standpoint, rapid exchanges of information and
effective international cooperation among the various agencies in countries
throughout the world have become a prerequisite to success.
     International cooperation is needed more and more at all stages (i.e., the
financial intelligence gathering, investigative and prosecution stages) of anti
money laundering (AML), investigations. At the financial intelligence gather-
ing stage of a money laundering case, for instance, financial intelligence units
(FIUs) need to exchange information with their foreign counterparts in order
to be able to analyze properly suspicious activity reports and other financial




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336 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              disclosures. The same can be said for the investigating stage in order for
              the police to investigate successfully money laundering cases. The ability to
              exchange rapidly information with their foreign counterparts, without undue
              obstacles or delay, is increasingly becoming a key feature of any FIU, law
              enforcement or prosecution authority.
                   In addition, having in mind that money launderers are always look-
              ing for safe havens with lax, ineffective or corrupt AML and combating the
              financing of terrorism (CFT) regimes, or those with limited international
              cooperation capabilities, countries will find that having a proper interna-
              tional cooperation framework in place helps them to prevent, detect and
              prosecute money laundering in their own domestic financial system.



              A. Prerequisites for Effective International Cooperation


              In order for countries to be able to use the existing channels of interna-
              tional cooperation, they need to meet several prerequisites, including:
              (1) building a comprehensive and efficient domestic capacity; (2) ratify-
              ing and implementing the international conventions regarding money
              laundering and terrorism financing; and (3) complying with the recom-
              mendations of the Financial Action Task Force on Money Laundering
              (FATF), i.e. The Forty Recommendations on Money Laundering (The Forty
              Recommendations)1 and the nine Special Recommendations on Terrorist
              Financing (Special Recommendations),2 as well as with other sector-specific
              international standards.



              1. Prerequisite Conditions for International Cooperation: Building a Comprehensive
              and Efficient Domestic Capacity


              Naturally, putting in place all the necessary authorities and providing them
              with all the necessary powers, responsibilities, staffing and budget so that

              1. The Forty Recommendations at http://www.fatf-gafi.org/pdf/40Recs-2003_en.pdf. Reprinted in
                 Annex IV of this Reference Guide.
              2. Special Recommendations at http://www.fatf-gafi.org/pdf/SRecTF_en.pdf. Reprinted in Annex V
                 of this Reference Guide.




     VIII-2
                                                                              International Cooperation   337

they can perform efficiently their duties is a prerequisite for a country to be
able to cooperate at the international level with its partners.3
     Among others, in order to have an effective AML/CFT framework, a
country should have established administrative supervisory authorities to
oversee financial institutions in each sector, as well as an FIU—that is, a
central authority charged with receiving and analyzing suspicious transac-
tion activities(STA) and other types of mandatory reporting (such as cash
transaction reports) for the purpose of fighting money laundering and ter-
rorist financing.
     Similarly, on the criminal justice system side, countries should have effec-
tive police services with specialized skills and training in money laundering
and terrorist financing investigations, as well as a functioning, non corrupt
judicial/prosecutorial system.
     Properly building and staffing these authorities provide the foundation
for an effective and comprehensive framework for fighting money laundering
and terrorist financing at both the domestic and international levels.



2. Ratifying and Implementing the International Conventions


All countries should sign and ratify the relevant conventions adopted by
the United Nations (UN): In particular, countries should sign and ratify the
UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic
Substances (1988) (Vienna Convention),4 the UN Convention for the
Suppression of the Financing of Terrorism (1999),5 and the UN Convention
Against Transnational Organized Crime (2000) (Palermo Convention).6
These actions are part of FATF’s recommendations.7
     In addition, countries should sign and ratify the other AML and CFT
conventions adopted by organizations in their respective region, such
as the Council of Europe’s Convention on Laundering, Search, Seizure

3. The Forty Recommendations, Rec. 36.
4. The Vienna Convention, http://www.incb.org/e/conv/1988/.
5. UN Convention for the Suppression of the Financing of Terrorism, http://www.un.org/law/cod/
   finterr.htm.
6. The Palermo Convention, http://www.unodc.org/palermo/convmain.html.
7. The Forty Recommendations, Rec. 1, and Special Recommendations, Spec. Rec. I.




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338 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              and Confiscation of the Proceeds from Crime (1990) (the Strasbourg
              Convention).8
                   Countries should implement fully all of the provisions of these conven-
              tions in their domestic laws, including those related to the criminalization
              of money laundering and international cooperation, which will enable them
              to take part in the mutual legal assistance arrangements provided by these
              conventions.9



              3. Complying with the FAFT Recommendations and Other Sector Specific
              International Standards


              Countries should comply with the existing international standards for fight-
              ing organized crime, money laundering, and combating the financing of ter-
              rorism. These standards include the FATF recommendations, which apply to
              all aspects of a country’s laws and regulations against money laundering and
              the financing of terrorism. It includes as well the Core Principles for Effective
              Banking Supervision adopted by Basel Committee on Banking Supervision
              (the Basel Committee), and its Customer Due Diligence Principles; Other
              standards have been set by the International Association of Insurance
              Supervisors (IAIS), the International Organization of Securities Commissions
              (IOSCO) and the Egmont Group.
                   Each of these standard setters requires that each country establish inter-
              national channels of cooperation with their foreign partners. For instance,
              FATF recommends that “each country should make efforts to improve a
              spontaneous or upon request international information exchange relating to
              suspicious transactions, persons and corporations involved in those transac-
              tions between competent authorities.”10 In addition to general principles on
              international cooperation against money laundering, specific conditions apply
              to the international cooperation between FIUs, financial supervisory authori-
              ties, and between law enforcement and judicial authorities.




              8. The Forty Recommendations, Rec. 35.
              9. Id., at Rec. 36.
              10. Id., at Rec. 40.




     VIII-4
                                                                   International Cooperation   339

B. General Principles of International Cooperation Against Money Laundering

According to the relevant international standards, the following general prin-
ciples should be implemented by countries in order to ensure that effective
gateways for the exchange of information and the provision of international
cooperation exist at each stage of a money laundering or terrorist financing
investigation:
    • When an authority in country A has information officially requested
        by an authority in country B, the requested country-A authority should
        be in a position to provide the information promptly to the requesting
      authority in country B.
    • When an authority in country A has information it knows would be
      useful for an authority in country B, the country-A authority should
      be able to provide the information spontaneously and promptly to the
      country-B authority.
    • When an authority in country A is requested by a country-B authority
        to obtain information or a document, or to conduct an investigation
        or an inquiry, or to perform a particular action useful in the context
        of an analysis, investigation, or prosecution of money laundering, the
        requested country-A authority should be in a position to perform the
        requested action (naturally if this action is permitted by rules regulat-
        ing the performance of its duties at the domestic level).11


      This exchange of information with, or provision of assistance and coop-
eration to, a foreign authority should not be subject to unduly restrictive con-
ditions. It is generally accepted however that the requested authority can sub-
ject its assistance to certain conditions. For example, the requested authority
could subject its assistance to the following conditions and stipulate that the
requesting authority:

    • Perform similar functions as the requested authority (specialty principle);
    • Describe in its request the purpose and the scope of information to be
      used, and the information, once transmitted by the requested authori-



11. Id., at Recs. 36 and 40.




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340 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                     ty, should be treated by the requesting authority according to the scope
                     of its request (transparency);
                  • Is subject to confidentiality provisions similar to those applicable to
                     the requested authority (confidentiality); and
                  • Is itself in a position to exchange information with the requested
                     authority (reciprocity).



              C. International Cooperation Between FIUs


              Because money laundering is a cross-border activity, the detection of money
              laundering operations often depends on information sharing among FIUs in
              different countries and on their ability to cooperate, efficiently and speedily,
              with their foreign counterparts. In addition, countries should be aware of the
              possible consequences of choosing a particular organizational structure when
              establishing their FIU.



              1. The Core Features of FIU International Cooperation


              An FIU’s ability to cooperate at the international level depends on a principle
              of mutual recognition among entities performing the same duties and on a
              foundation of mutual trust.12 The consequence is that each FIU should pos-
              sess certain core features in accordance with the Egmont Group definition
              and act in accordance with the Egmont principles. This would enable the
              entity to qualify and to be treated as an FIU by other FIUs. These features
              are described in Chapter VII, the Financial Intelligence Unit.
                   In addition, each FIU should be authorized by law to share financial
              information and other relevant financial intelligence with its foreign coun-
              terparts. In particular, the FIU should be able to cooperate and exchange
              information either on its own initiative or upon request. This could be
              achieved on the basis of reciprocity or formal mutual agreement, such as
              memorandum of understanding (MOU). Finally, the requested FIU should

              12. Revised Statement of Purpose, The Egmont Group (Julyne 123, 20031), http://www.egmont
                  group.org/statement_of_purpose.pdf.




     VIII-6
                                                                               International Cooperation     341

be authorized to produce, and be capable of producing, promptly any avail-
able information or analysis that may be relevant to an investigation by the
requesting FIU.



2. Conditioning the FIU’s Ability to Cooperate at the International Level


The FIU’s ability to cooperate at the international level should not be subject
to unduly restrictive conditions (see Part B of this Chapter for legislative
restrictions). Adequate safeguards—including confidentiality provisions—
should be in place to ensure that information exchanges between FIUs are
consistent with fundamental domestic and internationally agreed-on prin-
ciples of privacy and data protection.13 At a minimum, every country should
ensure that information received from a foreign FIU is treated with and pro-
tected by the same confidentiality provisions that apply to similar informa-
tion obtained from domestic sources.14



3. The Relationship Between Different Organizational Models and International
Cooperation


An FIU should be authorized to cooperate at the international level with
all its foreign counterparts, regardless of their internal and organizational
structure. This point is particularly important in light of the diverse orga-
nizational structures that exist among FIUs worldwide. Indeed, while most
FIUs, as financial intelligence gathering bodies, are attached to administrative
authorities, such as ministries of finance, treasury departments, regulatory/
supervisory authorities, or other ad hoc administrative structures, other FIUs
are attached to police units. Some are even attached to prosecutors’ offices.
In addition, even if most FIUs share the same responsibilities, there could be
some other structural differences among them, as well as certain legal/pro-
cedural differences. Therefore, the rules governing the ability of a particular
FIU to cooperate to the fullest extent at the international level have to take

13. The Forty Recommendations, Rec. 40.
14. Principles for Information Exchange Between financial Intelligence Units for Money Laundering
    Cases, Annex to Statement of Purpose, The Egmont Group.




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342 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              this diversity into account. In other words, the rules need to be sufficiently
              flexible so that FIUs can exchange information with all its counterparts,
              regardless of their nature or organizational structure.15
                   The question for a country is (1) whether there are or should be restric-
              tions on sharing financial information; (2) if so, how much information
              should be shared; and (3) what type of information should be shared. Thus,
              policy makers must be aware that choosing a particular organizational model
              may have direct and/or indirect consequences on the FIU’s ability to cooper-
              ate at the international level. For instance, creating a purely judiciary-based
              FIU may hamper international cooperation with other countries that do not
              have a judicial FIU. Indeed, in many countries, fundamental or constitutional
              legal principles do not allow judicial authorities to have access to the same
              international cooperation or information-exchange channels as the admin-
              istrative authorities or the police. In certain countries, these legal principles
              oblige the judicial authorities to cooperate at the international level only in
              accordance with the judicial cooperation procedures (mutual legal assistance
              mechanisms), which are governed by treaties and principles that may contain
              a number of restrictive conditions. Such conditions may inhibit the compre-
              hensive and rapid exchange of information with other FIUs at the intelligence
              stage.



              D. International Cooperation Between Financial Supervisory Authorities


              It is widely recognized that financial supervisors (banking insurance and
              securities) should be authorized to cooperate—spontaneously or upon
              request—with their foreign counterparts with respect to AML/CFT analysis
              and regulatory investigations. The general principles of international coop-
              eration, as described above in Part B, apply to these particular information
              exchange channels. In the supervisory context, this cooperation takes place in
              each specific sector between the relevant supervisors.




              15. The Forty Recommendations, Recs. 40.




     VIII-8
                                                                                International Cooperation     343

1. Cooperation Between Banking Supervisors

With respect to information sharing, the Basel Committee has issued addi-
tional principles, which apply to all banking supervisors. These principles
have been established in the Customer Due Diligence paper, issued by the
Basel Committee in October 2001. In particular, branch supervisors of bank-
ing groups should not be constrained from sharing consolidated reports per-
taining to deposits, “borrower concentration,” or notification of funds under
management if the home country supervisor needs this information.16
     The host jurisdiction should permit foreign home-country supervisors
or auditors to carry out on-site inspections to verify compliance with home
country “Know Your Customer” (KYC) procedures and policies at the local
branch level and among subsidiaries of foreign banks. This will require are
view of customer files and random sampling of accounts.17
     Foreign home-country supervisors, or auditors, should have access, in
the host jurisdiction, to information on individual customer accounts, to
the extent necessary. This is to say, to the extent that permits supervisors to
properly evaluate the due diligence standards being applied to customer iden-
tification, as well as to evaluate the risk management practices in place.18
      Finally, supervisors should have safeguards in place to ensure that infor-
mation regarding individual accounts obtained through cooperative arrange-
ments is used exclusively for lawful supervisory purposes, and can be pro-
tected by the recipient in a satisfactory manner.19



2. Cooperation Between Securities Supervisors


IOSCO has issued additional principles that apply to all securities supervi-
sors. The securities supervisor should have authority to share both public and
nonpublic information with domestic and foreign counterparts.20

16. Basel Committee on Banking Supervision, Customer Due Diligence, for Banks, October 2001,
    para. 68. http://www.bis.org/publ/bcbs85.pdf.
17. Id.
18. Id.
19. Id.
20. International Organization of Securities Commissioners (IOSCO), Core Principle No. 11. http://
    www.iaisweb.org/358coreprinicplesmethodologyoct03revised.pdf. For further information, see
    the IOSCO Multilateral MOU (May 2002).




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344 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                    Cooperative mechanisms should be in place at the international level to
               facilitate the detection and deterrence of cross-border misconduct and assist
               in the discharge of licensing and supervisory responsibilities. Among these are
               memoranda of understanding.21
                    International cooperation can provide assistance in: (1) obtaining pub-
               lic or nonpublic information, for example, about a license holder, a listed
               company, shareholder, beneficial owner, or a person exercising control over a
               license holder or company; banking, brokerage, or other records; (2)arranging
               for voluntary cooperation from those who may have information about the
               subject of an inquiry; (3) procuring information under compulsion—either or
               both the production of documents and oral testimony or statements; (4) pro-
               viding information on the regulatory processes in a jurisdiction; or (5) secur-
               ing court orders, for example, or other urgent court injunctions.22
                    Information-sharing arrangements, whether formal or informal, should
               consider providing assistance in obtaining or providing (1) public or non-
               public information, for example, about a license holder, listed company,
               shareholder, beneficial owner or a person exercising control over a license
               holder or company; (2) banking, brokerage or other records; (3) voluntary
               cooperation from those who may have information about the subject of an
               inquiry; (4) information under compulsion—either or both the production
               of documents and oral testimony or statements; and (5) information on the
               regulatory process in a jurisdiction, or in obtaining court orders, for example,
               urgent injunctions.23



               3. Cooperation Between Insurance Supervisors


               Insurance supervisors have no formal rules governing cooperation with each
               other for specific AML purposes. This does not mean that they do not share
               information to the extent permitted by their respective jurisdictions. In any

               21. IOSCO, Principles, Sec. 9.4. See also IOSCO Principles, Sec. 11.10, and IOSCO Public Document
                   No. 52, Discussion Paper on International Cooperation in Relation to Cross-Border Activity of
                   Collective Investment Schemes, IOSCO Technical Committee, June 1996.
               22. IOSCO Principles, Sec. 9.4; IOSCO, “Report on Issues Raised for Securities and Futures Regula-
                   tors by Under-regulated and Uncooperative Jurisdictions,” Public Document No. 41,IOSCO
                   Technical Committee, October 1994.
               23. IOSCO, Principles, Sec. 9.3.




     VIII-10
                                                                  International Cooperation   345

event, the general principles of international cooperation, as described above,
should apply in the insurance sector.



E. International Cooperation Between Law Enforcement and Judicial Authorities


International cooperation among prosecutorial and judicial authorities is
vital to any framework that hopes to be comprehensive and efficient against
money laundering activities. Almost no prosecution of money laundering
can succeed without the support of a foreign jurisdiction at one point of the
investigation.24
     International cooperation depends upon the signing and ratification of
all the relevant conventions agreed by the United Nations and other regional
international organizations. Indeed, these conventions often provide the nec-
essary legal basis to exchange information with and undertake actions on
behalf of foreign judicial authorities.
     The general principles in this area are the same as those described in Part
B, above. The unique nature of judicial international cooperation means that
a number of additional and/or entirely specific principles have been estab-
lished in this area. These principles come from the various United Nations
conventions, as well as from the FATF recommendations.
     It should be emphasized that varying constitutional requirements should
be respected and addressed when negotiating arrangements among sovereign
judicial authorities. In addition, care has to be taken not to allow suspects to
take refuge in the non-extraditable category of “political crimes” in AML/
CFT cases, especially when influential persons are involved.



1. Basic Principles


Laws and procedures should encourage and facilitate mutual legal assistance
in AML/CFT law-enforcement matters, particularly with regard to the use of
compulsory measures. These include the production of records by financial
institutions and other persons; the search of persons and premises; the track-

24. The Forty Recommendations, Rec. 36.




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346 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

               ing of property and the identification of assets; and the seizure of assets and
               obtaining evidence for use in AML/CFT investigations and prosecutions and
               in related actions in foreign jurisdictions.25
                     Appropriate laws and procedures must provide for effective mutual legal
               assistance in AML/CFT investigations or proceedings where the requesting
               jurisdiction is seeking: (1) the production or seizure of information, docu-
               ments, or evidence (including financial records) from financial institutions,
               other entities, or natural persons; (2) searches of financial institutions, other
               entities, and domiciles; (3) the taking of witnesses’ statements; and (4) the
               tracking, identifying, freezing, seizure, and confiscation of assets laundered or
               intended to be laundered, the proceeds of money laundering and assets used
               for or intended to be used for the financing of terrorism, as well as the instru-
               mentalities of such offenses, or assets of corresponding value.26
                     Treaties or other formal arrangements (and informal mechanisms) must
               be in place to support international cooperation; such as through the use of
               bilateral or multilateral mutual legal assistance.27 Institutional and other
               arrangements should permit law enforcement authorities to exchange infor-
               mation with their international counterparts regarding the subjects of inves-
               tigations; such arrangements should be based on agreements in force and by
               other mechanisms for cooperation. In addition, national authorities should
               record the number, source, and purpose of requests for such information
               exchange, as well as its resolution.
                     Countries should provide its relevant law enforcement and judicial
               authorities with adequate financial, human, and technical resources so that
               they can ensure adequate oversight, conduct investigations, and respond
               promptly and fully to requests for assistance received from other countries.



               2. Additional Principles


               To the greatest extent possible, differing standards in the requesting and
               requested jurisdictions concerning the “mental intent” of the offense under
               domestic law should not affect the ability to provide mutual legal assistance.28

               25. Id., at Rec. 40.
               26. Id., at Rec. 38.
               27. Id., at Rec 27.
               28. Id., at Rec 36.




     VIII-12
                                                                  International Cooperation   347

      Assistance should be provided in investigations and proceedings where
persons have committed both laundering and the predicate offenses, as well
as in investigations and proceedings where persons have committed money
laundering only.
     Authorities should be authorized to conduct cooperative investigations
(including controlled delivery of confidential information) along with other
countries’ appropriate competent authorities; assurance should be offered that
adequate safeguards are in place.29
      Arrangements should permit the effective cross-border coordination of
seizure and forfeiture, including, where permissible, authorizing the sharing of
confiscated assets with other countries when confiscation is directly or indi-
rectly a result of coordinated law enforcement actions.30
      Finally, procedures should allow for the extradition of individuals
charged with a money-laundering, terror-financing, or related offense or for
prosecution of the accused domestically when he or she is not extraditable.31



F. Considerations for Fiscal Matter Offenses


In general, countries should ensure that their competent authorities provide
the widest possible range of international cooperation to their foreign counter-
parts. As noted above (Section B), countries are entitled to place certain condi-
tions on their assistance, although they must avoid placing unduly restrictive
conditions upon their assistance. A condition that may be applied to mutual
legal assistance or extradition is dual criminality, although countries are
encouraged to render such help even in the absence of dual criminality.
      Some countries do not criminalize certain fiscal offenses, such as tax
evasion, as offenses for money laundering predicate and, thus, may not be
able to provide assistance if another country requests it in the context of an
enquiry concerning the laundering of the proceeds of a fiscal crime. However,
if fiscal matters are only a part of the request and it has a non-fiscal compo-
nent as well, provided the non-fiscal component includes a money laundering
predicate, the requested country should provide assistance.


29. Id., at Rec 27.
30. Id., at Rec 38.
31. Id., at Rec 39




                                                                                    VIII-13
                                                                                                             349


Chapter IX

Combating the Financing of Terrorism



    A. Ratification and Implementation of United             F. Alternative Remittance Systems
       Nations Instruments
                                                             G. Wire Transfers
    B. Criminalizing the Financing of Terrorism and
       Associated Money Laundering                           H. Non-Profit Organizations

    C. Freezing and Confiscating Terrorist Assets            I. Cash Couriers

    D. Reporting Suspicious Transactions Related to          J. Self-Assessment Questionnaire on Terrorist
       Terrorism                                                Financing

    E. International Cooperation




   he terrorist attacks on the United States on September 11, 2001, increased
T  the importance of preventing, detecting and suppressing the financing
of terrorism and terrorist acts on the part of the international community.
In October of 2001, the Financial Action Task Force on Money Laundering
(FATF) expanded its mission beyond anti-money laundering (AML) to
include the worldwide effort of combating the financing of terrorism (CFT).
     To achieve these goals, FATF adopted the original eight Special
Recommendations on Terrorist Financing (Special Recommendations) at
the same time that it amended its mission. In October 2004, FATF adopted
new Special Recommendation IX regarding cash couriers. Like its earlier
efforts, The Forty Recommendations on Money Laundering (The Forty
Recommendations), FATF’s Special Recommendations are not suggestions,
but rather mandates for action by every country, not just FATF members, if
that country is to be viewed as complying with international standards for




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350 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              CFT.1 Countries may also wish to consult the Methodology on AML/CFT for
              information on how the Special Recommendations are evaluated.2 Moreover,
              FATF specifically invited all countries to adopt the Special Recommendations
              and participate in its self-assessment exercise.3 Implementation of the Special
              Recommendations, together with The Forty Recommendations, sets out the
              basic framework to detect, prevent and suppress terrorist financing.
                   The Special Recommendations are still relatively new. Thus, experi-
              ence with interpreting and implementing them is somewhat limited. At
              first, FATF adopted general Guidance Notes to help explain the Special
              Recommendations.4 As it has gained experience over time, FATF has issued
              formal and more authoritative Interpretive Notes for several of the Special
              Recommendations.5 In addition, FATF has issued Best Practices guidance for
              several of the Special Recommendations.6 Finally, FATF has issued Guidance
              for Financial Institutions in Detecting Terrorist Financing as a means of help-
              ing financial institutions learn about mechanisms used to finance terrorism.7



              A. Ratification and Implementation of United Nations Instruments


              The first Special Recommendation consists of two parts.8 The first part
              provides that “each country is to take immediate steps to ratify and to
              implement fully the United Nations Convention for the Suppression of the
              Financing of Terrorism (1999).”9 Assessors of compliance with this recom-

              1. Special Recommendations, http://www.fatf-gafi.org/pdf/SRecTF_en.pdf. The Special Recom-
                 mendations and Guidance Notes are reprinted in Annex V of this Reference Guide.The Forty
                 Recommendations, http://www.fatf-gafi.org/pdf/40Recs-2003_en.pdf. The Forty Recommenda-
                 tions are reprinted in Annex IV of this Reference Guide.
              2. http://www.fatf-gafi.org/pdf/Meth-2004_en.pdf.
              3. elf-Assessment Questionnaire on Terrorist Financing, http://www.fatf-gafi.org/SAQTF_en.htm.
              4. Guidance Notes for the Special Recommendations on Terrorist Financing (Guidance Notes)
                 are reprinted in Annex VI of this Reference Guide, http://www.fatf-gafi.org/pdf/TF-SAGU-
                 IDE20020327_en.pdf.
              5. The Interpretive Notes for Special Recommendations II, III, VI and VII are reprinted in Annex
                 VI of this Reference Guide. For Spec. Rec. II, http://www.fatf-gafi.org/pdf/INSR2_en.PDF and
                 for Spec. Recs. III, VI and VII, http://www.fatf-gafi.org/TFInterpnotes_en.htm#Special%20Reco
                 mmendation%20III.
              6. For Spec. Rec. III, http://www.fatf-gafi.org/pdf/SR3-BPP_en.pdf; for Spec. Rec. VI, http://www.
                 fatf-gafi.org/pdf/SR6-BPP_en.pdf; for Spec Rec. VIII, http://www.fatf-gafi.org/pdf/SR8-NPO_
                 en.pdf.
              7. http://www.fatf-gafi.org/pdf/GuidFITF01_en.pdf.
              8. Special Recommendations, Spec. Rec. I.
              9. See http://www.un.org/law/cod/finterr.htm. See also Chapter III, United Nations.




     IX-2
                                                         Combating the Financing of Terrorism   351

mendation pay particular attention to the specific action that a country has
taken to implement the various provisions of this convention.
     The second part of the first Special Recommendation requires
each country to implement fully United Nations (UN) Security Council
Resolutions dealing with terrorist financing, particularly Security Council
Resolution 1373.10 While the Special Recommendations specifically men-
tion Resolution 1373,11 all such resolutions dealing with terrorist financing
should be addressed by a country. Moreover, the universe of such resolu-
tions is likely to change over time. Listed below, are the Security Council
Resolutions currently listed as important in the “Methodology for Assessing
Compliance with the FATF 40 Recommendations and the FATF 8 Special
Recommendations”:12


    • S/RES/1267 (1999)13
    • S/RES/1333 (2000)14
    • S/RES/1363 (2001)15
    • S/RES/1390 (2002)16
    • S/RES/1455 (2003)17
    • S/RES/1526 (2004)18


     As with all UN conventions, actual implementation is the key to com-
pliance for FATF purposes. Implementation means that a country has taken
all appropriate and necessary measures in order to make the provisions
of the UN Convention and the UN Security Council Resolutions effective,
i.e. legally binding within its borders.19 These necessary measures may be
accomplished by law, regulation, directive, decree or another appropriate
legislative or executive action, according to the country’s constitutional and
legal framework.20

10. Special Recommendations, Spec. Rec. I.
11. http://www.state.gov/p/io/rls/othr/2001/5108.htm.
12. http://www.fatf-gafi.org/pdf/Meth-2004_en.PDF.
13. http://www.un.org/Docs/scres/1999/sc99.htm.
14. http://www.un.org/Docs/scres/2000/sc2000.htm.
15. http://www.un.org/Docs/scres/2001/sc2001.htm.
16. http://www.un.org/Docs/scres/2002/sc2002.htm.
17. http://www.un.org/Docs/sc/unsc_resolutions03.html.
18. http://www.un.org/Docs/sc/unsc_resolutions04.html.
19. FATF, Guidance Notes, Paragraph 5.
20. Id.




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                   Of the UN Security Council Resolutions dealing with terrorist financing,
              the one that is specifically mentioned in this Recommendation is Resolution
              1373.21 This resolution obligates all UN member countries to:


                  • Criminalize actions to finance terrorism;
                  • Deny all forms of support for terrorist groups;
                  • Suppress the provision of safe haven or support for terrorists, includ-
                     ing freezing funds or assets of persons, organizations or entities
                     involved in terrorist acts;
                  • Prohibit active or passive assistance to terrorists; and
                  • Cooperate with other countries in criminal investigations and sharing
                    information about planned terrorist acts.22



              B. Criminalizing the Financing of Terrorism and Associated Money Laundering


              The second of the Special Recommendations contains two elements, which
              require that each country should:


                  • Criminalize the financing of terrorism, terrorist acts and terrorist orga-
                     nizations; and
                  • Establish terrorist offenses as predicate offenses of money launder-
                    ing.23


                  FATF has issued an Interpretive Note describing how a country should
              implement Special Recommendation II.24 This recommendation requires
              each country to criminalize the financing of terrorism, terrorist acts and ter-
              rorist organizations whether the funds were derived illegally (in which case
              the action should be a predicate offence for money laundering under the
              second element of the recommendation) or legally. The legislation should be
              specific in terms of criminalizing the financing of terrorism. It is not enough

              21. Special Recommendations, Spec. Rec. I.
              22. S/RES/1371 (2001), http://www.un.org/Docs/scres/2001/sc2001.htm.
              23. Special Recommendations, Spec. Rec. II.
              24. http://www.fatf-gafi.org/pdf/INSR2_en.PDF.




     IX-4
                                                                   Combating the Financing of Terrorism   353

to criminalize “aiding and abetting” or “attempting” or “conspiracy.”25
This concept is not always clear enough in some legal systems. The legisla-
tion should also cover any person who collects or provides funds with the
intention that the funds should be used for terrorism; it is not necessary to
establish or prove that the funds were actually used for terrorism.26



C. Freezing and Confiscating Terrorist Assets

Under the third Special Recommendation, each country should implement
measures to freeze the “funds or other assets of terrorists, those who finance
terrorism and terrorist organizations in accordance with the UN resolu-
tions.”27 Furthermore, each country should take appropriate action to
authorize competent authorities within the country “to seize and confiscate
property that are the proceeds of, or used in, or intended or allocated for use
in, the financing of terrorism, terrorist acts or terrorist organizations.”28
      FATF has issued a formal Interpretive Note for the implementation of
Special Recommendation III.29 In addition, FATF has also issued a set of
Best Practices that should help countries understand how to best implement
the requirements of this recommendation.30
     In this recommendation, there are three basic concepts that may have
different meanings in different countries: freezing, seizure and confiscation
(or forfeiture). “Freezing” means that a competent authority within a coun-
try has the authorization to block or restrain specific funds or assets and,
thereby, prevent those funds or assets from being moved or otherwise dis-
persed.31 The “frozen” funds or assets remain the property of the owner and
remain under the administration of the financial institution (or other entity)
and under the control of existing management. The goal of freezing assets is
to eliminate control over the assets by the owner so that the assets cannot be
used for any prohibited purpose.


25. Id.
26. Id.
27. Special Recommendations, Spec. Rec. III.
28. Id.
29. http://www.fatf-gafi.org/pdf/INSR3_en.pdf.
30. http://www.fatf-gafi.org/pdf/SR3-BPP_en.pdf.
31. FATF, Interpretive Note for Spec. Rec. III, at Paragraph 7a.




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                  “Seizure” means that the competent government authority has the
              authorization to take control of the specified funds or assets.32 Under seiz-
              ing, the assets or funds remain the property of the original owner, but pos-
              session, administration and management of the assets is taken over by the
              relevant competent authority. “Confiscation” or “forfeiture” means that the
              competent authority has authorization to transfer ownership of the speci-
              fied funds or assets to the country itself.33 Confiscation usually occurs when
              there is a criminal conviction or judicial decision that determined that the
              assets or funds were derived from criminal activity, or were intended to be
              used in violation of law.
                   The freezing of terrorist funds under the authority of the relevant UN
              resolutions should be done by administrative action without the need for
              further legislative or judicial procedures. Because implementation of U.N.
              Security Council resolutions is a binding legal obligation on member states,
              it should be possible for all countries to act immediately. Indeed it is very
              important that freezing action is immediate because if there is any delay, the
              funds are likely to be removed from the jurisdiction.
                   The United Nations 1267 Committee issues a consolidated list of indi-
              viduals and organizations whose funds are ordered frozen under the various
              UNSCRs on Al-Qaeda, the Taliban and Osama bin-Laden.34 The freezing
              order relates both to those individuals and organizations and anyone acting
              for them. The list is updated from time to time and a consolidated list is pub-
              lished on the UN website.
                   Under Special Recommendation III, countries should also have in place
              mechanisms to freeze funds of individuals or organizations involved in ter-
              rorism. This is also a general requirement under Security Council Resolution
              1373. The Counter Terror Committee (CTC), acting under Resolution
              1373, does not issue a list but gives the authority to individual countries to
              designate the persons and entities whose funds should be frozen. Countries
              should take into account the freezing action taken by other countries under
              Resolution 1373.35 While there is no obligation to follow freezing action
              taken by other countries, such lists should be examined and, where appro-

              32. Id., at Paragraph 7b.
              33. Id., Guidance Notes, at Paragraph 7c.
              34. http://www.un.org/Docs/sc/committees/1267/1267ListEng.htm.
              35. FATF, Interpretive Note to Spec. Rec. II, at Paragraph I.




     IX-6
                                                                  Combating the Financing of Terrorism     355

priate, imitated. Countries should take such action on the basis of reason-
able grounds or reasonable belief that the designated entity or individual is
involved in financing terrorism.



D. Reporting Suspicious Transactions Related to Terrorism


Under the fourth of the Special Recommendations, financial institutions,
that “suspect or have reasonable grounds to suspect that funds are linked
or related to, or are to be used for terrorism, terrorist acts or by terrorist
organizations” should report promptly their suspicions to the competent
authorities.36
     This requirement applies to both financial institutions, as defined in The
Forty Recommendations, and to the non-financial businesses and professions
that are now defined in The Forty Recommendations (see Chapter 5).37
These reporting requirements must be consistent in the application of the
country’s AML and CFT laws.
     This recommendation involves reporting under two alternative cir-
cumstances: when there is a “suspicion” that funds are linked to terrorist
financing; and when there are “reasonable grounds to suspect” that funds
are linked to terrorist financing. The distinction between the two is the cer-
tainty that forms the standard for the required reporting of a transaction.38
The “suspect” standard is a subjective standard and is the same as that used
in FATF’s AML recommendations.39 The “reasonable grounds to suspect”
standard is consistent with the AML recommendation, but is somewhat
broader than the pure “suspect” standards and, thereby, requires reporting
under a broader set of circumstances. Countries can satisfy this report-
ing requirement based upon either the “suspicion” or “having reasonable
grounds to suspect” standard.40




36. Special Recommendations, Spec. Rec. IV.
37. FATF, Guidance Notes, at Paragraph 19.
38. FATF, Guidance Notes, at Paragraph 21.
39. The Forty Recommendations, Rec. 1513, which provides: “If financial institutions suspect that
    funds stem from a criminal activity,” they should promptly report their suspicions.
40. FATF, Guidance Notes, at Paragraph 21.




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356 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              E. International Cooperation


              The fifth of the Special Recommendations, provides that each country should
              afford another country, through mutual legal assistance mechanism or other
              mechanisms, “the greatest possible measure of assistance in connection with
              criminal, civil enforcement, and administrative investigations, inquiries and
              proceedings relating to the financing of terrorism, terrorist acts and terrorist
              organizations.”41 Each country should also take all appropriate measures
              to assure that it does not provide safe havens for individuals charged with
              financing terrorism, terrorist acts or terrorist organizations, and should have
              procedures in place to extradite such persons, if possible.42
                   The first part of this recommendation mandates the exchange of infor-
              mation through mutual legal assistance mechanisms or means other than
              mutual legal assistance. “Mutual legal assistance” means the authority to
              provide a full range of legal assistance, including the taking of evidence; the
              search and seizure of documents or items relevant to criminal proceedings or
              criminal investigations; and the ability to enforce a foreign restraint, seizure,
              confiscation or forfeiture order in a criminal matter.43 Exchange of informa-
              tion by means “other than through mutual legal assistance” means any other
              arrangement, including an exchange occurring through financial intelligence
              units (FIUs) or other governmental agencies that exchange information bilat-
              erally pursuant to memoranda of understanding (MOUs), exchange of letter
              or otherwise.44
                   The second part of this recommendation concerns the concepts of “safe
              haven” and “extradition.” These terms have the same meanings as the terms
              “safe haven,”45 as used in UN Security Resolution 1373,46 and “extra-
              dite,”47 as used in the UN International Convention for the Suppression of
              the Financing of Terrorism.48 With regard to extradition, countries should
              assure that “claims of political motivation are not recognized as a ground

              41. Special Recommendations, Spec. Rec. V.
              42. Id.
              43. FATF, Guidance Notes, at Paragraph 24.
              44. Id., at Paragraph 25.
              45. Id., at Paragraph 26.
              46. UN Security Resolution 1373 (2001), at paragraph 2 (c).
              47. Id.
              48. UN Convention of Suppression of the Financing of Terrorism, at Article 11, http://www.un.org/
                  law/cod/finterr.htm.




     IX-8
                                                                 Combating the Financing of Terrorism   357

for refusing requests to extradite persons alleged to be involved in terrorist
financing.”49 This concept and phrasing are from the UN Convention on
Suppression of the Financing of Terrorism.50



F. Alternative Remittance Systems

Under the sixth Special Recommendation, each country should take actions
to ensure that individuals and legal entities that provide for “the transmission
of money or value” are licensed or registered and subject to the same stan-
dards, i.e., The Forty Recommendations, that apply to other financial institu-
tions.51 In addition, those entities that perform such services illegally should
be subject to administrative, civil or criminal sanctions.52 Such requirements
should apply the transmission on money or value through an informal trans-
fer system.
     FATF has issued an Interpretive Note as well as a set of Best Practices
on Special Recommendation VI, in order to provide formal guidance and
general assistance, respectively, to countries on how to implement this recom-
mendation.53
    Formal money remittance or transfer services are often provided by a
distinct category of non-bank financial institutions, through which funds are
moved on behalf of individuals or legal entities through a dedicated network
or through the regulated banking system. For purposes of determining compli-
ance with The Forty Recommendations, these money transmitters, which are
included within the definition of the term “financial institutions,” should be
subject to a country’s AML/CFT laws, and should be licensed or registered.54
     The “money or value transfer system” refers to a type of financial ser-
vice through which funds or value are moved from one geographic location
to another through informal and unsupervised networks or mechanisms.55
In many jurisdictions, these informal systems have traditionally operated out-


49. FATF, Guidance Notes, at Paragraph 26.
50. Article 14 of Convention.
51. Special Recommendations, Spec. Rec. VI.
52. Id.
53. http://www.fatf-gafi.org/pdf/INSR6_en.PDF and http://www.fatf-gafi.org/pdf/SR6-BPP_en.pdf.
54. The Forty Recommendations, Glossary, Financial Institutions.
55. FATF, Guidance Notes, at paragraph 31, and Interpretive Note at paragraph 4.




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358 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              side the regulated financial sector, as described above. Such informal systems
              include the Black Market Peso Exchange, hundi or Hawala systems.56
                   The goal of Special Recommendation VI is to assure that countries
              impose AML and CFT requirements on all forms of money/value transfer
              systems.57 Thus, at a minimum, a country should ensure that all money and
              value transmission services, including informal ones, are subject to specific
              FATF and international standards.58 Furthermore, a corollary requirement
              of this special recommendation is that a competent authority be designated
              to license or register all such informal money/value transmission services and
              to require these entities to have adequate programs to guard against money
              laundering and terrorist financing.59 Such a requirement is consistent with
              The Forty Recommendations.60
                   The international community is not, through this recommendation,
              attempting to eliminate informal money value transfer systems. In many
              cases, these systems provide a valuable service to people who cannot easily
              access the formal financial sector. However, there have been cases where such
              systems have been used to launder money and transfer funds to terrorists
              and this recommendation aims to apply AML/CFT controls to them. This
              recommendation also requires the compliance of such entities, but does not
              subject them to the same kind of requirements for regulation and supervi-
              sion as an institution subject to the Basel Committee on Banking Supervision,
              International Association of Insurance Supervisors or International
              Organization of Securities Commissions.



              G. Wire Transfers


              Under the seventh Special Recommendation, each country should take appro-
              priate actions to require covered financial institutions, including money remit-

              56. For a discussion on this subject, see Bank/Fund papers on these issues (See Chapter X, Analysis of
                  the Hawala System and Remittance System Studies). See also, FATF-XI Typologies Report (2000)
                  (http://www.fatf-gafi.org/pdf/TY2000_en.pdf), and Asia Pacific Group Report on Underground
                  Banking and Alternative Remittance Systems (2001) (http://www.apgml.org/content/typolo-
                  gies_reports.jsp).
              57. FATF, Guidance Notes, at paragraph 29, and Interpretive Note, paragraph 2.
              58. The Forty Recommendations, Recs. 4–25.
              59. Id., Rec. 23.
              60. Id.




     IX-10
                                                       Combating the Financing of Terrorism   359

ters, to include accurate and meaningful originator information (name, address
and account number) on fund transfers and related messages that are sent, and
further require that the information should remain with the transfer or related
message throughout the payment chain.61 In addition, such financial institu-
tions should conduct enhanced scrutiny of, and monitor for suspicious activity
funds transfers that do not contain complete originator information.62
     The implementation of this recommendation has proven somewhat com-
plex and FATF has produced a rather lengthy Interpretative Note to clarify
the requirements of Special Recommendation VII.63 There is no set of Best
Practices applicable to this recommendation.
     The objective of this recommendation is to obtain information on who
is sending wire transfers so that funds sent for illegal purposes can be identi-
fied along with their senders.64 The information requirements depend upon
whether the transfer is cross-border or domestic. Cross-border transfers
need to be accompanied by the name, account number (or unique reference
number where there is no account e.g. one-off transactions), and address.65
An identity number or customer identification number or date and place of
birth can be substituted for the address if there are fears about revealing the
address of a customer. Providing this information on the wire transfer will
enable information about the sender to be obtained much more quickly and
easily if there is an international money laundering or terrorist financing
investigation than if it has to be the subject of lengthy inquiries.
    Domestic transfers need only to be accompanied by the account number,
provided there is the ability to trace the rest of the information about the
organization within three days of the sender institution receiving a request,
either from the beneficiary institution or the authorities. Countries may
exempt transactions of up to EUR/USD 3,000 from those requirements.66
     Beneficiary financial institutions should be able to identify wire trans-
fers that do not show meaningful information. This is not a requirement to
examine every transaction and it is very unlikely that the beneficiary institu-
tions would be able to carry out any investigation about the accuracy of the


61. Special Recommendations, Spec. Rec. VII.
62. Id.
63. http://www.fatf-gafi.org/pdf/INSR7_en.PDF.
64. Id. At paragraph 1.
65. Id., at paragraph 8 and 9.
66. http://www.fatf-gafi.org/pdf/INSR7_en.PDF.




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              information. The originator of the funds transfers are not their customers.
              However, institutions should have systems in place to examine a sample of
              wire transfers. Where there is incomplete information institutions should
              consider filing a suspicious transaction report. Where a financial institution
              sends messages that do not include the required originator information, the
              beneficiary institution should reconsider the business relationship with the
              originator.67



              H. Non-Profit Organizations


              According to the eighth Special Recommendation, each county should review
              the adequacy of its laws and regulations regarding non-profit organizations,
              in order to determine whether they can be used for terrorist financing purpos-
              es.68 In particular, a country should ensure that its non-profit organizations
              cannot be misused:


                  • By terrorist organizations posing as legitimate ones;
                  • To exploit legitimate entities as conduits for terrorist financing, includ-
                     ing to avoid asset freezing measures; or
                  • To conceal or obscure the clandestine diversion of funds intended for
                    legitimate purposes to terrorist organizations.69


                   There is no Interpretive Note on this recommendation, however, in an
              effort to help countries protect their non-profit institutions from abuse, FATF
              has issued a set of international best practices entitled, Combating the Abuse
              of Non-Profit Organizations.70
                   The goal of this recommendation is to prevent non-profit organizations
              (i.e., those organized for charitable, religious, educational, social or frater-
              nal purposes), as well as other legal entities and arrangements, from being
              misused by terrorists.71 In this regard, the recommendation is rather general
              because the different entities categorized as non-profit organizations take

              67. Id., at paragraphs 11–14.
              68. Special Recommendations, Spec. Rec. VIII.
              69. Id.
              70. http://www.fatf-gafi.org/pdf/SR8-NPO_en.pdf (11 October 2002).
              71. FATF, Guidance Notes, at Paragraph 39.




     IX-12
                                                                 Combating the Financing of Terrorism   361

various legal forms and the nature of their operations varies from jurisdiction
to jurisdiction.72
     In an effort not to require adherence to a rigid set of rules that may be of
little or no meaning in certain jurisdictions, the recommendation consists of
general guidance and goals to be achieved, rather than specific requirements.
There are three areas for attention by countries under the recommendation:


    • Ensure financial transparency. Such organizations should have trans-
      parent financial records and conduct their activities in a way that can
        be audited and funds accounted for. Accounts should be published and
        disbursements of funds should be done through accounts with estab-
        lished financial institutions.
    • Programmatic verification. The organizations should know who
        receives funds and how they are spent and should take active steps to
        monitor these things. This is especially important when the recipients
        are in another country.
    • Administration. There should be good records kept for the activities of
      the organization and there should be clear governance structures and
        internal accountability.



I. Cash Couriers


The objective of the ninth Special Recommendation, which was adopted
in October of 2004, is to ensure that terrorists and other criminals cannot
finance their activities or launder the proceeds of their crimes through the
transportation of currency and monetary instruments from one country to
another.73 Persons or entities that carry cash and cash equivalents across
national borders are often referred to as “cash couriers.”
     Special Recommendation IX has essentially four specific requirements
regarding cash courier activities. First, each country should have a system in
place to detect the physical cross-border transportation of currency and bear-
er negotiable instruments.74 Second, each country should provide its compe-


72. Id.
73. Interpretative Note to Special Recommendation IX, at Paragraph 1.
74. Special Recommendations, Spec. Rec. IX.




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362 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              tent authorities with legal authority to stop or restrain currency and bearer
              negotiable instruments that are either: (i) suspected of being related to terror-
              ist financing or money laundering; or (ii) misrepresented in a required dec-
              laration or disclosure. Third, this Special Recommendation further requires
              that each country have effective, proportionate, and dissuasive sanctions in
              place for persons making a false declaration or disclosure regarding a cross-
              border transportation of currency or bearer negotiable instrument(s). Fourth
              and finally, there is the requirement for each country to adopt measures per-
              mitting it to confiscate currency and bearer negotiable instruments that are
              related to terrorist financing or money laundering.
                   FATF adopted a formal Interpretative Note to accompany Special
              Recommendation IX at the same time that it adopted this recommenda-
              tion.75 The Interpretative Note provides a reasonably thorough definition
              of the terms used in the recommendation as well as a reasonably thorough
              description of how a country may implement the requirements of this recom-
              mendation. FATF also adopted an International Best Practices paper, entitled
              “Detecting and Preventing the Cross-Border Transportation of Cash by
              Terrorists and Other Criminals,” to accompany this recommendation.76 A
              country may also wish to consult the best practices paper, which was adopted
              in February of 2005, for purposes of how to implement the requirements of
              Special Recommendation IX.
                  According to the Interpretative Note, “bearer negotiable instruments”
              means:

                  • monetary instruments in bearer form, such as travelers’ checks;
                  • negotiable instruments (including checks, promissory notes and money
                    orders) that are in bearer form, endorsed to a fictitious payee, or other-
                    wise in such a form that title passes upon delivery; or
                  • incomplete instruments ( including checks, promissory notes and
                    money orders) that are signed, but do not include the payee’s name.77

                  It should be noted that, for purposes of this Special Recommendation,
              gold, precious metals and precious stones are specifically excluded from the


              75. Interpretative Note to Special Recommendation IX.
              76. http://www.fatf-gafi/50/63/3442418.pdf.
              77. Interpretative Note to Special Recommendation IX, at Paragraph 3.




     IX-14
                                                      Combating the Financing of Terrorism   363

meaning of the term “bearer negotiable instruments.”78 Disclosures, decla-
rations or other representations regarding these items may, nonetheless, be
covered under a country’s legal requirements, such as its customs laws or
regulations, but it is not necessary to cover them in order to comply with this
recommendation.79
     “Physical cross-border transportation” means any in-bound or out-
bound physical transportation of currency or bearer negotiable instruments
from one country to another. It includes: physical transportation (i) by a
natural person, or in that person’s luggage or vehicle; (ii) shipment through
containerized cargo; or (iii) mailing by a natural or legal person.80
     Under the Interpretative Note, a country may satisfy the recommenda-
tion’s requirement to have detection measures in place through the use of one
of two systems: a declaration system or a disclosure system.81 With a “dec-
laration system,” all persons making a physical cross-border transportation
of currency or bearer negotiable instrument(s) having a specified threshold
value (maximum value may not exceed EUR/USD 15,000) or more, would be
required to submit a truthful declaration to designated competent authorities
regarding the value of such transfer and other relevant information. The pre-
determined threshold should be set sufficiently low to meet the objectives of
the recommendation.82
     With a “disclosure system,” all persons making a cross-border transpor-
tation of currency or bearer negotiable instrument(s) would be required to
make a truthful disclosure to designated competent authorities upon request
regarding the value of the transfer and other relevant information.83 In this
regard, a country should ensure that competent authorities are authorized to
make their requests on a targeted basis, either upon intelligence or suspicion,
or on a random basis.
     It is important to note that a country needs to have a detection system in
place for both in-coming and out-going transportations, but does not have to
use the same type of system for in-coming and out-going transportations.84



78. Id., at footnote 1.
79. Id.
80. Id., at Paragraph 5.
81. Id., at Paragraph 9.
82. Id., at Paragraph 9a.
83 Id., at Paragraph 9b.
84. Id., at Paragraphs 9 and 10a.




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              Thus, for example, a country could have a declaration system for in-coming
              transportations and a disclosure system for out-going transportations, and
              vice-versa.
                    A false declaration or disclosure is defined to mean:

                  • a misrepresentation of the value of the currency or bearer negotiable
                      instrument(s) being transported,
                  • a misrepresentation of any relevant data that is asked for in the
                    required declaration or disclosure or otherwise requested by competent
                      authorities, or
                  • the failure to make a declaration or disclosure as required.85

                    Upon discovery of either a false declaration or false disclosure, the des-
              ignated competent authority should have the legal authority to request and
              obtain additional information from the person with regard to the origin of
              the subject currency or bearer negotiable instrument(s) and the intended use
              of such currency or instruments.86
                    Regardless of which system is utilized, information obtained through the
              declaration and/or disclosure processes should be made available to the finan-
              cial intelligence unit (FIU).87 In addition, the declaration and/or disclosure
              process should permit the greatest possible range of international cooperation
              and assistance in accordance with The Forty Recommendations, specifically
              Recommendations 35 through 40, and Special Recommendation V.88 In
              this regard, where declarations or disclosures above the maximum threshold
              are made, where false declarations or disclosures are discovered, or where
              there are suspicions of money laundering or terrorist financing, relevant
              information should be retained, including the amount of currency or bearer
              instrument(s) declared, disclosed or discovered, and the identification data of
              the persons.89
                   With regard to persons carrying out the physical transportation of
              currency or bearer negotiable instruments that are actually related to ter-
              rorist financing or money laundering, such currency or bearer negotiable

              85. Id., at Paragraphs 6 and 7.
              86. Id., at Paragraph 10b.
              87. Id., at Paragraph 10c.
              88. Id., at Paragraph 10f.
              89. Id.




     IX-16
                                                                Combating the Financing of Terrorism   365

instruments should be subject to measures, including legislative ones, con-
sistent with The Forty Recommendations (Recommendation 3) and Special
Recommendation III, that would permit their confiscation.90 Prior to such
a determination, where there is either a: (i) suspicion of terrorist financing or
money laundering; or (ii) false declaration or disclosure, competent authori-
ties should have the legal authority to stop or restrain the subject currency
and/or bearer negotiable instrument(s) for a reasonable time to determine
whether there is evidence of terrorist financing.91
     Finally, countries are encouraged to implement Special Recommendation
IX subject to safeguards to ensure the proper use of information received and
without restricting either trade payments between countries for goods and
services or the freedom of capital movements in any way.92



J. Self-Assessment Questionnaire on Terrorist Financing


In order to focus on issues of interpretation and implementation with
regard to the Special Recommendations, FATF issued a Self Assessment
Questionnaire on Terrorist Financing (SAQFT).93The SAQFT was initially
used only by FATF members. Upon completion of the initial assessment of the
SAQFT, FATF issued the Guidance Notes on the Special Recommendations
and the SAQTF. The SAQTF is also available on the FATF website and may
be used by any country for its own assessment purposes.94




90. Special Recommendation IX and Interpretative Note to Special Recommendation IX, at para-
    graph 11.
91. Interpretative Note to Special Recommendation IX, at paragraph 10e.
92. Interpretative Note to Special Recommendation IX, at paragraph 10e.
93. http://www.fatf-gafi.org/SAQTF_en.htm.
94. Id.




                                                                                               IX-17
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Chapter X

World Bank and International Monetary
Fund Initiatives to Fight Money
Laundering and Terrorist Financing
    A. Awareness Raising                                           C. Building Institutional Capacity
       1. The Global Dialogue Series                                  1. Organization of Training Conferences
       2. Country Assistance Strategy                                 2. Delivery of Technical Assistance to Individual Countries
    B. Development of a Universal AML/CFT                          D. Research and Analysis
       Assessment Methodology                                         1. Analysis of the Hawala System
       1. Twelve-Month Pilot Program                                  2. Alternate Remittance System Studies
       2. Reports on the Observance of Standards and Codes            3. World Bank AML/CF Website
       3. Revision of the Universal Methodology                       4. FIU Handbook
                                                                      5. Reference Guide




    he missions of the World Bank (Bank) and the International Monetary
T   Fund (IMF or Fund) are fundamentally different. Nonetheless, both orga-
nizations have identical goals with regard to anti-money laundering (AML)
and combating the financing of terrorism (CFT). Moreover, the Bank and the
Fund work jointly in all of their efforts to achieve those goals.
     The basic mission of the Bank is to fight poverty throughout the world.
The Bank helps countries strengthen their development efforts by providing
loans and technical assistance for institutional capacity building, as well as
loans for improvements in the infrastructure and environment of develop-
ing countries. The mission of the Bank includes providing resources, sharing
knowledge and forging partnerships in the public and private sectors.1
     In essence, the mission of the IMF is macro-economic and involves
financial stability surveillance throughout the world. IMF goals include:

1. About the World Bank, http://www.worldbank.org.




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368 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                  • Promoting international monetary cooperation;
                  • Facilitating the expansion and balanced growth of international trade;
                  • Promoting foreign currency exchange stability; and
                  • Assisting in the establishment of multilateral systems of payments.


                   In addition, the Fund promotes international monetary stability by mak-
              ing loans to countries to permit them to correct maladjustments in their bal-
              ance of payments without resorting to measures that may destroy national or
              international prosperity.2
                   In April 2001, the two Boards of Executive Directors of the World
              Bank and the IMF recognized that money laundering is a problem of global
              concern that affects major financial markets and smaller ones.3 Taking into
              account that money laundering has potentially devastating economic, politi-
              cal and social consequences for countries that are in the process of develop-
              ing domestic economies and building strong financial institutions, the Bank
              recognized that money laundering can impose important costs upon develop-
              ing countries. The IMF recognized that money laundering has a full range
              of macroeconomic consequences, including unpredictable changes in money
              demand, risks to the soundness of financial institutions and financial systems,
              and increased volatility on international capital flows and exchange rates due
              to unanticipated cross border transfers.
                   Following the events of September 11, 2001, the World Bank and
              IMF Boards of Executive Directors adopted action plans to enhance efforts
              for AML/CFT. Furthermore, the Boards recognized, in July and August
              2002, The Forty Recommendations on Money Laundering (The Forty
              Recommendations) and the eight Special Recommendations on Terrorist
              Financing (Special Recommendations), issued by the Financial Action Task
              Force on Money Laundering (FATF), as the relevant international standards
              for AML/CFT. The Boards added AML and CFT to the list of areas that are
              useful for their operational work and started a 12-month pilot program using

              2. About the IMF, http://www.imf.org.
              3. For a more detailed discussion of the actions of the Bank and the Fund, see Intensified Work
                 on Anti-Money Laundering and Combating the Financing of Terrorism. Joint Progress
                 Report on Work of the IMF and World Bank, http://www.imf.org/external/np/mae/aml/2002/
                 eng/092502.htm.




     X-2
                                    World Bank and International Monetary Fund Initiatives   369

a universal, comprehensive AML/CFT assessment methodology in November
2002.
    Over the course of the pilot program, the Fund and the Bank conducted
assessments in 33 jurisdictions and FATF and the FATF-style regional bod-
ies (FSRBs) conducted assessments in an additional eight jurisdictions. The
Boards of the Fund and the Bank reviewed the outcome of the pilot program
in March 2004. They concluded that the pilot had been successful and wel-
comed the deepening of international attention that it had led to on AML/
CFT issues and the good collaboration that had taken place with FATF and
the FATF-style regional bodies (FSRBs). At that time, the Boards resolved to
make AML/CFT work a permanent part of their activities; to continue their
collaboration with the FATF; to endorse the revised FATF recommendations
as the new standard for which Reports on the Observance of Standards and
Codes (ROSCs) are prepared and the revised Methodology to assess that
standard; and to devote additional resources to this work in the future. The
Fund and Bank expect to conduct approximately 20 assessments per year
using the same Methodology used by FATF and the FSRBs.



A. Awareness Raising


1. The Global Dialogue Series
The first step in establishing or improving a country’s institutional framework
for AML and CFT is to raise the awareness level within the country’s leader-
ship about the issues, to demonstrate the implications for the country's future,
to share the experiences that other countries have had, and to inform the
country about available resources and assistance. Toward that goal, the World
Bank and IMF have established a series of Regional Policy Global Dialogues
on AML/CFT. These are organized through interactive videoconferences for
member countries within a given geographic region enabling government offi-
cials from those countries, staff of the Bank and Fund, FATF-Style Regional
Bodies (FSRBs), regional development banks and other international organiza-
tions to discuss and exchange information. The issues discussed center upon:


   • Identifying the challenges faced by countries in the struggle against
        illicit money flows;




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370 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                  • Sharing the lessons of success;
                  • Identifying specific problems for countries in that region; and
                  • Understanding the types of assistance countries need to combat money
                     laundering and terrorist financing.


                   Some of the key questions addressed in the Global Dialogue Series are:


                  • How can the World Bank and IMF help countries strengthen their
                     response to money laundering and terrorist financing?
                  • How does money laundering and terrorist financing fit into the broad-
                     er context of corruption and poor governance?
                  • What has been the response of governments?
                  • What are the current challenges for regulators?
                  • What is the appropriate institutional structure for each country in
                     implementing an effective program to fight money laundering and ter-
                     rorist fighting?
                  • What are the future challenges in combating money laundering and
                     terrorist financing in participating countries?


                   To answer those questions, senior policymakers in the participating
              countries offer their views on the economic costs of criminal abuse of finan-
              cial systems, particularly money laundering and the financing of terrorism.
              Other points for discussion include practical means of sustaining economic
              development and financial market integrity in the face of such threats. The
              dialogue helps countries to learn from each other by drawing on their par-
              ticular experiences as well as the broader experience of international experts.



              2. Country Assistance Strategy


              The Bank is integrating the results of the Financial Sector Assessment
              Program (FSAP) into the broader range of development measures considered
              in the Country Assistance Strategy (CAS), which sets out the priorities for
              the Bank’s program for a given country on a three-year basis in consultation
              with the government of that country. Following systematic reviews of FSAP
              findings, AML/CFT assistance has already been included in more than 30




     X-4
                                         World Bank and International Monetary Fund Initiatives   371

CASs prepared since March 2002. Technical assistance is given high priority
in countries where weaknesses in the integrity of the AML/CFT regime may
pose significant governance and development risks. CASs also address AML/
CFT issues in greater detail in countries that have been deficient in meeting
international standards and best practices.
    The Fund has integrated AML/CFT components into its Article IV
surveillance.4 In addition to Financial System Stability Assessment (FSSA)
reports to the Executive Board (which summarize the outcome of FSAPs,
including the AML/CFT assessments), results from the AML/CFT question-
naire have been incorporated in more than 70 Article IV discussions since
January 2002.



B. Development of a Universal AML/CFT Assessment Methodology

Over the course of 2002, the Bank and IMF worked in close collaboration
with FATF and other international standard setters, i.e., the Basel Committee
on Banking Supervision (Basel Committee), International Association of
Securities Commissioners (IOSCO), International Association of Insurance
Supervisors (IAIS) and the Egmont Group, to produce a single, compre-
hensive AML/CFT assessment methodology. This methodology was agreed
and endorsed by FATF at its October 2002 Plenary meeting. The methodol-
ogy consisted of 120 criteria covering each of the FATF Forty and Special
Recommendations, including implementation of criminal law enforcement.5
It covered the legal and institutional AML/CFT framework for a coun-
try, including the establishment of financial intelligence units (FIUs). The
methodology also covered relevant United Nations (UN) Security Council
Resolutions and international conventions and other measures of interna-
tional standard setters. It provided an in-depth assessment of the preventive
measures for financial institutions.
      Following the revision of The Forty Recommendations in June 2003,
the Bank and Fund worked with the FATF and FSRBs to produce a revised
assessment methodology. This was endorsed by the FATF in February 2004



4. About the IMF, http://www.imf.org.
5. Methodology on AML/CFT, http://www.fatf-gafi.org/pdf/Meth-2004_en.PDF.




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372 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              and by the Bank and Fund Boards in March 2004. It incorporates over
              200 “essential criteria” against which countries will be assessed for their
              compliance with the FATF standards and some “additional criteria” which,
              although not part of the standard against which compliance is rated, com-
              prise international best practices and will be part of the assessment. There are
              considerably more criteria than in the previous version of the methodology,
              reflecting the extension of the standards agreed in 2003.
                   The methodology will be used by the international organizations in their
              evaluations of AML/CFT controls carried out as part of their overall assess-
              ments of a country’s compliance with international financial standards in the
              FSAP and OFC processes. They will result in a ROSC for AML/CFT, which
              will be reported to the Executive Boards of the Bank and the Fund. The
              methodology will also be used by the FATF and FSRBs in their mutual evalu-
              ations. FATF and the FSRBs will prepare a ROSC as part of their mutual
              evaluatios, which will be recognized by the Bank and the Fund.
                   The process is one in which the FATF, FSRBs, the Bank, and the Fund
              each carry out assessments using the same methodology and agree to rec-
              ognize each others reports. The organizations work together to establish a
              sensible schedule for assessments, which fits in with the FSAP/OFC schedule
              of the international financial institutions and FATF/FSRB mutual evaluation
              timetables. It is expected that the Fund and the Bank will conduct approxi-
              mately 20 assessments per year, and that FATF and the FSRBs will conduct
              about the same number. This schedule should allow every country to receive
              a full assessment approximately once every five years.



              C. Building Institutional Capacity


              1. The Organization of Training Conferences


              The Bank and Fund hold targeted training conferences on specific AML/CFT
              issues, utilizing public officials involved in AML/CFT from a particular
              region. For example, during 2002, two technical assistance conferences took
              place: one in Montevideo, Uruguay, and one in Moscow, Russia.
                   The Moscow conference is illustrative of the type of information presented.
              The focus of the conference was the creation of operational Financial Intelligence




     X-6
                                       World Bank and International Monetary Fund Initiatives   373

Units (FIUs). The conference was aimed at those countries that either do not
have operational FIUs or that have just started operating them. The primary aim
of the conference was to involve experts from Eastern European countries that
have recently achieved AML/CFT compliance standards, and allow officials from
those countries to present their experience and best practices.
     The conference was also a useful mechanism to help countries and orga-
nizations that provide AML/CFT technical assistance understand where the
most urgent needs are, and to enable them to make personal contacts with
government officials of those countries so future assistance might be more
readily and easily provided.
     The conference was successful in demonstrating the importance of
attention to AML/CFT issues, and presenting the various requirements of
international standards in such a manner that officials from participating
countries could understand. It also demonstrated the specific steps neces-
sary to begin taking action in their respective countries. Additionally, gov-
ernment officials were able to make personal contacts with experts in the
field as well as their counterparts in their own neighboring countries, which
makes obtaining advice and assistance in implementing AML/CFT less bur-
densome.
     A further workshop was held in South Africa in May 2004, involving
the 14 member countries of the Eastern and Southern Africa Anti-Money
Laundering Group (ESAAMLG). It was organized by ESAAMLG with the
participation of the Bank and Fund and included experts from several other
international organizations and countries. The aim of the workshop was to
inform policy makers from the ESAAMLG countries of the basic elements of
a national strategy to counter money laundering and terrorist financing and
work with them to develop their strategies to tackle the major AML/CFT
issues in each country. The participants worked at the meeting to produce out-
line strategies which were then to be further developed in the country before
being finalized and presented to the ESAAMLG plenary in August 2004.



2. Delivery of Technical Assistance to Individual Countries


The Bank and the Fund are providing various forms of technical assis-
tance (TA) to countries that want to establish or improve their AML/CFT




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374 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              regimes.6 Since April of 2001, these TA efforts have increased. The Bank and
              Fund use the findings from the FSAPs and separate AML/CFT reviews as a
              means of determining what TA is needed and prioritizing the TA.
                   For developing countries, AML/CFT TA is included in a jurisdiction’s
              CAS, which sets out the priorities for the Bank’s assistance program on
              a three-year basis in consultation with the government of the country. In
              particular, TA is given high priority in countries where weakness in the
              integrity of the AML/CFT may pose significant governance and develop-
              mental risks.
                   The focus of the Bank’s and the Fund’s TA for AML/CFT is on:


                  • Formulation of AML/CFT laws and regulations that meet international
                      best practices;
                  • Implementation of laws, regulations, policies and procedures by finan-
                      cial sector supervisors and other similar competent authorities charged
                      with responsibility for enforcement of AML/CFT measures;
                  • Establishment of legal frameworks for financial intelligence units
                      (FIUs) that meet international best practices;
                  • Development of training and awareness programs to address AML/
                      CFT concerns in the public and private sectors;
                  • Collaboration with other parties in multinational training programs;
                      and development of computer-based training materials.


                   In the two-year period leading up to the March 2004 decision by the
              Bank and Fund boards to make AML/CFT a permanent part of their work
              programs, the Bank and Fund delivered 85 country-specific technical assis-
              tance projects reaching 63 countries and 32 regional projects reaching over
              130 countries.




              6. Intensified Work on AML/CFT, paragraphs 39 and 40. See http://finsec.worldbank.org/assets/im-
                 ages/AML-CFT_Methodology_SecM2002-0554.pdf.




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                                          World Bank and International Monetary Fund Initiatives   375

D. Research and Analysis

1. Analysis of the Hawala System


The Bank and the Fund conducted a study on the operational characteristics
of informal funds transfer systems (IFTs), commonly referred to as Hawalas.7
The study examines the historical and socioeconomic context within which
Hawalas have evolved. In this regard, their growth is rooted primarily in the
facilitation of trade between distant geographic locations at a time when con-
ventional banking instruments were either weak or nonexistent.
    The study also analyzes the operational features of IFTs for both legiti-
mate and illegitimate purposes. These operational features are mainly speed,
lower transaction costs, ethnic and cultural convenience and familiarity,
versatility and potential anonymity. In addition, IFTs have prospered in
countries where financial institutions are inefficient and financial policies are
restrictive. Finally, like any underground economic activity, IFTs have impli-
cations for monetary control; influencing exchange rate operations; distorting
economic data, (and, thereby, statistical information available to policy mak-
ers); and reducing taxes on income and services.
      The study further discusses the implications for regulatory and supervi-
sory responses to this type of activity. Recommendation VI of FATF’s Special
Recommendations recommends that countries treat Hawalas and other IFTs
as part of the regulated system, subject to many of the same AML/CFT
requirements as covered financial institutions.8 More countries are subjecting
these entities to licensing or registration in accordance with the FATF recom-
mendation.



2. Alternative Remittances Systems Studies

In September of 2002, the Asia-Pacific Economic Cooperation (APEC)
Finance Ministers established a working group on alternative remittance
systems (ARS) to examine the economic, structural and regulatory factors



7. http://www1.worldbank.org/finance/html/amlcft/docs/IFTS_IMF/IFTS_Contents.pdf.
8. http://www.fatf-gafi.org/pdf/SRecTF_en.pdf.




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376 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              that encourage the use of ARS in the APEC economies. In support of the
              project, the World Bank prepared a report that creates a framework for esti-
              mating the magnitude of remittances flows, analyzes incentives for formal
              versus informal channels, and examines the role of formal financial sectors
              in the provision of remittance services that are compliant with international
              AML/CFT standards.9
                   As part of the APEC ARS Initiative follow-up, and as part of an effort
              to increase the World Bank’s involvement in studying the important topic of
              ARSs for all of its clients, comparative case studies have been planned for
              specific economies. Research findings and conclusions of these case studies
              will be shared as part of the exchange of ideas and experiences. This is an on-
              going project; the findings from different studies will be reported and avail-
              able on the Bank’s AML/CFT website.



              3. World Bank AML/CFT Website


              The Bank operates a website specifically for AML/CFT purposes.10 This
              website contains up-to-date information about the Bank’s programs and
              efforts to combat money laundering and terrorist financing. It also contains
              reference materials and publications, such as this Reference Guide. The web-
              site may be accessed at www.amlcft.org. Those wishing to contact the Bank
              on AML/CFT matters should write aml@worldbank.org.



              4. FIU Handbook


              In 2004, the Fund and the Bank jointly published a handbook on virtually
              all aspects of the establishment and operation of financial intelligence units
              (FIUs). The handbook is entitled Financial Intelligence Unit, An Overview.11




              9. See http://www.amlcft.org, APEC Symposium on Remittances.
              10. http://www.amlcft.org.
              11. The handbook is available for purchase from the IMF. It is also available for viewing (read-only)
                  on the Bank’s AML/CFT website, http://www.amlcft.org.




     X-10
                                           World Bank and International Monetary Fund Initiatives   377

     The handbook covers a wide array of topics relating to FIU, including:

    • Key steps for establishing an FIU,
    • Basic models of operation,
    • Core functions,
    • Additional functions, and
    • International assessments.



5. The Reference Guide

This Reference Guide on AML and CFT is a product of the Bank’s and
Fund’s efforts to fight money laundering and terrorist financing. When policy
makers looked at the AML/CFT material available to a country, particularly
a developing country with limited experience in the area, it quickly became
apparent that there was no single source that could be used to address all the
issues. Hence, the Bank and Fund commissioned this Reference Guide as a
means to make all relevant information available from a single and compre-
hensive source.
     The first edition was published in 2003 and made available in five
languages (English, French, Russian, Arabic and Spanish). This second edi-
tion has been prepared as an update, following the revision of The Forty
Recommendations in June 2003,12 the revised Methodology for assessments
in 2004,13 other changes in relevant materials, and subsequent developments
in Fund and Bank AML/CFT programs and activities.
     The Reference Guide is available on the Bank’s website, http://www.aml
cft.org/, and will also be translated into other languages.




12. http://www.fatf-gafi.org/pdf/40Recs-2003_en.pdf.
13. http://www1.worldbank.org/finance/html/amlcft/methodology.htm.




                                                                                            X-11
                                                                            379


Annex I

Websites for Key Organizations,
Legal Instruments, and Initiatives




Basel Committee on Banking Supervision—Bank For International Settlements
   • http://www.bis.org/ (BIS Home Page)
   • http://www.bis.org/bcbs/ (Basel Committee on Banking Supervision)
   • http://www.bis.org/publ/bcbs30.pdf (Core Principles for Effective
     Banking Supervision)
   • http://www.bis.org/publ/bcbs61.pdf (Core Principles Methodology)
   • http://www.bis.org/publ/bcbs85.htm#pgtop (Customer Due Diligence
     for Banks)
   • http://www.bis.org/publ/bcbsc137.pdf (Prevention of Criminal Use
     of the Banking System for the Purpose of Money Laundering—
     December 1988)

Commonwealth Secretariat
   • http://www.thecommonwealth.org/ (Main site)




                                  Annex I-1
380 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                    • http://www.thecommonwealth.org/dynamic/Country.asp
                       (Commonwealth countries)

                 Council Of Europe
                    • http://www.coe.int/portalT.asp (Main page)
                    • http://conventions.coe.int/Treaty/en/Treaties/Html/141.htm
                      (Convention on Laundering, Search, Seizure and Confiscation of the
                       Proceeds from Crime—The Strasbourg Convention, 8.XI.1990)


                 Egmont Group For Financial Intelligence Units (FIUs)
                    • http://www.egmontgroup.org/ (Main page)
                    • http://www.egmontgroup.org/list_of_fius_062304.pdf (Countries with
                      operational Financial Intelligence Units)
                    • http://www.egmontgroup.org/statement_of_purpose.pdf (Statement
                      of Purpose of the Egmont Group of Financial Intelligence Units,
                      Guernsey, 2004)
                    • http://www.egmontgroup.org/info_paper_final_092003.pdf
                      (Information Paper on Financial Intelligence Units and the Egmont
                      Group)
                    • http://www.egmontgroup.org/procedure_for_being_recognised.pdf
                      (Procedure for being recognized as member country)
                    • http://www.fincen.gov/fiuinaction.pdf (List of AML cases)


                 European Union
                    • http://europa.eu.int/ (Main page)
                    • http://www.imolin.org/eudireng.htm (Council Directive on Prevention
                      of use of Financial System for the Purpose of Money Laundering
                      (91/308/EC))
                    • http://www.imolin.org/EUdir01e.htm (Directive 2001/97/EC of the
                       European Parliament and of the Council of 4 December 2001 amend-
                       ing Council Directive 91/308/EC on prevention of the use of the finan-
                       cial system for the purpose of money laundering.)


                 Financial Action Task Force on Money Laundering (FATF)
                    • http://www.fatf-gafi.org (Welcome page)




     Annex I-2
                  Annex I: Websites for Key Organizations, Legal Instruments, and Initiatives   381

   • http://www.fatf-gafi.org/MLaundering_en.htm (Money Laundering)
   • http://www.fatf-gafi.org/pdf/40Recs-2003_en.pdf (The Forty
     Recommendations 2003)
   • http://www.fatf-gafi.org/pdf/SRecTF_en.pdf (The Special
      Recommendations 2001)
   • http://www1.oecd.org/fatf/TerFinance_en.htm (Terrorist Financing)
   • http://www1.oecd.org/fatf/pdf/PB9906_en.pdf (Policy Brief Money
      Laundering)
   • http://www.fatf-gafi.org/FATDocs_en.htm(Money Laundering Methods
     and Trends)
   • http://www1.oecd.org/fatf/pdf/GuidFITF01_en.pdf (Guidance for
     financial institutions in Detecting Terrorist Financing)
   • http://www1.oecd.org/fatf/Initiatives_en.htm (Other International Anti-
     Money Laundering and Combating Terrorist Financing Initiatives)
   • http://www.fatf-gafi.org/pdf/SR8-NPO_en.pdf (Combating the Abuse of
     Non-Profit Organisations: International Best Practices (11 October 2002)
   • http://www1.oecd.org/fatf/pdf/PR-20021220_en.pdf (FATF statements
      and documents on NCCT, Press Release, December 20, 2002, FATF
      decides to impose counter-measures on Ukraine; no counter-measures
      to apply to Nigeria at this time)
   • http://www1.oecd.org/fatf/pdf/INSR7-Consult_en.pdf (FATF issues
     for public consultation a proposal of an Interpretative Note to Special
     Recommendation VII: Wire Transfers (11 October 2002))
   • http://www1.oecd.org/fatf/pdf/FEEDB_en.pdf (FATF Best Practice
     Guidelines on Providing Feedback to Reporting Financial Institutions
     and Other Persons (25 June 1998))
   • http://www1.oecd.org/fatf/pdf/AR2004_en.PDF (Annual Report
     (2003–2004))
   • http://www.fatf-gafi.org/SAQTF_en.htm. (Self-assessment questionnaire)
   • http://www1.oecd.org/fatf/NCCT_en.htm (Non-Cooperative Countries
     and Territories)


FATF-Style Regional Bodies


Asia/Pacific Group on Money Laundering
   • http://www.apgml.org (Main site)




                                                                                   Annex I-3
382 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                    • http://www.apgml.org/content/member_jurisdiction.jsp (Member
                      Jurisdictions)
                    • http://www.apgml.org/content/observer_jurisdiction.jsp (Observer
                       Jurisdictions)
                    • http://www.apgml.org/content/organisations.jsp (Observer
                       Organisations)

                 Caribbean Financial Action Task Force
                    • http://www.cfatf.org (Main site)
                    • http://www1.oecd.org/fatf/Ctry-orgpages/org-cfatf_en.htm (Co-operat-
                      ing and Supporting Nations and Observers)
                    • http://www.cfatf.org/about/about.asp?PageNumber=1 (Membership)
                    • http://www.cfatf.org/eng/recommendations/cfatf/ (Caribbean Financial
                      Action Task Force—CFATF 19 Recommendations, 1990)
                    • http://www.cfatf.org/eng/kingdec/index.pdf (Kingston Declaration on
                      Money Laundering—November 5–6, 1992)


                 MONEYVAL (Council of Europe Select Committee of Experts on the Evaluation of Anti-
                 Money Laundering Measures (PC-R-EV Committee), (Now known as MONEYVAL)
                    • http://www.coe.int/T/E/Legal_affairs/Legal_cooperation/Combating_
                      economic crime/Money_laundering/ (Main site)
                    • http://www1.oecd.org/fatf/Ctry-orgpages/org-pcrev_en.htm
                       (Membersand Observers)


                 Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)
                    • http://www.esaamlg.org (Main site)
                    • http://www1.oecd.org/fatf/Ctry-orgpages/org-esaamlg_en.htm
                      (Members and Observers)


                 Financial Action Task Force of South America (GAFISUD)
                    • http://www.gafisud.org (Main site)
                    • http://www.gafisud.org (See members and observers)




     Annex I-4
                   Annex I: Websites for Key Organizations, Legal Instruments, and Initiatives   383

International Association of Insurance Supervisors
   • http://www.iaisweb.org/ (Main page)
   • http://www.iaisweb.org/framesets/pas.html (Overview of IAIS princi-
     ples, standards and guidance papers)
   • http://www.iaisweb.org/132_176_ENU_HTML.asp (Member countries
      and jurisdictions)

International Monetary Fund
   • http://www.imf.org/ (Main page)
   • http://www.imf.org/external/np/mae/aml/2002/eng/092502.htm
     (Intensified Work on Anti-Money Laundering and Combating the
     Financing of Terrorism (AML/CFT) (September 2002)
   • http://www.imf.org/external/np/mae/am/2002/eng/092523.htm
     (Comprehensive Methodology on AML/CFT)


International Organization of Securities Commissioners
   • http://www.iosco.org/iosco.html (Main page)
   • http://www.iosco.org/pubdocs/pdf/IOSCOPD125.pdf (IOSCO
     Objectives and Principles of Securities Regulation) (2002)
   • http://www.iosco.org/docs-public/1997-authorisation_of_collective.
     html (Authorisation of Collective Investment Schemes (CIS) and
     Related Services. A Report of the Technical Committee) (1997)
   • http://www.iosco.org/library/index.cfm?whereami=resolutions (A
     Directory of Resolutions Passed by the International Organisation of
     Securities Commissions)
   • http://www.iosco.org/docs (Principles for the Supervision of Operators
     of Collective Investment Schemes (September, 1997))

Organization of American States–CICAD
   • http://www.oas.org/main/english/ (Main page)
   • http://www.cicad.oas.org/en/?CICAD%20-%New.htm (Summit of
     the Americas, Ministerial Conference Concerning the Laundering of
     Proceeds and Instrumentalities of Crime – Buenos Aires, Argentina,
     December 2, 1995. See Money Laundering, see Documents, see Plan of
     Action of Buenos Aires.)




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384 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                    • http://www.cicad.oas.org/Desarrollo_Juridico/eng/legal-regulations-
                       money.htm (Model Regulations Concerning Laundering Offenses
                       Connected to Illicit Drug Trafficking and Other Serious Offenses
                       (1998)


                 United Nations
                    • http://www.un.org
                    • http://www.undcp.org/ (Office on Drugs Control and Crime)
                    • http://www.un.org/Overview/unmember.html (List of Member Sates)
                    • http://www.unodc.org/pdf/lap_money-laundering-proceeds_2000.pdf
                      (United Nations International Drug Control Programme (UNDCP)
                      Money Laundering and Proceeds of Crime Bill 2000)
                    • http://www.incb.org/e/conv/1988/ (United Nations Convention Against
                      Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988)
                      (Vienna Convention))
                    • http://www.undcp.org/adhoc/palermo/convmain.html (United Nations
                      Convention against Transnational Organized Crime (2000) (The
                      Palermo Convention))
                    • http://www.unodc.org/unodc/crime_cicp_signatures_convention.html
                      (Signatories–Convention against Transnational Organized Crime)
                    • http://www.un.org/law/cod/finterr.htm (United Nations International
                      Convention for the Suppression of the Financing of Terrorism (1999))
                    • http://www.untreaty.un.org/ENGLISH/Status/Chapter_xviii/treaty11.asp
                      (Status–Convention of the Suppression of the Financing of Terrorism)
                    • http://www.un.org/aboutun/charter/index.html (UN Charter)
                    • http://untreaty.un.org/English/Terrorism.asp (United Nations Treaty
                      Collection Conventions on Terrorism)
                    • http://www.imolin.org/ml99eng.htm (United Nations Model
                      Legislation on Laundering, Confiscation and International
                      Cooperation in Relation to the Proceeds of Crime (1999))
                    • http://www.un.org/terrorism/ (UN Action against Terrorism)
                    • http://www.un.org/sc/ctc (Counter-Terrorism Committee)
                    • http://www.unodc.org/unodc/treaty_adherence.html (List of member
                      countries)
                    • http://www.imolin.org/imolin/en/pocf03.html (United Nations Model
                      Money Laundering, Proceeds of Crime and Terrorist Financing Bill
                      2003)



     Annex I-6
                  Annex I: Websites for Key Organizations, Legal Instruments, and Initiatives   385

   • http://www.imolin.org/imolin/en/tfbill03.html (United Nations Model
      Terrorist Financing Bill 2003)

United Nations–International Money Laundering Information Network
   • http://www.imolin.org/ (Main page)
   • http://www.imolin.org/imolin/gpml.html(United Nations Global
     Program Against Money Laundering)
   • http://www.imolin.org/conventi.htm (Standards, Conventions and
      Legal Instruments)
   • http://www.imolin.org/model.htm (Model Laws/Regulation)
   • http://www.imolin.org/map.htm (National legislation relating to money
     laundering (map))
   • http://www.imolin.org/reference.htm (Reference)
   • http://www.imolin.org/current.htm (Current Events in the Anti-Money
     Laundering Arena)
   • http://www.imolin.org/calendar.htm (Calendar of Events)


United Nations–Security Council Resolutions
   • http://www.un.org/documents/scres.htm


Wolfsberg Group of Banks
   • http://www.wolfsberg-principles.com/index.html (The Wolfsberg
     Group of Banks)
   • http://www.wolfsberg-principles.com/privat-banking.html (Global
     Anti-Money-Laundering Guidelines for Private Banking)
   • http://www.wolfsberg-principles.com/wolfsberg_statement.html (The
     Suppression of the Financing of Terrorism)
   • http://www.wolfsberg-principles.com/corresp-banking.html (The
     Wolfsberg Anti-Money Laundering Principles for Correspondent
      Banking)

The World Bank Group
   • http://www.worldbank.org/
   • http://www.amlcft.org (Financial Market Integrity website on anti-
     money laundering and terrorist financing)




                                                                                   Annex I-7
                                                                         387


Annex II

Other Useful Websites and Resources




Websites


European Central Bank
    • http://www.ecb.int/


The Financial Crimes Enforcement Network (FinCEN)
    • http://www.fincen.gov/af_main.html

Financial Stability Forum)
    • http://www.fsforum.org/

Interpol
    • http://www.interpol.com/Public/Terrorism/default.asp (Interpol’s
      involvement in the fight against international terrorism)




                                  Annex II-1
388 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              The Money Laundering Compliance Website
                  • http://www.countermoneylaundering.com/

              Organisation for Economic Co-operation and Development
                  • http://www.oecd.org/ (Home page)


              U.S. Department of the Treasury, Comptroller of the Currency, Administrator of
              National Banks
                  • http://www.occ.treas.gov/launder/origc.htm (Money Laundering: A
                     Banker’s guide to Avoiding Problems)


              U.S. State Department—Country Summaries
                  • http://www.state.gov/documents/organization/8703.pdf (Money
                     Laundering and Financial Crimes)


              The World Customs Organization
                  • http://www.wcoomd.org/ie/index.html (Main page)


              Other Resources
                  • Guy Stessens. 2000. Money Laundering :A New International Law
                    Enforcement Model. Cambridge, England, and New York, New York,
                    United States: Cambridge University Press.
                  • Herbert Morais. 2002. “The War Against Money Laundering,
                    Terrorism and the Financing of Terrorism,” LAWASIA Journal. This
                     publication is produced by the Law Association for Asia and the
                     Pacific, Darwin, Australia, although is not currently available online
                     (http://www.lawsocnsw.asn.au/publications.htm). Contact the LAWA-
                     SIA secretariat. A much shorter version of this article, under the title
                     “Behind the Lines in the War on Terrorist Funding,” was published in
                     the International Financial Law Review, December 2001.




     Annex II-2
                                                                              389


Annex III

United Nations Anti-Terrorist Conventions
Referred to in the International
Convention for the Suppression of the
Financing of Terrorism




  1. Convention for the Suppression of Unlawful Seizure of Aircraft, done
     at The Hague on 16 December 1970.
  2. Convention for the Suppression of Unlawful Acts against the Safety of
     Civil Aviation, done at Montreal on 23 September 1971.
  3. Convention on the Prevention and Punishment of Crimes against
     Internationally Protected Persons, including Diplomatic Agents, adopt-
     ed by the General Assembly of the United Nations on 14 December
     1973.
  4. International Convention against the Taking of Hostages, adopted by
     the General Assembly of the United Nations on 17 December 1979.
  5. Convention on the Physical Protection of Nuclear Material, adopted at
     Vienna on 3 March 1980.
  6. Protocol for the Suppression of Unlawful Acts of Violence at Airports
     Serving International Civil Aviation, supplementary to the Convention
     for the Suppression of Unlawful Acts against the Safety of Civil
     Aviation, done at Montreal on 24 February 1988.



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390 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                   7. Convention for the Suppression of Unlawful Acts against the Safety of
                      Maritime Navigation, done at Rome on 10 March 1988.
                   8. Protocol for the Suppression of Unlawful Acts against the Safety of
                     Fixed Platforms located on the Continental Shelf, done at Rome on 10
                     March 1988.
                   9. International Convention for the Suppression of Terrorist Bombings,
                      adopted by the General Assembly of the United Nations on 15
                     December 1997.




     Annex III-2
                                                                                 391


Annex IV

The Financial Action Task Force Forty
Recommendations on Money Laundering
and Interpretative Notes




A. Legal Systems


Scope of the criminal offence of money laundering


1. Countries should criminalise money laundering on the basis of the
United Nations Convention against Illicit Traffic in Narcotic Drugs and
Psychotropic Substances, 1988 (the Vienna Convention) and the United
Nations Convention against Transnational Organized Crime, 2000 (the
Palermo Convention).
      Countries should apply the crime of money laundering to all serious
offences, with a view to including the widest range of predicate offences.
Predicate offences may be described by reference to all offences, or to a
threshold linked either to a category of serious offences or to the penalty of
imprisonment applicable to the predicate offence (threshold approach), or to
a list of predicate offences, or a combination of these approaches.




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                   Where countries apply a threshold approach, predicate offences should
              at a minimum comprise all offences that fall within the category of serious
              offences under their national law or should include offences which are pun-
              ishable by a maximum penalty of more than one year’s imprisonment or for
              those countries that have a minimum threshold for offences in their legal sys-
              tem, predicate offences should comprise all offences, which are punished by a
              minimum penalty of more than six months imprisonment.
                   Whichever approach is adopted, each country should at a minimum
              include a range of offences within each of the designated categories of offences.1
                   Predicate offences for money laundering should extend to conduct that
              occurred in another country, which constitutes an offence in that country,
              and which would have constituted a predicate offence had it occurred domes-
              tically. Countries may provide that the only prerequisite is that the conduct
              would have constituted a predicate offence had it occurred domestically.
                  Countries may provide that the offence of money laundering does not
              apply to persons who committed the predicate offence, where this is required
              by fundamental principles of their domestic law.


              2.    Countries should ensure that:

                   a) The intent and knowledge required to prove the offence of money
                      laundering is consistent with the standards set forth in the Vienna and
                      Palermo Conventions, including the concept that such mental state
                      may be inferred from objective factual circumstances.
                   b) Criminal liability, and, where that is not possible, civil or administra-
                      tive liability, should apply to legal persons. This should not preclude
                      parallel criminal, civil or administrative proceedings with respect to
                      legal persons in countries in which such forms of liability are avail-
                      able. Legal persons should be subject to effective, proportionate and
                      dissuasive sanctions. Such measures should be without prejudice to the
                      criminal liability of individuals.



              Provisonal measures and confiscation


              1. See the definition of “designated categories of offences” in the Glossary.




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3.   Countries should adopt measures similar to those set forth in the
Vienna and Palermo Conventions, including legislative measures, to enable
their competent authorities to confiscate property laundered, proceeds from
money laundering or predicate offences, instrumentalities used in or intended
for use in the commission of these offences, or property of corresponding
value, without prejudicing the rights of bona fide third parties.
      Such measures should include the authority to: (a) identify, trace and
evaluate property which is subject to confiscation; (b) carry out provisional
measures, such as freezing and seizing, to prevent any dealing, transfer or
disposal of such property; (c) take steps that will prevent or void actions that
prejudice the State’s ability to recover property that is subject to confiscation;
and (d) take any appropriate investigative measures.
     Countries may consider adopting measures that allow such proceeds or
instrumentalities to be confiscated without requiring a criminal conviction,
or which require an offender to demonstrate the lawful origin of the property
alleged to be liable to confiscation, to the extent that such a requirement is
consistent with the principles of their domestic law.



B. Measures to Be Taken by Financial Institutions and Nonfinancial Businesses
and Professions to Prevent Money Laundering and Terrorist Financing

4.   Countries should ensure that financial institution secrecy laws do not
inhibit implementation of the FATF Recommendations.



Customer due diligence and record-keeping

5.* Financial institutions should not keep anonymous accounts or accounts
in obviously fictitious names.
     Financial institutions should undertake customer due diligence measures,
including identifying and verifying the identity of their customers, when:
   • establishing business relations;

* Recommendations marked with an asterisk should be read in conjunction with their Interpreta-
  tive Note.




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394 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                  •    carrying out occasional transactions: (i) above the applicable desig-
                       nated threshold; or (ii) that are wire transfers in the circumstances
                       covered by the Interpretative Note to Special Recommendation VII;
                  •    there is a suspicion of money laundering or terrorist financing; or
                  •    the financial institution has doubts about the veracity or adequacy of
                       previously obtained customer identification data.


                      The customer due diligence (CDD) measures to be taken are as follows:


                  a) Identifying the customer and verifying that customer’s identity using
                     reliable, independent source documents, data or information.2
                  b) Identifying the beneficial owner, and taking reasonable measures to
                       verify the identity of the beneficial owner such that the financial insti-
                       tution is satisfied that it knows who the beneficial owner is. For legal
                       persons and arrangements this should include financial institutions
                       taking reasonable measures to understand the ownership and control
                       structure of the customer.
                  c) Obtaining information on the purpose and intended nature of the busi-
                       ness relationship.
                  d) Conducting ongoing due diligence on the business relationship and
                       scrutiny of transactions undertaken throughout the course of that rela-
                       tionship to ensure that the transactions being conducted are consistent
                       with the institution’s knowledge of the customer, their business and
                       risk profile, including, where necessary, the source of funds.


                      Financial institutions should apply each of the CDD measures under (a)
              to (d) above, but may determine the extent of such measures on a risk sensi-
              tive basis depending on the type of customer, business relationship or trans-
              action. The measures that are taken should be consistent with any guidelines
              issued by competent authorities. For higher risk categories, financial institu-
              tions should perform enhanced due diligence. In certain circumstances, where
              there are low risks, countries may decide that financial institutions can apply
              reduced or simplified measures.

              2. Reliable, independent source documents, data or information will hereafter be referred to as
                “identification data.”




     Annex IV-4
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         Annex IV: FATF Forty Recommendations on Money Laundering and Interpretive            395

      Financial institutions should verify the identity of the customer and ben-
eficial owner before or during the course of establishing a business relation-
ship or conducting transactions for occasional customers. Countries may per-
mit financial institutions to complete the verification as soon as reasonably
practicable following the establishment of the relationship, where the money
laundering risks are effectively managed and where this is essential not to
interrupt the normal conduct of business.
     Where the financial institution is unable to comply with paragraphs (a)
to (c) above, it should not open the account, commence business relations or
perform the transaction; or should terminate the business relationship; and
should consider making a suspicious transactions report in relation to the
customer.
     These requirements should apply to all new customers, though financial
institutions should also apply this Recommendation to existing customers on
the basis of materiality and risk, and should conduct due diligence on such
existing relationships at appropriate times.


6.* Financial institutions should, in relation to politically exposed persons,
in addition to performing normal due diligence measures:


     a) Have appropriate risk management systems to determine whether the
       customer is a politically exposed person.
     b) Obtain senior management approval for establishing business relation-
       ships with such customers.
     c) Take reasonable measures to establish the source of wealth and source
       of funds.
     d) Conduct enhanced ongoing monitoring of the business relationship.


7.   Financial institutions should, in relation to cross-border correspondent
banking and other similar relationships, in addition to performing normal
due diligence measures:


     a) Gather sufficient information about a respondent institution to under-
       stand fully the nature of the respondent’s business and to determine
       from publicly available information the reputation of the institution
       and the quality of supervision, including whether it has been subject to




                                                                                 Annex IV-5
396 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                     a money laundering or terrorist financing investigation or regulatory
                     action.
                  b) Assess the respondent institution’s anti-money laundering and terrorist
                     financing controls.
                  c) Obtain approval from senior management before establishing new cor-
                     respondent relationships.
                  d) Document the respective responsibilities of each institution.
                  e) With respect to “payable-through accounts”, be satisfied that the
                     respondent bank has verified the identity of and performed on-going
                     due diligence on the customers having direct access to accounts of the
                     correspondent and that it is able to provide relevant customer identifi-
                     cation data upon request to the correspondent bank.


              8. Financial institutions should pay special attention to any money launder-
              ing threats that may arise from new or developing technologies that might
              favour anonymity, and take measures, if needed, to prevent their use in
              money laundering schemes. In particular, financial institutions should have
              policies and procedures in place to address any specific risks associated with
              nonface to face business relationships or transactions.


              9.* Countries may permit financial institutions to rely on intermediaries or
              other third parties to perform elements (a) – (c) of the CDD process or to
              introduce business, provided that the criteria set out below are met. Where
              such reliance is permitted, the ultimate responsibility for customer identifi-
              cation and verification remains with the financial institution relying on the
              third party.
                   The criteria that should be met are as follows:

                  a) A financial institution relying upon a third party should immediately
                     obtain the necessary information concerning elements (a) – (c) of the
                     CDD process. Financial institutions should take adequate steps to
                     satisfy themselves that copies of identification data and other relevant
                     documentation relating to the CDD requirements will be made avail-
                     able from the third party upon request without delay.




     Annex IV-6
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        Annex IV: FATF Forty Recommendations on Money Laundering and Interpretive               397

    b) The financial institution should satisfy itself that the third party is reg-
       ulated and supervised for, and has measures in place to comply with
       CDD requirements in line with Recommendations 5 and 10.


     It is left to each country to determine in which countries the third
party that meets the conditions can be based, having regard to information
available on countries that do not or do not adequately apply the FATF
Recommendations.


10.* Financial institutions should maintain, for at least five years, all neces-
sary records on transactions, both domestic or international, to enable them
to comply swiftly with information requests from the competent authorities.
Such records must be sufficient to permit reconstruction of individual trans-
actions (including the amounts and types of currency involved if any) so as
to provide, if necessary, evidence for prosecution of criminal activity.
     Financial institutions should keep records on the identification data
obtained through the customer due diligence process (e.g. copies or records
of official identification documents like passports, identity cards, driving
licenses or similar documents), account files and business correspondence for
at least five years after the business relationship is ended.
     The identification data and transaction records should be available to
domestic competent authorities upon appropriate authority.


11.* Financial institutions should pay special attention to all complex, unusual
large transactions, and all unusual patterns of transactions, which have no
apparent economic or visible lawful purpose. The background and purpose of
such transactions should, as far as possible, be examined, the findings estab-
lished in writing, and be available to help competent authorities and auditors.


12.* The customer due diligence and record-keeping requirements set out in
Recommendations 5, 6, and 8 to 11 apply to designated non-financial busi-
nesses and professions in the following situations:


    a) Casinos—when customers engage in financial transactions equal to or
       above the applicable designated threshold.




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398 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                  b) Real estate agents—when they are involved in transactions for their
                     client concerning the buying and selling of real estate.
                  c) Dealers in precious metals and dealers in precious stones—when they
                     engage in any cash transaction with a customer equal to or above the
                     applicable designated threshold.
                  d) Lawyers, notaries, other independent legal professionals and accoun-
                     tants when they prepare for or carry out transactions for their client
                     concerning the following activities:

                    –   buying and selling of real estate;
                    –   managing of client money, securities or other assets;
                    –    management of bank, savings or securities accounts;
                    –   organisation of contributions for the creation, operation or man-
                        agement of companies;
                    –   creation, operation or management of legal persons or arrange-
                        ments, and buying and selling of business entities.


                  e) Trust and company service providers when they prepare for or carry
                     out transactions for a client concerning the activities listed in the defi-
                     nition in the Glossary.



              Reporting of suspicious transactions and compliance


              13.* If a financial institution suspects or has reasonable grounds to suspect
              that funds are the proceeds of a criminal activity, or are related to terror-
              ist financing, it should be required, directly by law or regulation, to report
              promptly its suspicions to the financial intelligence unit (FIU).


              14.* Financial institutions, their directors, officers and employees should be:


                  a) Protected by legal provisions from criminal and civil liability for
                     breach of any restriction on disclosure of information imposed by
                     contract or by any legislative, regulatory or administrative provision,
                     if they report their suspicions in good faith to the FIU, even if they




     Annex IV-8
      Annex IV: FATF Forty Recommendations on Money Laundering and Interpretative Notes
       Annex IV: FATF Forty Recommendations on Money Laundering and Interpretive                399

      did not know precisely what the underlying criminal activity was, and
      regardless of whether illegal activity actually occurred.
   b) Prohibited by law from disclosing the fact that a suspicious transaction
      report (STR) or related information is being reported to the FIU.


15.* Financial institutions should develop programmes against money laun-
dering and terrorist financing. These programmes should include:
   a) The development of internal policies, procedures and controls, includ-
      ing appropriate compliance management arrangements, and adequate
      screening procedures to ensure high standards when hiring employees.
   b) An ongoing employee training programme.
   c) An audit function to test the system.


16.* The requirements set out in Recommendations 13 to 15, and 21 apply
to all designated nonfinancial businesses and professions, subject to the fol-
lowing qualifications:


   a) Lawyers, notaries, other independent legal professionals and accoun-
      tants should be required to report suspicious transactions when, on
      behalf of or for a client, they engage in a financial transaction in rela-
      tion to the activities described in Recommendation 12(d). Countries
      are strongly encouraged to extend the reporting requirement to the
      rest of the professional activities of accountants, including auditing.
   b) Dealers in precious metals and dealers in precious stones should be
      required to report suspicious transactions when they engage in any
      cash transaction with a customer equal to or above the applicable des-
      ignated threshold.
   c) Trust and company service providers should be required to report
      suspicious transactions for a client when, on behalf of or for a client,
      they engage in a transaction in relation to the activities referred to
      Recommendation 12(e).


     Lawyers, notaries, other independent legal professionals, and accoun-
tants acting as independent legal professionals, are not required to report
their suspicions if the relevant information was obtained in circumstances
where they are subject to professional secrecy or legal professional privilege.




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400 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              Other measures to deter money laundering and terrorist financing


              17. Countries should ensure that effective, proportionate and dissuasive
              sanctions, whether criminal, civil or administrative, are available to deal with
              natural or legal persons covered by these Recommendations that fail to com-
              ply with anti-money laundering or terrorist financing requirements.
              18. Countries should not approve the establishment or accept the continued
              operation of shell banks. Financial institutions should refuse to enter into, or
              continue, a correspondent banking relationship with shell banks. Financial
              institutions should also guard against establishing relations with respondent
              foreign financial institutions that permit their accounts to be used by shell
              banks.


              19.* Countries should consider the feasibility and utility of a system where
              banks and other financial institutions and intermediaries would report all
              domestic and international currency transactions above a fixed amount, to
              a national central agency with a computerised data base, available to com-
              petent authorities for use in money laundering or terrorist financing cases,
              subject to strict safeguards to ensure proper use of the information.


              20. Countries should consider applying the FATF Recommendations to busi-
              nesses and professions, other than designated non-financial businesses and
              professions, that pose a money laundering or terrorist financing risk. Countries
              should further encourage the development of modern and secure techniques of
              money management that are less vulnerable to money laundering.



              Measures to be taken with respect to countries that do not or insufficiently comply
              with the FATF Recommendations


              21. Financial institutions should give special attention to business relation-
              ships and transactions with persons, including companies and financial
              institutions, from countries which do not or insufficiently apply the FATF
              Recommendations. Whenever these transactions have no apparent economic
              or visible lawful purpose, their background and purpose should, as far as
              possible, be examined, the findings established in writing, and be available to




     Annex IV-10
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       Annex IV: FATF Forty Recommendations on Money Laundering and Interpretive              401

help competent authorities. Where such a country continues not to apply or
insufficiently applies the FATF Recommendations, countries should be able
to apply appropriate countermeasures.


22. Financial institutions should ensure that the principles applicable to
financial institutions, which are mentioned above are also applied to branch-
es and majority owned subsidiaries located abroad, especially in countries
which do not or insufficiently apply the FATF Recommendations, to the
extent that local applicable laws and regulations permit. When local applica-
ble laws and regulations prohibit this implementation, competent authorities
in the country of the parent institution should be informed by the financial
institutions that they cannot apply the FATF Recommendations.



Regulation and supervision


23.* Countries should ensure that financial institutions are subject to ade-
quate regulation and supervision and are effectively implementing the FATF
Recommendations. Competent authorities should take the necessary legal or
regulatory measures to prevent criminals or their associates from holding or
being the beneficial owner of a significant or controlling interest or holding a
management function in a financial institution.
    For financial institutions subject to the Core Principles, the regulatory
and supervisory measures that apply for prudential purposes and which are
also relevant to money laundering, should apply in a similar manner for anti-
money laundering and terrorist financing purposes.
    Other financial institutions should be licensed or registered and appro-
priately regulated, and subject to supervision or oversight for anti-money
laundering purposes, having regard to the risk of money laundering or ter-
rorist financing in that sector. At a minimum, businesses providing a service
of money or value transfer, or of money or currency changing should be
licensed or registered, and subject to effective systems for monitoring and
ensuring compliance with national requirements to combat money laundering
and terrorist financing.




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402 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              24. Designated non-financial businesses and professions should be subject to
              regulatory and supervisory measures as set out below.

                   a) Casinos should be subject to a comprehensive regulatory and super-
                     visory regime that ensures that they have effectively implemented the
                      necessary anti-money laundering and terrorist-financing measures. At
                      a minimum:


                     –   casinos should be licensed;
                     –   competent authorities should take the necessary legal or regulatory
                         measures to prevent criminals or their associates from holding or
                         being the beneficial owner of a significant or controlling interest,
                         holding a management function in, or being an operator of a casino
                     –   competent authorities should ensure that casinos are effectively
                         supervised for compliance with requirements to combat money
                         laundering and terrorist financing.


                   b) Countries should ensure that the other categories of designated non-
                      financial businesses and professions are subject to effective systems for
                      monitoring and ensuring their compliance with requirements to combat
                      money laundering and terrorist financing. This should be performed on
                      a risk-sensitive basis. This may be performed by a government authority
                      or by an appropriate self-regulatory organisation, provided that such an
                      organisation can ensure that its members comply with their obligations
                      to combat money laundering and terrorist financing.


              25.* The competent authorities should establish guidelines, and provide
              feedback which will assist financial institutions and designated non-financial
              businesses and professions in applying national measures to combat money
              laundering and terrorist financing, and in particular, in detecting and report-
              ing suspicious transactions.




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C. Institutional and Other Measures Necessary in Systems for Combating Money
Laundering and Terrorist Financing

Competent authorities, their powers and resources


26.* Countries should establish a FIU that serves as a national centre for
the receiving (and, as permitted, requesting), analysis and dissemination of
STR and other information regarding potential money laundering or terror-
ist financing. The FIU should have access, directly or indirectly, on a timely
basis to the financial, administrative and law enforcement information that it
requires to properly undertake its functions, including the analysis of STR.

27.* Countries should ensure that designated law enforcement authorities
have responsibility for money laundering and terrorist financing investiga-
tions. Countries are encouraged to support and develop, as far as possible,
special investigative techniques suitable for the investigation of money laun-
dering, such as controlled delivery, undercover operations and other relevant
techniques. Countries are also encouraged to use other effective mechanisms
such as the use of permanent or temporary groups specialised in asset inves-
tigation, and co-operative investigations with appropriate competent authori-
ties in other countries.

28. When conducting investigations of money laundering and underlying
predicate offences, competent authorities should be able to obtain docu-
ments and information for use in those investigations, and in prosecutions
and related actions. This should include powers to use compulsory measures
for the production of records held by financial institutions and other per-
sons, for the search of persons and premises, and for the seizure and obtain-
ing of evidence.

29. Supervisors should have adequate powers to monitor and ensure compli-
ance by financial institutions with requirements to combat money laundering
and terrorist financing, including the authority to conduct inspections. They
should be authorised to compel production of any information from financial
institutions that is relevant to monitoring such compliance, and to impose
adequate administrative sanctions for failure to comply with such requirements.




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              30. Countries should provide their competent authorities involved in combat-
              ing money laundering and terrorist financing with adequate financial, human
              and technical resources. Countries should have in place processes to ensure
              that the staff of those authorities are of high integrity.


              31. Countries should ensure that policy makers, the FIU, law enforcement
              and supervisors have effective mechanisms in place which enable them to
              co-operate, and where appropriate coordinate domestically with each other
              concerning the development and implementation of policies and activities to
              combat money laundering and terrorist financing.


              32. Countries should ensure that their competent authorities can review
              the effectiveness of their systems to combat money laundering and terrorist
              financing systems by maintaining comprehensive statistics on matters rel-
              evant to the effectiveness and efficiency of such systems. This should include
              statistics on the STR received and disseminated; on money laundering and
              terrorist financing investigations, prosecutions and convictions; on property
              frozen, seized and confiscated; and on mutual legal assistance or other inter-
              national requests for co-operation.



              Transparency of legal persons and arrangements


              33. Countries should take measures to prevent the unlawful use of legal
              persons by money launderers. Countries should ensure that there is adequate,
              accurate and timely information on the beneficial ownership and control of
              legal persons that can be obtained or accessed in a timely fashion by com-
              petent authorities. In particular, countries that have legal persons that are
              able to issue bearer shares should take appropriate measures to ensure that
              they are not misused for money laundering and be able to demonstrate the
              adequacy of those measures. Countries could consider measures to facilitate
              access to beneficial ownership and control information to financial institu-
              tions undertaking the requirements set out in Recommendation 5.


              34. Countries should take measures to prevent the unlawful use of legal
              arrangements by money launderers. In particular, countries should ensure




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that there is adequate, accurate and timely information on express trusts,
including information on the settlor, trustee and beneficiaries, that can be
obtained or accessed in a timely fashion by competent authorities. Countries
could consider measures to facilitate access to beneficial ownership and con-
trol information to financial institutions undertaking the requirements set out
in Recommendation 5.


D. International Co-operation


35. Countries should take immediate steps to become party to and imple-
ment fully the Vienna Convention, the Palermo Convention, and the
1999 United Nations International Convention for the Suppression of the
Financing of Terrorism. Countries are also encouraged to ratify and imple-
ment other relevant international conventions, such as the 1990 Council
of Europe Convention on Laundering, Search, Seizure and Confiscation of
the Proceeds from Crime and the 2002 Inter-American Convention against
Terrorism.



Mutual legal assistance and extradition


36. Countries should rapidly, constructively and effectively provide the wid-
est possible range of mutual legal assistance in relation to money laundering
and terrorist financing investigations, prosecutions, and related proceedings.
In particular, countries should:

   a) Not prohibit or place unreasonable or unduly restrictive conditions on
      the provision of mutual legal assistance.
   b) Ensure that they have clear and efficient processes for the execution of
      mutual legal assistance requests.
   c) Not refuse to execute a request for mutual legal assistance on the sole
      ground that the offence is also considered to involve fiscal matters.
   d) Not refuse to execute a request for mutual legal assistance on the
      grounds that laws require financial institutions to maintain secrecy or
      confidentiality.




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                   Countries should ensure that the powers of their competent authorities
              required under Recommendation 28 are also available for use in response
              to requests for mutual legal assistance, and if consistent with their domes-
              tic framework, in response to direct requests from foreign judicial or law
              enforcement authorities to domestic counterparts.
                   To avoid conflicts of jurisdiction, consideration should be given to devis-
              ing and applying mechanisms for determining the best venue for prosecution
              of defendants in the interests of justice in cases that are subject to prosecu-
              tion in more than one country.

              37. Countries should, to the greatest extent possible, render mutual legal
              assistance notwithstanding the absence of dual criminality.
                   Where dual criminality is required for mutual legal assistance or extradi-
              tion, that requirement should be deemed to be satisfied regardless of whether
              both countries place the offence within the same category of offence or
              denominate the offence by the same terminology, provided that both coun-
              tries criminalise the conduct underlying the offence.


              38.* There should be authority to take expeditious action in response to
              requests by foreign countries to identify, freeze, seize and confiscate property
              laundered, proceeds from money laundering or predicate offences, instru-
              mentalities used in or intended for use in the commission of these offences,
              or property of corresponding value. There should also be arrangements for
              co-ordinating seizure and confiscation proceedings, which may include the
              sharing of confiscated assets.


              39. Countries should recognise money laundering as an extraditable offence.
              Each country should either extradite its own nationals, or where a country
              does not do so solely on the grounds of nationality, that country should,
              at the request of the country seeking extradition, submit the case without
              undue delay to its competent authorities for the purpose of prosecution of
              the offences set forth in the request. Those authorities should take their deci-
              sion and conduct their proceedings in the same manner as in the case of any
              other offence of a serious nature under the domestic law of that country. The
              countries concerned should cooperate with each other, in particular on proce-
              dural and evidentiary aspects, to ensure the efficiency of such prosecutions.




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       Annex IV: FATF Forty Recommendations on Money Laundering and Interpretive              407

    Subject to their legal frameworks, countries may consider simplifying
extradition by allowing direct transmission of extradition requests between
appropriate ministries, extraditing persons based only on warrants of arrests
or judgements, and/or introducing a simplified extradition of consenting per-
sons who waive formal extradition proceedings.



Other forms of co-operation

40.* Countries should ensure that their competent authorities provide the
widest possible range of international co-operation to their foreign counter-
parts. There should be clear and effective gateways to facilitate the prompt
and constructive exchange directly between counterparts, either spontane-
ously or upon request, of information relating to both money laundering and
the underlying predicate offences. Exchanges should be permitted without
unduly restrictive conditions. In particular:


   a) Competent authorities should not refuse a request for assistance on the
      sole ground that the request is also considered to involve fiscal matters.
   b) Countries should not invoke laws that require financial institutions to
      maintain secrecy or confidentiality as a ground for refusing to provide
      co-operation.
   c) Competent authorities should be able to conduct inquiries; and where
      possible, investigations; on behalf of foreign counterparts.

    Where the ability to obtain information sought by a foreign competent
authority is not within the mandate of its counterpart, countries are also
encouraged to permit a prompt and constructive exchange of information
with non-counterparts. Co-operation with foreign authorities other than
counterparts could occur directly or indirectly. When uncertain about the
appropriate avenue to follow, competent authorities should first contact their
foreign counterparts for assistance.




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                       Countries should establish controls and safeguards to ensure that infor-
              mation exchanged by competent authorities is used only in an authorised
              manner, consistent with their obligations concerning privacy and data pro-
              tection.



              Glossary


              In these Recommendations the following abbreviations and references are
              used:


             “Beneficial owner” refers to the natural person(s) who ultimately owns or
              controls a customer and/or the person on whose behalf a transaction is being
              conducted. It also incorporates those persons who exercise ultimate effective
              control over a legal person or arrangement.


             “Core Principles” refers to the Core Principles for Effective Banking
              Supervision issued by the Basel Committee on Banking Supervision, the
              Objectives and Principles for Securities Regulation issued by the International
              Organization of Securities Commissions, and the Insurance Supervisory
              Principles issued by the International Association of Insurance Supervisors.

             “Designated categories of offences” means:


                   •    participation in an organised 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;




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          Annex IV: FATF Forty Recommendations on Money Laundering and Interpretive             409

   •    murder, grievous bodily injury;
   •    kidnapping, illegal restraint and hostage-taking;
   •    robbery or theft;
   •    smuggling;
   •    extortion;
   •    forgery;
   •    piracy; and
   •    insider trading and market manipulation.

       When deciding on the range of offences to be covered as predicate
offences under each of the categories listed above, each country may decide,
in accordance with its domestic law, how it will define those offences and the
nature of any particular elements of those offences that make them serious
offences.

“Designated non-financial businesses and professions” means:


    a) Casinos (which also includes internet casinos).
    b) Real estate agents.
    c) Dealers in precious metals.
    d) Dealers in precious stones.
    e) Lawyers, notaries, other independent legal professionals and accoun-
       tants—this refers to sole practitioners, partners or employed profes-
       sionals within professional firms. It is not meant to refer to ‘internal’
       professionals that are employees of other types of businesses, nor to
       professionals working for government agencies, who may already be
       subject to measures that would combat money laundering.
    f) Trust and Company Service Providers refers to all persons or busi-
       nesses that are not covered elsewhere under these Recommendations,
       and which as a business, provide any of the following services to third
       parties:
        –   acting as a formation agent of legal persons;
        –   acting as (or arranging for another person to act as) a director or
            secretary of a company, a partner of a partnership, or a similar
            position in relation to other legal persons;




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410 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                     –    providing a registered office; business address or accommodation,
                          correspondence or administrative address for a company, a partner-
                          ship or any other legal person or arrangement;
                     –    acting as (or arranging for another person to act as) a trustee of an
                          express trust;
                     –    acting as (or arranging for another person to act as) a nominee
                          shareholder for another person.


             “Designated threshold” refers to the amount set out in the Interpretative
              Notes.


             “Financial institutions” means any person or entity who conducts as a busi-
              ness one or more of the following activities or operations for or on behalf of
              a customer:

                   1. Acceptance of deposits and other repayable funds from the public.3
                   2. Lending.4
                   3. Financial leasing.5
                   4. The transfer of money or value.6
                   5. Issuing and managing means of payment (e.g. credit and debit cards,
                      cheques, traveller’s cheques, money orders and bankers’ drafts, elec-
                      tronic money).
                   6. Financial guarantees and commitments.
                   7. Trading in:
                      a) money market instruments (cheques, bills, CDs, derivatives etc.);
                      b) foreign exchange;
                      c) exchange, interest rate and index instruments;
                      d) transferable securities;
                      e) commodity futures trading.



              3. This also captures private banking.
              4. This includes inter alia: consumer credit; mortgage credit; factoring, with or without recourse;
                 and finance of commercial transactions (including forfeiting).
              5. This does not extend to financial leasing arrangements in relation to consumer products.
              6. This applies to financial activity in both the formal or informal sector e.g. alternative remittance
                 activity. See the Interpretative Note to Special Recommendation VI. It does not apply to any
                 natural or legal person that provides financial institutions solely with message or other support
                 systems for transmitting funds. See the Interpretative Note to Special Recommendation VII.




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    8. Participation in securities issues and the provision of financial services
       related to such issues.
    9. Individual and collective portfolio management.
    10. Safekeeping and administration of cash or liquid securities on behalf
         of other persons.
    11. Otherwise investing, administering or managing funds or money on
        behalf of other persons.
    12. Underwriting and placement of life insurance and other investment
        related insurance.7
    13. Money and currency changing.

     When a financial activity is carried out by a person or entity on an
occasional or very limited basis (having regard to quantitative and absolute
criteria) such that there is little risk of money laundering activity occurring, a
country may decide that the application of anti-money laundering measures
is not necessary, either fully or partially.
     In strictly limited and justified circumstances, and based on a proven
low risk of money laundering, a country may decide not to apply some or
all of the Forty Recommendations to some of the financial activities stated
above.


“FIU” means financial intelligence unit.


“Legal arrangements” refers to express trusts or other similar legal arrange-
 ments.

“Legal persons” refers to bodies corporate, foundations, anstalt, partnerships,
 or associations, or any similar bodies that can establish a permanent custom-
 er relationship with a financial institution or otherwise own property.

“Payable-through accounts” refers to correspondent accounts that are used
 directly by third parties to transact business on their own behalf.




7. This applies both to insurance undertakings and to insurance intermediaries (agents and bro-
   kers).




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             “Politically Exposed Persons” (PEPs) are individuals who are or have been
              entrusted with prominent public functions in 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. Business relationships with family mem-
              bers or close associates of PEPs involve reputational risks similar to those
              with PEPs themselves. The definition is not intended to cover middle ranking
              or more junior individuals in the foregoing categories.
             “Shell bank” means a bank incorporated in a jurisdiction in which it has no
              physical presence and which is unaffiliated with a regulated financial group.


             “STR” refers to suspicious transaction reports.


             “Supervisors” refers to the designated competent authorities responsible for
              ensuring compliance by financial institutions with requirements to combat
              money laundering and terrorist financing.


             “the FATF Recommendations” refers to these Recommendations and to the
              FATF Special Recommendations on Terrorist Financing.



              Interpretative Notes to the Forty Recommendations


              General


              1.   Reference in this document to “countries” should be taken to apply
              equally to “territories” or “jurisdictions.”


              2.   Recommendations 5–16 and 21–22 state that financial institutions
              or designated non-financial businesses and professions should take certain
              actions. These references require countries to take measures that will oblige
              financial institutions or designated non-financial businesses and profes-
              sions to comply with each Recommendation. The basic obligations under
              Recommendations 5, 10 and 13 should be set out in law or regulation, while
              more detailed elements in those Recommendations, as well as obligations




     Annex IV-22
           Annex IV: FATF Forty Recommendations on Money Laundering and Interpretative Notes      413

under other Recommendations, could be required either by law or regulation
or by other enforceable means issued by a competent authority.


3.       Where reference is made to a financial institution being satisfied as to
a matter, that institution must be able to justify its assessment to competent
authorities.


4.       To comply with Recommendations 12 and 16, countries do not need to
issue laws or regulations that relate exclusively to lawyers, notaries, accoun-
tants and the other designated non-financial businesses and professions so
long as these businesses or professions are included in laws or regulations
covering the underlying activities.


5.       The Interpretative Notes that apply to financial institutions are also rele-
vant to designated nonfinancial businesses and professions, where applicable.



Recommendations 5, 12 and 16


The designated thresholds for transactions (under Recommendations 5 and
12) are as follows:


     •    Financial institutions (for occasional customers under
           Recommendation 5)—USD/EUR 15,000.
     •    Casinos, including internet casinos (under Recommendation 12)—
           USD/EUR 3000
     •    For dealers in precious metals and dealers in precious stones when
           engaged in any cash transaction (under Recommendations 12 and
          16)—USD/EUR 15,000.


         Financial transactions above a designated threshold include situations
where the transaction is carried out in a single operation or in several opera-
tions that appear to be linked.




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414 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              Recommendation 5


              CUSTOMER DUE DILIGENCE AND TIPPING OFF


              1.   If, during the establishment or course of the customer relationship, or
              when conducting occasional transactions, a financial institution suspects that
              transactions relate to money laundering or terrorist financing, then the insti-
              tution should:


                   a) Normally seek to identify and verify the identity of the customer and the
                      beneficial owner, whether permanent or occasional, and irrespective of
                     any exemption or any designated threshold that might otherwise apply.
                   b) Make a STR to the FIU in accordance with Recommendation 13.


              2. Recommendation 14 prohibits financial institutions, their directors,
              officers and employees from disclosing the fact that an STR or related infor-
              mation is being reported to the FIU. A risk exists that customers could be
              unintentionally tipped off when the financial institution is seeking to perform
              its customer due diligence (CDD) obligations in these circumstances. The
              customer’s awareness of a possible STR or investigation could compromise
              future efforts to investigate the suspected money laundering or terrorist
              financing operation.


              3. Therefore, if financial institutions form a suspicion that transactions
              relate to money laundering or terrorist financing, they should take into
              account the risk of tipping off when performing the customer due diligence
              process. If the institution reasonably believes that performing the CDD pro-
              cess will tip-off the customer or potential customer, it may choose not to pur-
              sue that process, and should file an STR. Institutions should ensure that their
              employees are aware of and sensitive to these issues when conducting CDD.



              CDD FOR LEGAL PERSONS AND ARRANGEMENTS


              4. When performing elements (a) and (b) of the CDD process in relation to
              legal persons or arrangements, financial institutions should:




     Annex IV-24
       Annex IV: FATF Forty Recommendations on Money Laundering and Interpretative Notes         415

    a) Verify that any person purporting to act on behalf of the customer is so
       authorised, and identify that person.
    b) Identify the customer and verify its identity—the types of measures
       that would be normally needed to satisfactorily perform this function
       would require obtaining proof of incorporation or similar evidence of
       the legal status of the legal person or arrangement, as well as informa-
       tion concerning the customer’s name, the names of trustees, legal form,
       address, directors, and provisions regulating the power to bind the
       legal person or arrangement.
    c) Identify the beneficial owners, including forming an understanding of
       the ownership and control structure, and take reasonable measures to
       verify the identity of such persons. The types of measures that would
       be normally needed to satisfactorily perform this function would
       require identifying the natural persons with a controlling interest and
       identifying the natural persons who comprise the mind and manage-
       ment of the legal person or arrangement. Where the customer or the
       owner of the controlling interest is a public company that is subject to
       regulatory disclosure requirements, it is not necessary to seek to iden-
       tify and verify the identity of any shareholder of that company.


     The relevant information or data may be obtained from a public register,
from the customer or from other reliable sources.



RELIANCE ON IDENTIFICATION AND VERIFICATION ALREADY PERFORMED


5. The CDD measures set out in Recommendation 5 do not imply that financial
institutions have to repeatedly identify and verify the identity of each customer
every time that a customer conducts a transaction. An institution is entitled to
rely on the identification and verification steps that it has already undertaken
unless it has doubts about the veracity of that information. Examples of situa-
tions that might lead an institution to have such doubts could be where there is
a suspicion of money laundering in relation to that customer, or where there is
a material change in the way that the customer’s account is operated which is
not consistent with the customer’s business profile.




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              TIMING OF VERIFICATION


              6.       Examples of the types of circumstances where it would be permissible for
              verification to be completed after the establishment of the business relation-
              ship, because it would be essential not to interrupt the normal conduct of
              business include:


                   •    Non face-to-face business.
                   •    Securities transactions. In the securities industry, companies and
                        intermediaries may be required to perform transactions very rapidly,
                        according to the market conditions at the time the customer is con-
                         tacting them, and the performance of the transaction may be required
                         before verification of identity is completed.
                   •    Life insurance business. In relation to life insurance business, countries
                         may permit the identification and verification of the beneficiary under
                         the policy to take place after having established the business relationship
                        with the policyholder. However, in all such cases, identification and veri-
                        fication should occur at or before the time of payout or the time where
                         the beneficiary intends to exercise vested rights under the policy.


              7.       Financial institutions will also need to adopt risk management proce-
              dures with respect to the conditions under which a customer may utilise the
              business relationship prior to verification.
                       These procedures should include a set of measures such as a limitation
              of the number, types and/or amount of transactions that can be performed
              and the monitoring of large or complex transactions being carried out outside
              of expected norms for that type of relationship. Financial institutions should
              refer to the Basel CDD paper8 (section 2.2.6.) for specific guidance on exam-
              ples of risk management measures for non-face to face business.




              8. “Basel CDD paper” refers to the guidance paper on Customer Due Diligence for Banks issued by
                 the Basel Committee on Banking Supervision in October 2001.




     Annex IV-26
           Annex IV: FATF Forty Recommendations on Money Laundering and Interpretative Notes     417

REQUIREMENT TO IDENTIFY EXISTING CUSTOMERS


8.       The principles set out in the Basel CDD paper concerning the identifica-
tion of existing customers should serve as guidance when applying customer
due diligence processes to institutions engaged in banking activity, and could
apply to other financial institutions where relevant.



SIMPLIFIED OR REDUCED CDD MEASURES


9.       The general rule is that customers must be subject to the full range of
CDD measures, including the requirement to identify the beneficial owner.
Nevertheless there are circumstances where the risk of money laundering or
terrorist financing is lower, where information on the identity of the customer
and the beneficial owner of a customer is publicly available, or where ade-
quate checks and controls exist elsewhere in national systems. In such circum-
stances it could be reasonable for a country to allow its financial institutions
to apply simplified or reduced CDD measures when identifying and verifying
the identity of the customer and the beneficial owner.


10. Examples of customers where simplified or reduced CDD measures could
apply are:


     •    Financial institutions—where they are subject to requirements to
           combat money laundering and terrorist financing consistent with
           the FATF Recommendations and are supervised for compliance with
           those controls.
     •    Public companies that are subject to regulatory disclosure requirements.
     •    Government administrations or enterprises.


11. Simplified or reduced CDD measures could also apply to the benefi-
cial owners of pooled accounts held by designated non financial businesses
or professions provided that those businesses or professions are subject to
requirements to combat money laundering and terrorist financing consistent
with the FATF Recommendations and are subject to effective systems for
monitoring and ensuring their compliance with those requirements. Banks




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418 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              should also refer to the Basel CDD paper (section 2.2.4.), which provides spe-
              cific guidance concerning situations where an account holding institution may
              rely on a customer that is a professional financial intermediary to perform the
              customer due diligence on his or its own customers (i.e. the beneficial own-
              ers of the bank account). Where relevant, the CDD Paper could also provide
              guidance in relation to similar accounts held by other types of financial insti-
              tutions.


              12. Simplified CDD or reduced measures could also be acceptable for vari-
              ous types of products or transactions such as (examples only):


                   •    Life insurance policies where the annual premium is no more than
                        USD/EUR 1000 or a single premium of no more than USD/EUR 2500.
                   •    Insurance policies for pension schemes if there is no surrender clause
                        and the policy cannot be used as collateral.
                   •    A pension, superannuation or similar scheme that provides retirement
                        benefits to employees, where contributions are made by way of deduc-
                        tion from wages and the scheme rules do not permit the assignment of
                        a member’s interest under the scheme.


              13. Countries could also decide whether financial institutions could apply
              these simplified measures only to customers in its own jurisdiction or allow
              them to do for customers from any other jurisdiction that the original coun-
              try is satisfied is in compliance with and has effectively implemented the
              FATF Recommendations.
                       Simplified CDD measures are not acceptable whenever there is suspicion
              of money laundering or terrorist financing or specific higher risk scenarios
              apply.



              Recommendation 6


              Countries are encouraged to extend the requirements of Recommendation 6
              to individuals who hold prominent public functions in their own country.




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Recommendation 9


This Recommendation does not apply to outsourcing or agency relationships.
     This Recommendation also does not apply to relationships, accounts or
transactions between financial institutions for their clients. Those relation-
ships are addressed by Recommendations 5 and 7.



Recommendations 10 and 11


In relation to insurance business, the word “transactions” should be under-
stood to refer to the insurance product itself, the premium payment and the
benefits.



Recommendation 13


1.   The reference to criminal activity in Recommendation 13 refers to:


     a) all criminal acts that would constitute a predicate offence for money
       laundering in the jurisdiction; or
     b) at a minimum to those offences that would constitute a predicate
       offence as required by Recommendation 1.


     Countries are strongly encouraged to adopt alternative (a). All suspicious
transactions, including attempted transactions, should be reported regardless
of the amount of the transaction.


2.   In implementing Recommendation 13, suspicious transactions should be
reported by financial institutions regardless of whether they are also thought
to involve tax matters. Countries should take into account that, in order to
deter financial institutions from reporting a suspicious transaction, money
launderers may seek to state inter alia that their transactions relate to tax
matters.




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              Recommendation 14 (tipping off)

              Where lawyers, notaries, other independent legal professionals and accoun-
              tants acting as independent legal professionals seek to dissuade a client from
              engaging in illegal activity, this does not amount to tipping off.



              Recommendation 15

              The type and extent of measures to be taken for each of the requirements set
              out in the Recommendation should be appropriate having regard to the risk
              of money laundering and terrorist financing and the size of the business.
                  For financial institutions, compliance management arrangements should
              include the appointment of a compliance officer at the management level.

              Recommendation 16


              1.   It is for each jurisdiction to determine the matters that would fall under
              legal professional privilege or professional secrecy. This would normally cover
              information lawyers, notaries or other independent legal professionals receive
              from or obtain through one of their clients: (a) in the course of ascertaining
              the legal position of their client, or (b) in performing their task of defending
              or representing that client in, or concerning judicial, administrative, arbitra-
              tion or mediation proceedings. Where accountants are subject to the same
              obligations of secrecy or privilege, then they are also not required to report
              suspicious transactions.


              2. Countries may allow lawyers, notaries, other independent legal profes-
              sionals and accountants to send their STR to their appropriate self-regulatory
              organisations, provided that there are appropriate forms of co-operation
              between these organisations and the FIU.




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       Annex IV: FATF Forty Recommendations on Money Laundering and Interpretative Notes       421

Recommendation 23

Recommendation 23 should not be read as to require the introduction of a
system of regular review of licensing of controlling interests in financial insti-
tutions merely for anti-money laundering purposes, but as to stress the desir-
ability of suitability review for controlling shareholders in financial institu-
tions (banks and non-banks in particular) from a FATF point of view. Hence,
where shareholder suitability (or “fit and proper”) tests exist, the attention
of supervisors should be drawn to their relevance for anti-money laundering
purposes.



Recommendation 25


When considering the feedback that should be provided, countries should
have regard to the FATF Best Practice Guidelines on Providing Feedback to
Reporting Financial Institutions and Other Persons.


Recommendation 26

Where a country has created an FIU, it should consider applying for mem-
bership in the Egmont Group. Countries should have regard to the Egmont
Group Statement of Purpose, and its Principles for Information Exchange
Between Financial Intelligence Units for Money Laundering Cases. These doc-
uments set out important guidance concerning the role and functions of FIUs,
and the mechanisms for exchanging information between FIU.



Recommendation 27

Countries should consider taking measures, including legislative ones, at
the national level, to allow their competent authorities investigating money
laundering cases to postpone or waive the arrest of suspected persons and/
or the seizure of the money for the purpose of identifying persons involved
in such activities or for evidence gathering. Without such measures the use




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422 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              of procedures such as controlled deliveries and undercover operations are
              precluded.



              Recommendation 38

              Countries should consider:

                   a) Establishing an asset forfeiture fund in its respective country into
                        which all or a portion of confiscated property will be deposited for law
                      enforcement, health, education, or other appropriate purposes.
                   b) Taking such measures as may be necessary to enable it to share among
                        or between other countries confiscated property, in particular, when
                        confiscation is directly or indirectly a result of co-ordinated law
                        enforcement actions.



              Recommendation 40


              1.       For the purposes of this Recommendation:

                   •    “Counterparts” refers to authorities that exercise similar responsibili-
                        ties and functions.
                   •    “Competent authority” refers to all administrative and law enforce-
                        ment authorities concerned with combating money laundering and ter-
                        rorist financing, including the FIU and supervisors.

              2. Depending on the type of competent authority involved and the nature
              and purpose of the cooperation, different channels can be appropriate for
              the exchange of information. Examples of mechanisms or channels that are
              used to exchange information include: bilateral or multilateral agreements
              or arrangements, memoranda of understanding, exchanges on the basis of
              reciprocity, or through appropriate international or regional organisations.
              However, this Recommendation is not intended to cover co-operation in rela-
              tion to mutual legal assistance or extradition.




     Annex IV-32
           Annex IV: FATF Forty Recommendations on Money Laundering and Interpretative Notes     423

3.       The reference to indirect exchange of information with foreign authori-
ties other than counterparts covers the situation where the requested infor-
mation passes from the foreign authority through one or more domestic or
foreign authorities before being received by the requesting authority. The
competent authority that requests the information should always make it
clear for what purpose and on whose behalf the request is made.


4. FIUs should be able to make inquiries on behalf of foreign counterparts
where this could be relevant to an analysis of financial transactions. At a
minimum, inquiries should include:

     •    Searching its own databases, which would include information related
           to suspicious transaction reports.
     •    Searching other databases to which it may have direct or indirect
          access, including law enforcement databases, public databases, admin-
           istrative databases and commercially available databases.

         Where permitted to do so, FIUs should also contact other competent
authorities and financial institutions in order to obtain relevant information.




                                                                                   Annex IV-33
                                                                                  425


Annex V

The Financial Action Task Force Special
Recommendations on Terrorist Financing




I. Ratification and implementation of UN instruments
Each country should take immediate steps to ratify and to implement fully
the 1999 United Nations International Convention for the Suppression of the
Financing of Terrorism.
     Countries should also immediately implement the United Nations resolu-
tions relating to the prevention and suppression of the financing of terrorist
acts, particularly United Nations Security Council Resolution 1373.

II. Criminalising the financing of terrorism and associated money laundering
Each country should criminalise the financing of terrorism, terrorist acts and
terrorist organisations. Countries should ensure that such offences are desig-
nated as money laundering predicate offences.


III. Freezing and confiscating terrorist assets
Each country should implement measures to freeze without delay funds or
other assets of terrorists, those who finance terrorism and terrorist organisa-



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426 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              tions in accordance with the United Nations resolutions relating to the pre-
              vention and suppression of the financing of terrorist acts.
                   Each country should also adopt and implement measures, including leg-
              islative ones, which would enable the competent authorities to seize and con-
              fiscate property that is the proceeds of, or used in, or intended or allocated
              for use in, the financing of terrorism, terrorist acts or terrorist organisations.

              IV. Reporting suspicious transactions related to terrorism
              If financial institutions, or other businesses or entities subject to anti-money
              laundering obligations, suspect or have reasonable grounds to suspect that
              funds are linked or related to, or are to be used for terrorism, terrorist acts
              or by terrorist organisations, they should be required to report promptly
              their suspicions to the competent authorities.


              V. International co-operation
              Each country should afford another country, on the basis of a treaty,
              arrangement or other mechanism for mutual legal assistance or information
              exchange, the greatest possible measure of assistance in connection with
              criminal, civil enforcement, and administrative investigations, inquiries and
              proceedings relating to the financing of terrorism, terrorist acts and terrorist
              organisations.
                  Countries should also take all possible measures to ensure that they do
              not provide safe havens for individuals charged with the financing of terror-
              ism, terrorist acts or terrorist organisations, and should have procedures in
              place to extradite, where possible, such individuals.
                    Each country should take measures to ensure that persons or legal enti-
              ties, including agents, that provide a service for the transmission of money or
              value, including transmission through an informal money or value transfer
              system or network, should be licensed or registered and subject to all the
              FATF Recommendations that apply to banks and non-bank financial institu-
              tions. Each country should ensure that persons or legal entities that carry out
              this service illegally are subject to administrative, civil or criminal sanctions.

              VII. Wire transfers
              Countries should take measures to require financial institutions, including
              money remitters, to include accurate and meaningful originator information




     Annex V-2
                          Annex V: The FATF Special Recommendations on Terrorist Financing       427

(name, address and account number) on funds transfers and related messages
that are sent, and the information should remain with the transfer or related
message through the payment chain.
     Countries should take measures to ensure that financial institutions,
including money remitters, conduct enhanced scrutiny of and monitor for
suspicious activity funds transfers which do not contain complete originator
information (name, address and account number).

VIII. Non-profit organisations
Countries should review the adequacy of laws and regulations that relate to
entities that can be abused for the financing of terrorism. Non-profit organi-
sations are particularly vulnerable, and countries should ensure that they can-
not be misused:
   i. by terrorist organisations posing as legitimate entities;
   ii. to exploit legitimate entities as conduits for terrorist financing, includ-
       ing for the purpose of escaping asset freezing measures; and
   iii. to conceal or obscure the clandestine diversion of funds intended for-
        legitimate purposes to terrorist organisations.


IX. Cash couriers
Countries should have measures in place to detect the physical cross-border
transportation of currency and bearer negotiable instruments, including a dec-
laration system or other disclosure obligation.
     Countries should ensure that their competent authorities have the legal
authority to stop or restrain currency or bearer negotiable instruments that
are suspected to be related to terrorist financing or money laundering, or that
are falsely declared or disclosed.
     Countries should ensure that effective, proportionate and dissuasive
sanctions are available to deal with persons who make false declaration(s) or
disclosure(s). In cases where the currency or bearer negotiable instruments
are related to terrorist financing or money laundering, countries should also
adopt measures, including legislative ones consistent with Recommendation
3 and Special Recommendation III, which would enable the confiscation of
such currency or instruments.




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                                                                                        429


Annex VI

The Financial Action Task Force
Interpretative Notes and Guidance Notes
for the Special Recommendations on
Terrorist Financing and the Self-
Assessment Questionnaire




Interpretative Notes


Interpretative Note to Special Recommendation II: Criminalising the financing of ter-
rorism and associated money laundering

OBJECTIVE

1. Special Recommendation II (SR II) was developed with the objective of
ensuring that countries have the legal capacity to prosecute and apply crimi-
nal sanctions to persons that finance terrorism. Given the close connection
between international terrorism and inter alia money laundering, another
objective of SR II is to emphasise this link by obligating countries to include
terrorist financing offences as predicate offences for money laundering.
The basis for criminalising terrorist financing should be the United Nations




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430 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              International Convention for the Suppression of the Financing of Terrorism,
              1999.1



              DEFINITIONS


              2. For the purposes of SR II and this Interpretative Note, the following defi-
              nitions apply:


                  a) The term funds refers to assets of every kind, whether tangible or
                      intangible, movable or immovable, however acquired, and legal docu-
                      ments or instruments in any form, including electronic or digital,
                      evidencing title to, or interest in, such assets, including, but not lim-
                      ited to, bank credits, travellers cheques, bank cheques, money orders,
                      shares, securities, bonds, drafts, letters of credit.
                  b) The term terrorist refers to any natural person who: (i) commits, or
                      attempts to commit, terrorist acts by any means, directly or indirectly,
                      unlawfully and wilfully; (ii) participates as an accomplice in terrorist
                      acts; (iii) organises or directs others to commit terrorist acts; or (iv)
                      contributes to the commission of terrorist acts by a group of persons
                      acting with a common purpose where the contribution is made inten-
                      tionally and with the aim of furthering the terrorist act or with the
                      knowledge of the intention of the group to commit a terrorist act.
                  c) The term terrorist act includes:
                      i) An act which constitutes an offence within the scope of, and
                          as defined in one of the following treaties: Convention for the
                          Suppression of Unlawful Seizure of Aircraft (1970), Convention
                          for the Suppression of Unlawful Acts against the Safety of Civil
                          Aviation (1971), Convention on the Prevention and Punishment
                          of Crimes against Internationally Protected Persons, including
                          Diplomatic Agents (1973), International Convention against the
                          Taking of Hostages (1979), Convention on the Physical Protection

              1. Although the UN Convention had not yet come into force at the time that SR II was originally
                 issued in October 2001—and thus is not cited in the SR itself—the intent of the FATF has been
                 from the issuance of SR II to reiterate and reinforce the criminalisation standard as set forth in
                 the Convention (in particular, Article 2). The Convention came into force in April 2003.




     Annex VI-2
   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations        431

          of Nuclear Material (1980), Protocol for the Suppression of
          Unlawful Acts of Violence at Airports Serving International Civil
          Aviation, supplementary to the Convention for the Suppression
          of Unlawful Acts against the Safety of Civil Aviation (1988),
          Convention for the Suppression of Unlawful Acts against the Safety
          of Maritime Navigation (1988), Protocol for the Suppression of
          Unlawful Acts against the Safety of Fixed Platforms located on the
          Continental Shelf (1988), and the International Convention for the
          Suppression of Terrorist Bombings (1997); and
       ii) Any other act intended to cause death or serious bodily injury to
          a civilian, or to any other person not taking an active part in the
          hostilities in a situation of armed conflict, when the purpose of such
          act, by its nature or context, is to intimidate a population, or to
          compel a Government or an international organisation to do or to
          abstain from doing any act.
    d) The term terrorist financing includes the financing of terrorist acts,
       and of terrorists and terrorist organisations.
    e) The term terrorist organisation refers to any group of terrorists that:
       (i) commits, or attempts to commit, terrorist acts by any means,
       directly or indirectly, unlawfully and wilfully; (ii) participates as an
       accomplice in terrorist acts; (iii) organises or directs others to commit
       terrorist acts; or (iv) contributes to the commission of terrorist acts by
       a group of persons acting with a common purpose where the contribu-
       tion is made intentionally and with the aim of furthering the terrorist
       act or with the knowledge of the intention of the group to commit a
       terrorist act.



CHARACTERISTICS OF THE TERRORIST FINANCING OFFENCE


3. Terrorist financing offences should extend to any person who wilfully pro-
vides or collects funds by any means, directly or indirectly, with the unlawful
intention that they should be used or in the knowledge that they are to be
used, in full or in part: (a) to carry out a terrorist act(s); (b) by a terrorist
organisation; or (c) by an individual terrorist.




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432 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              4. Criminalising terrorist financing solely on the basis of aiding and abetting,
              attempt, or conspiracy does not comply with this Recommendation.


              5. Terrorist financing offences should extend to any funds whether from a
              legitimate or illegitimate source.


              6. Terrorist financing offences should not require that the funds: (a) were
              actually used to carry out or attempt a terrorist act(s); or (b) be linked to a
              specific terrorist act(s).


              7. It should also be an offence to attempt to commit the offence of terrorist
              financing.


              8. It should also be an offence to engage in any of the following types of con-
              duct:


                  a) Participating as an accomplice in an offence as set forth in paragraphs
                      3 or 7 of this Interpretative Note;
                  b) Organising or directing others to commit an offence as set forth in
                      paragraphs 3 or 7 of this Interpretative Note;
                  c) Contributing to the commission of one or more offence(s) as set forth
                      in paragraphs 3 or 7 of this Interpretative Note by a group of persons
                      acting with a common purpose. Such contribution shall be intentional
                      and shall either: (i) be made with the aim of furthering the criminal
                      activity or criminal purpose of the group, where such activity or pur-
                      pose involves the commission of a terrorist financing offence; or (ii) be
                      made in the knowledge of the intention of the group to commit a ter-
                      rorist financing offence.


              9. Terrorist financing offences should be predicate offences for money laun-
              dering.


              10. Terrorist financing offences should apply, regardless of whether the per-
              son alleged to have committed the offence(s) is in the same country or a dif-
              ferent country from the one in which the terrorist(s)/terrorist organisation(s)
              is located or the terrorist act(s) occurred/will occur.




     Annex VI-4
   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations        433

11. The law should permit the intentional element of the terrorist financing
offence to be inferred from objective factual circumstances.


12. Criminal liability for terrorist financing should extend to legal persons.
Where that is not possible (i.e. due to fundamental principles of domestic
law), civil or administrative liability should apply.


13. Making legal persons subject to criminal liability for terrorist financing
should not preclude the possibility of parallel criminal, civil or administrative
proceedings in countries in which more than one form of liability is available.


14. Natural and legal persons should be subject to effective, proportionate and
dissuasive criminal, civil or administrative sanctions for terrorist financing.



Interpretative Note to Special Recommendation III: Freezing and Confiscating
Terrorist Assets Objectives


1. FATF Special Recommendation III consists of two obligations. The first
requires jurisdictions to implement measures that will freeze or, if appropri-
ate, seize terrorist-related funds or other assets without delay in accordance
with relevant United Nations resolutions. The second obligation of Special
Recommendation III is to have measures in place that permit a jurisdiction to
seize or confiscate terrorist funds or other assets on the basis of an order or
mechanism issued by a competent authority or a court.


2. The objective of the first requirement is to freeze terrorist-related funds or
other assets based on reasonable grounds, or a reasonable basis, to suspect
or believe that such funds or other assets could be used to finance terrorist
activity. The objective of the second requirement is to deprive terrorists of
these funds or other assets if and when links have been adequately estab-
lished between the funds or other assets and terrorists or terrorist activity.
The intent of the first objective is preventative, while the intent of the second
objective is mainly preventative and punitive. Both requirements are neces-
sary to deprive terrorists and terrorist networks of the means to conduct
future terrorist activity and maintain their infrastructure and operations.




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434 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              SCOPE

              3. Special Recommendation III is intended, with regard to its first require-
              ment, to complement the obligations in the context of the United Nations
              Security Council (UNSC) resolutions relating to the prevention and suppres-
              sion of the financing of terrorist acts—S/RES/1267(1999) and its successor
              resolutions,2 S/RES/1373(2001) and any prospective resolutions related to
              the freezing, or if appropriate seizure, of terrorist assets. It should be stressed
              that none of the obligations in Special Recommendation III is intended to
              replace other measures or obligations that may already be in place for deal-
              ing with funds or other assets in the context of a criminal, civil or adminis-
              trative investigation or proceeding.3 The focus of Special Recommendation
              III instead is on the preventative measures that are necessary and unique in
              the context of stopping the flow or use of funds or other assets to terrorist
              groups.


              4. S/RES/1267(1999) and S/RES/1373(2001) differ in the persons and entities
              whose funds or other assets are to be frozen, the authorities responsible for
              making these designations, and the effect of these designations.


              5. S/RES/1267(1999) and its successor resolutions obligate jurisdictions
              to freeze without delay the funds or other assets owned or controlled by
              Al-Qaida, the Taliban, Usama bin Laden, or persons and entities associ-
              ated with them as designated by the United Nations Al-Qaida and Taliban
              Sanctions Committee established pursuant to United Nations Security
              Council Resolution 1267 (the Al-Qaida and Taliban Sanctions Committee),
              including funds derived from funds or other assets owned or controlled,


              2. When issued, S/RES/1267(1999) had a time limit of one year. A series of resolutions have been
                 issued by the United Nations Security Council (UNSC) to extend and further refine provisions of
                 S/RES/1267(1999). By successor resolutions are meant those resolutions that extend and are di-
                 rectly related to the original resolution S/RES/1267(1999). At the time of issue of this Interpreta-
                 tive Note, these resolutions included S/RES/1333(2000), S/RES/1363(2001), S/RES/1390(2002)
                 and S/RES/1455(2003). In this Interpretative Note, the term S/RES/1267(1999) refers to
                 S/RES/1267(1999) and its successor resolutions.
              3. For instance, both the UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic
                 Substances (1988) and UN Convention against Transnational Organised Crime (2000) contain
                 obligations regarding freezing, seizure and confiscation in the context of combating transna-
                 tional crime. Those obligations exist separately and apart from obligations that are set forth in
                 S/RES/1267(1999), S/RES/1373(2001) and SpecialRecommendation III.




     Annex VI-6
   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations                      435

directly or indirectly, by them or by persons acting on their behalf or at their
direction, and ensure that neither these nor any other funds or other assets
are made available, directly or indirectly, for such persons’ benefit, by their
nationals or by any person within their territory. The Al-Qaida and Taliban
Sanctions Committee is the authority responsible for designating the per-
sons and entities that should have their funds or other assets frozen under
S/RES/1267(1999). All jurisdictions that are members of the United Nations
are obligated by S/RES/1267(1999) to freeze the assets of persons and entities
so designated by the Al-Qaida and Taliban Sanctions Committee.4

6. S/RES/1373(2001) obligates jurisdictions5 to freeze without delay the
funds or other assets of persons who commit, or attempt to commit, terrorist
acts or participate in or facilitate the commission of terrorist acts; of entities
owned or controlled directly or indirectly by such persons; and of persons
and entities acting on behalf of, or at the direction of such persons and
entities, including funds or other assets derived or generated from property
owned or controlled, directly or indirectly, by such persons and associated
persons and entities. Each individual jurisdiction has the authority to des-
ignate the persons and entities that should have their funds or other assets
frozen. Additionally, to ensure that effective co-operation is developed among
jurisdictions, jurisdictions should examine and give effect to, if appropriate,
the actions initiated under the freezing mechanisms of other jurisdictions.
When (i) a specific notification or communication is sent and (ii) the jurisdic-
tion receiving the request is satisfied, according to applicable legal principles,
that a requested designation is supported by reasonable grounds, or a reason-
able basis, to suspect or believe that the proposed designee is a terrorist, one
who finances terrorism or a terrorist organisation, the jurisdiction receiving
the request must ensure that the funds or other assets of the designated per-
son are frozen without delay.




4. When the UNSC acts under Chapter VII of the UN Charter, the resolutions it issues are manda-
   tory for all UN members.
5. The UNSC was acting under Chapter VII of the UN Charter in issuing S/RES/1373(2001) (see
   previous footnote).




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436 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              DEFINITIONS

              7. For the purposes of Special Recommendation III and this Interpretive
              Note, the following definitions apply:

                  a) The term freeze means to prohibit the transfer, conversion, disposition
                      or movement of funds or other assets on the basis of, and for the dura-
                      tion of the validity of, an action initiated by a competent authority or
                      a court under a freezing mechanism. The frozen funds or other assets
                      remain the property of the person(s) or entity(ies) that held an interest
                      in the specified funds or other assets at the time of the freezing and
                      may continue to be administered by the financial institution or other
                     arrangements designated by such person(s) or entity(ies) prior to the
                     initiation of an action under a freezing mechanism.
                  b) The term seize means to prohibit the transfer, conversion, disposi-
                      tion or movement of funds or other assets on the basis of an action
                      initiated by a competent authority or a court under a freezing mecha-
                      nism. However, unlike a freezing action, a seizure is effected by a
                      mechanism that allows the competent authority or court to take
                      control of specified funds or other assets. The seized funds or other
                      assets remain the property of the person(s) or entity(ies) that held an
                      interest in the specified funds or other assets at the time of the sei-
                      zure, although the competent authority or court will often take over
                      possession, administration or management of the seized funds or
                      other assets.
                  c) The term confiscate, which includes forfeiture where applicable, means
                     the permanent deprivation of funds or other assets by order of a
                     competent authority or a court. Confiscation or forfeiture takes place
                     through a judicial or administrative procedure that transfers the own-
                     ership of specified funds or other assets to be transferred to the State.
                     In this case, the person(s) or entity(ies) that held an interest in the
                     specified funds or other assets at the time of the confiscation or forfei-
                     ture loses all rights, in principle, to the confiscated or forfeited funds
                     or other assets.6


              6. Confiscation or forfeiture orders are usually linked to a criminal conviction or a court deci-




     Annex VI-8
   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations                       437

    d) The term funds or other assets means financial assets, property of
        every kind, whether tangible or intangible, movable or immovable,
        however acquired, and legal documents or instruments in any form,
        including electronic or digital, evidencing title to, or interest in, such
        funds or other assets, including, but not limited to, bank credits, trav-
        ellers cheques, bank cheques, money orders, shares, securities, bonds,
        drafts, or letters of credit, and any interest, dividends or other income
        on or value accruing from or generated by such funds or other assets.
    e) The term terrorist refers to any natural person who: (i) commits, or
       attempts to commit, terrorist acts7 by any means, directly or indirectly,
        unlawfully and wilfully; (ii) participates as an accomplice in terrorist
        acts or terrorist financing; (iii) organises or directs others to commit
        terrorist acts or terrorist financing; or (iv) contributes to the commis-
        sion of terrorist acts or terrorist financing by a group of persons acting
        with a common purpose where the contribution is made intentionally
        and with the aim of furthering the terrorist act or terrorist financing or
        with the knowledge of the intention of the group to commit a terrorist
        act or terrorist financing.
    f) The phrase those who finance terrorism refers to any person, group,
        undertaking or other entity that provides or collects, by any means,
        directly or indirectly, funds or other assets that may be used, in full or
        in part, to facilitate the commission of terrorist acts, or to any persons
        or entities acting on behalf of, or at the direction of such persons,
        groups, undertakings or other entities. This includes those who pro-
        vide or collect funds or other assets with the intention that they should

   sion whereby the confiscated or forfeited property is determined to have been derived from or
   intended for use in a violation of the law.
7. A terrorist act includes an act which constitutes an offence within the scope of, and as defined
   in one of the following treaties: Convention for the Suppression of Unlawful Seizure of Aircraft,
   Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation, Conven-
   tion on the Prevention and Punishment of Crimes against Internationally Protected Persons,
   including Diplomatic Agents, International Convention against the Taking of Hostages, Conven-
   tion on the Physical Protection of Nuclear Material, Protocol for the Suppression of Unlawful
   Acts of Violence at Airports Serving International Civil Aviation, supplementary to the Conven-
   tion for the Suppression of Unlawful Acts against the Safety of Civil Aviation, Convention for
   the Suppression of Unlawful Acts against the Safety of Maritime Navigation, Protocol for the
   Suppression of Unlawful Acts against the Safety of Fixed Platforms located on the Continental
   Shelf, International Convention for the Suppression of Terrorist Bombings, and the International
   Convention for the Suppression of the Financing of Terrorism (1999).




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438 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                     be used or in the knowledge that they are to be used, in full or in part,
                     in order to carry out terrorist acts.
                   g) The term terrorist organisation refers to any legal person, group,
                     undertaking or other entity owned or controlled directly or indirectly
                     by a terrorist(s).
                   h) The term designated persons refers to those persons or entities desig-
                     nated by the Al-Qaida and Taliban Sanctions Committee pursuant to
                     S/RES/1267(1999) or those persons or entities designated and accept-
                     ed, as appropriate, by jurisdictions pursuant to S/RES/1373(2001).
                   i) The phrase without delay, for the purposes of S/RES/1267(1999),
                     means, ideally, within a matter of hours of a designation by the
                     Al-Qaida and Taliban Sanctions Committee. For the purposes of S/
                     RES/1373(2001), the phrase without delay means upon having reason-
                     able grounds, or a reasonable basis, to suspect or believe that a person
                     or entity is a terrorist, one who finances terrorism or a terrorist organ-
                     isation. The phrase without delay should be interpreted in the context
                     of the need to prevent the flight or dissipation of terrorist-linked funds
                     or other assets, and the need for global, concerted action to interdict
                     and disrupt their flow swiftly.



              FREEZING WITHOUT DELAY TERRORIST-RELATED FUNDS OR OTHER ASSETS


              8. In order to fulfil the preventive intent of Special Recommendation III,
              jurisdictions should establish the necessary authority and adopt the follow-
              ing standards and procedures to freeze the funds or other assets of terrorists,
              those who finance terrorism and terrorist organisations in accordance with
              both S/RES/1267(1999) and S/RES/1373(2001):


                   a) Authority to freeze, unfreeze and prohibit dealing in funds or other
                     assets of designated persons. Jurisdictions should prohibit by enforce-
                     able means the transfer, conversion, disposition or movement of funds
                     or other assets. Options for providing the authority to freeze and
                     unfreeze terrorist funds or other assets include:




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Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations         439

   i) empowering or designating a competent authority or a court to
      issue, administer and enforce freezing and unfreezing actions under
      relevant mechanisms, or
   ii) enacting legislation that places responsibility for freezing the funds
      or other assets of designated persons publicly identified by a com-
      petent authority or a court on the person or entity holding the
      funds or other assets and subjecting them to sanctions for non-com-
      pliance.
      The authority to freeze and unfreeze funds or other assets should
   also extend to funds or other assets derived or generated from funds or
   other assets owned or controlled directly or indirectly by such terror-
   ists, those who finance terrorism, or terrorist organisations.
      Whatever option is chosen there should be clearly identifiable com-
   petent authorities responsible for enforcing the measures. The com-
   petent authorities shall ensure that their nationals or any persons and
   entities within their territories are prohibited from making any funds
   or other assets, economic resources or financial or other related ser-
   vices available, directly or indirectly, wholly or jointly, for the benefit
   of: designated persons, terrorists; those who finance terrorism; terrorist
   organisations; entities owned or controlled, directly or indirectly, by
   such persons or entities; and persons and entities acting on behalf of or
   at the direction of such persons or entities.
b) Freezing procedures. Jurisdictions should develop and implement pro-
   cedures to freeze the funds or other assets specified in paragraph (c)
   below without delay and without giving prior notice to the persons
   or entities concerned. Persons or entities holding such funds or other
   assets should be required by law to freeze them and should further-
   more be subject to sanctions for non-compliance with this require-
   ment. Any delay between the official receipt of information provided
   in support of a designation and the actual freezing of the funds or
   other assets of designated persons undermines the effectiveness of
   designation by affording designated persons time to remove funds or
   other assets from identifiable accounts and places. Consequently, these
   procedures must ensure (i) the prompt determination whether reason-
   able grounds or a reasonable basis exists to initiate an action under a
   freezing mechanism and (ii) the subsequent freezing of funds or other




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                     assets without delay upon determination that such grounds or basis for
                     freezing exist. Jurisdictions should develop efficient and effective sys-
                     tems for communicating actions taken under their freezing mechanisms
                     to the financial sector immediately upon taking such action. As well,
                     they should provide clear guidance, particularly financial institutions
                     and other persons or entities that may be holding targeted funds or
                     other assets on obligations in taking action under freezing mechanisms.
                   c) Funds or other assets to be frozen or, if appropriate, seized. Under
                     Special Recommendation III, funds or other assets to be frozen
                     include those subject to freezing under S/RES/1267(1999) and S/
                     RES/1373(2001). Such funds or other assets would also include those
                     wholly or jointly owned or controlled, directly or indirectly, by desig-
                     nated persons. In accordance with their obligations under the United
                     Nations International Convention for the Suppression of the Financing
                     of Terrorism (1999) (the Terrorist Financing Convention (1999)), juris-
                     dictions should be able to freeze or, if appropriate, seize any funds or
                     other assets that they identify, detect, and verify, in accordance with
                     applicable legal principles, as being used by, allocated for, or being
                     made available to terrorists, those who finance terrorists or terror-
                     ist organisations. Freezing or seizing under the Terrorist Financing
                     Convention (1999) may be conducted by freezing or seizing in the con-
                     text of a criminal investigation or proceeding. Freezing action taken
                     under Special Recommendation III shall be without prejudice to the
                     rights of third parties acting in good faith.
                   d) De-listing and unfreezing procedures. Jurisdictions should develop
                     and implement publicly known procedures to consider de-listing
                     requests upon satisfaction of certain criteria consistent with interna-
                     tional obligations and applicable legal principles, and to unfreeze the
                     funds or other assets of de-listed persons or entities in a timely man-
                     ner. For persons and entities designated under S/RES/1267(1999),
                     such procedures and criteria should be in accordance with proce-
                     dures adopted by the Al-Qaida and Taliban Sanctions Committee
                     under S/RES/1267(1999).
                   e) Unfreezing upon verification of identity. For persons or entities with
                     the same or similar name as designated persons, who are inadvertently
                     affected by a freezing mechanism, jurisdictions should develop and




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   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations               441

        implement publicly known procedures to unfreeze the funds or other
        assets of such persons or entities in a timely manner upon verification
        that the person or entity involved is not a designated person.
    f) Providing access to frozen funds or other assets in certain circum-
        stances. Where jurisdictions have determined that funds or other
        assets, which are otherwise subject to freezing pursuant to the obliga-
        tions under S/RES/1267(1999), are necessary for basic expenses; for
        the payment of certain types of fees, expenses and service charges, or
        for extraordinary expenses,8 jurisdictions should authorise access to
        such funds or other assets in accordance with the procedures set out
        in S/RES/1452(2002) and subject to approval of the Al-Qaida and
        Taliban Sanctions Committee. On the same grounds, jurisdictions
        may authorise access to funds or other assets, if freezing measures are
        applied pursuant to S/RES/1373(2001).
    g) Remedies. Jurisdictions should provide for a mechanism through
        which a person or an entity that is the target of a freezing mechanism
        in the context of terrorist financing can challenge that measure with a
        view to having it reviewed by a competent authority or a court.
    h) Sanctions. Jurisdictions should adopt appropriate measures to monitor
        effectively the compliance with relevant legislation, rules or regulations
        governing freezing mechanisms by financial institutions and other per-
        sons or entities that may be holding funds or other assets as indicated
        in paragraph 8(c) above. Failure to comply with such legislation, rules
        or regulations should be subject to civil, administrative or criminal
        sanctions.



SEIZURE AND CONFISCATION


9. Consistent with FATF Recommendation 3, jurisdictions should adopt mea-
sures similar to those set forth in Article V of the United Nations Convention
against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988),
Articles 12 to 14 of the United Nations Convention on Transnational
Organised Crime (2000), and Article 8 of the Terrorist Financing Convention

8. See Article 1, S/RES/1452(2002) for the specific types of expenses that are covered.




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              (1999), including legislative measures, to enable their courts or competent
              authorities to seize and confiscate terrorist funds or other assets.



              Interpretative Note to Special Recommendation VI: Alternative Remittance


              GENERAL


              1. Money or value transfer systems have shown themselves vulnerable to
              misuse for money laundering and terrorist financing purposes. The objective
              of Special Recommendation VI is to increase the transparency of payment
              flows by ensuring that jurisdictions impose consistent anti-money laundering
              and counter-terrorist financing measures on all forms of money/value transfer
              systems, particularly those traditionally operating outside the conventional
              financial sector and not currently subject to the FATF Recommendations.
              This Recommendation and Interpretative Note underscore the need to bring
              all money or value transfer services, whether formal or informal, within the
              ambit of certain minimum legal and regulatory requirements in accordance
              with the relevant FATF Recommendations.


              2. Special Recommendation VI consists of three core elements:


                   a) Jurisdictions should require licensing or registration of persons (natural
                      or legal) that provide money/value transfer services, including through
                      informal systems;
                   b) Jurisdictions should ensure that money/value transmission services,
                      including informal systems (as described in paragraph 5 below), are
                      subject to applicable FATF Forty Recommendations (2003) (in par-
                      ticular, Recommendations 4–16 and 21–25)9 and the Eight Special
                      Recommendations (in particular SR VII); and
                   c) Jurisdictions should be able to impose sanctions on money/value
                      transfer services, including informal systems, that operate without

              9. When this Interpretative Note was originally issued, these references were to the 1996 FATF
                 Forty Recommendations. Subsequent to the publication of the revised FATF Forty Recommenda-
                 tions in June 2003, this text was updated accordingly. All references are now to the 2003 FATF
                 Forty Recommendations.




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   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations                          443

        a license or registration and that fail to comply with relevant FATF
        Recommendations.

SCOPE AND APPLICATION

3. For the purposes of this Recommendation, the following definitions are
used.

4. Money or value transfer service refers to a financial service that accepts
cash, cheques, other monetary instruments or other stores of value in one
location and pays a corresponding sum in cash or other form to a benefi-
ciary in another location by means of a communication, message, transfer
or through a clearing network to which the money/value transfer service
belongs. Transactions performed by such services can involve one or more
intermediaries and a third party final payment.


5. A money or value transfer service may be provided by persons (natural or
legal) formally through the regulated financial system or informally through
non-bank financial institutions or other business entities or any other mecha-
nism either through the regulated financial system (for example, use of bank
accounts) or through a network or mechanism that operates outside the regu-
lated system. In some jurisdictions, informal systems are frequently referred
to as alternative remittance services or underground (or parallel) banking
systems. Often these systems have ties to particular geographic regions and
are therefore described using a variety of specific terms. Some examples of
these terms include hawala, hundi, fei-chien, and the black market peso
exchange.10


6. Licensing means a requirement to obtain permission from a designated
competent authority in order to operate a money/value transfer service legally.




10. The inclusion of these examples does not suggest that such systems are legal in any particular
    jurisdiction.




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444 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              7. Registration in this Recommendation means a requirement to register with
              or declare to a designated competent authority the existence of a money/
              value transfer service in order for the business to operate legally.


              8. The obligation of licensing or registration applies to agents. At a mini-
              mum, the principal business must maintain a current list of agents which
              must be made available to the designated competent authority. An agent is
              any person who provides money or value transfer service under the direction
              of or by contract with a legally registered or licensed remitter (for example,
              licensees, franchisees, concessionaires).



              APPLICABILITY OF SPECIAL RECOMMENDATION VI


              9. Special Recommendation VI should apply to all persons (natural or legal),
              which conduct for or on behalf of another person (natural or legal) the types
              of activity described in paragraphs 4 and 5 above as a primary or substantial
              part of their business or when such activity is undertaken on a regular or
              recurring basis, including as an ancillary part of a separate business enter-
              prise.


              10. Jurisdictions need not impose a separate licensing / registration system or
              designate another competent authority in respect to persons (natural or legal)
              already licensed or registered as financial institutions (as defined by the FATF
              Forty Recommendations [2003]) within a particular jurisdiction, which under
              such license or registration are permitted to perform activities indicated in
              paragraphs 4 and 5 above and which are already subject to the full range
              of applicable obligations under the FATF Forty Recommendations (2003)
              (in particular, Recommendations 4–16 and 21–25) and the Eight Special
              Recommendations (in particular SR VII).



              LICENSING OR REGISTRATION AND COMPLIANCE


              11. Jurisdictions should designate an authority to grant licences and/or
              carry out registration and ensure that the requirement is observed. There




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    Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations                          445

should be an authority responsible for ensuring compliance by money/value
transfer services with the FATF Recommendations (including the Eight
Special Recommendations). There should also be effective systems in place
for monitoring and ensuring such compliance. This interpretation of Special
Recommendation VI (i.e., the need for designation of competent authorities)
is consistent with FATF Recommendation 23.



SANCTIONS

12. Persons providing money/value transfer services without a license or
registration should be subject to appropriate administrative, civil or crimi-
nal sanctions.11 Licensed or registered money/value transfer services which
fail to comply fully with the relevant measures called for in the FATF Forty
Recommendations (2003) or the Eight Special Recommendations should also
be subject to appropriate sanctions.



Interpretative Note to Special Recommendation VII: Wire Transfers12


OBJECTIVE


1. Special Recommendation VII (SR VII) was developed with the objective
of preventing terrorists and other criminals from having unfettered access to
wire transfers for moving their funds and for detecting such misuse when it
occurs. Specifically, it aims to ensure that basic information on the originator
of wire transfers is immediately available (1) to appropriate law enforcement
and/or prosecutorial authorities to assist them in detecting, investigating,
prosecuting terrorists or other criminals and tracing the assets of terrorists
or other criminals, (2) to financial intelligence units for analysing suspicious
or unusual activity and disseminating it as necessary, and (3) to beneficiary
financial institutions to facilitate the identification and reporting of suspicious

11. The inclusion of these examples does not suggest that such systems are legal in any particular
    jurisdiction.
12. It is recognised that jurisdictions will need time to make relevant legislative or regulatory changes
    and to allow financial institutions to make necessary adaptations to their systems and procedures.
    This period should not be longer than two years after the adoption of this Interpretative Note.




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446 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              transactions. It is not the intention of the FATF to impose rigid standards or
              to mandate a single operating process that would negatively affect the pay-
              ment system.



              DEFINITIONS


              2. For the purposes of this interpretative note, the following definitions
              apply.

                   a) The terms wire transfer and funds transfer refer to any transaction
                      carried out on behalf of an originator person (both natural and legal)
                      through a financial institution by electronic means with a view to mak-
                      ing an amount of money available to a beneficiary person at another
                      financial institution. The originator and the beneficiary may be the
                      same person.
                   b) Cross-border transfer means any wire transfer where the originator
                      and beneficiary institutions are located in different jurisdictions. This
                      term also refers to any chain of wire transfers that has at least one
                      cross-border element.
                   c) Domestic transfer means any wire transfer where the originator and
                      beneficiary institutions are located in the same jurisdiction. This term
                      therefore refers to any chain of wire transfers that takes place entirely
                      within the borders of a single jurisdiction, even though the system used
                      to effect the wire transfer may be located in another jurisdiction.
                   d) The term financial institution is as defined by the FATF Forty
                      Recommendations (2003).13 The term does not apply to any persons
                      or entities that provide financial institutions solely with message or
                      other support systems for transmitting funds.14




              13. When this Interpretative Note was originally issued, these references were to the 1996 FATF
                  Forty Recommendations. Subsequent to the publication of the revised FATF Forty Recommenda-
                  tions in June 2003, this text was updated accordingly. All references are now to the 2003 FATF
                  Forty Recommendations.
              14. However, these systems do have a role in providing the necessary means for the financial institu-
                  tions to fulfil their obligations under SR VII and, in particular, in preserving the integrity of the
                  information transmitted with a wire transfer.




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   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations                        447

    e) The originator is the account holder, or where there is no account, the
        person (natural or legal) that places the order with the financial institu-
        tion to perform the wire transfer.



SCOPE


3. SR VII applies, under the conditions set out below, to cross-border and
domestic transfers between financial institutions.



CROSS-BORDER WIRE TRANSFERS


4. Cross-border wire transfers should be accompanied by accurate and mean-
ingful originator information.15

5. Information accompanying cross-border wire transfers must always contain
the name of the originator and where an account exists, the number of that
account. In the absence of an account, a unique reference number must be
included.


6. Information accompanying the wire transfer should also contain the
address of the originator. However, jurisdictions may permit financial institu-
tions to substitute the address with a national identity number, customer iden-
tification number, or date and place of birth.


7. Cross-border wire transfers that are contained within batch transfers,
except for those sent by money remitters, will be treated as domestic wire
transfers. In such cases, the ordering institutions must retain the information
necessary to identify all originators and make it available on request to the
authorities and to the beneficiary financial institution. Financial institutions

15. Jurisdictions may have a de minimis threshold (no higher than USD 3,000) for a one-year period
    from publication of this Interpretative Note. At the end of this period, the FATF will undertake
    a review of this issue to determine whether the use of a de minimis threshold is acceptable. Not-
    withstanding any thresholds, accurate and meaningful originator information must be retained
    and made available by the ordering financing institution as set forth in paragraph 9.




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448 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              should ensure that non-routine transactions are not batched where this
              would increase the risk of money laundering or terrorist financing.



              DOMESTIC WIRE TRANSFERS


              8. Information accompanying domestic wire transfers must also include
              originator information as indicated for cross-border wire transfers, unless
              full originator information can be made available to the beneficiary financial
              institution and appropriate authorities by other means. In this latter case,
              financial institutions need only include the account number or a unique iden-
              tifier provided that this number or identifier will permit the transaction to be
              traced back to the originator.


              9. The information must be made available by the ordering financial insti-
              tution within three business days of receiving the request either from the
              beneficiary financial institution or from appropriate authorities. Law enforce-
              ment authorities should be able to compel immediate production of such
              information.



              EXEMPTIONS FROM SR VII


              10. SR VII is not intended to cover the following types of payments:

                   a) Any transfer that flows from a transaction carried out using a credit or
                      debit card so long as the credit or debit card number accompanies all
                      transfers flowing from the transaction. However, when credit or debit
                      cards are used as a payment system to effect a money transfer, they are
                      covered by SR VII, and the necessary information should be included
                      in the message.
                   b) Financial institution-to-financial institution transfers and settlements
                      where both the originator person and the beneficiary person are finan-
                      cial institutions acting on their own behalf.




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    Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations    449

ROLE OF ORDERING, INTERMEDIARY AND BENEFICIARY FINANCIAL INSTITUTIONS

ORDERING FINANCIAL INSTITUTION

11. The ordering financial institution must ensure that qualifying wire
transfers contain complete originator information. The ordering financial
institution must also verify this information for accuracy and maintain this
information in accordance with the standards set out in the FATF Forty
Recommendations (2003).16



INTERMEDIARY FINANCIAL INSTITUTION


12. For both cross-border and domestic wire transfers, financial institutions
processing an intermediary element of such chains of wire transfers must
ensure that all originator information that accompanies a wire transfer is
retained with the transfer.


13. Where technical limitations prevent the full originator information accom-
panying a crossborder wire transfer from remaining with a related domestic
wire transfer (during the necessary time to adapt payment systems), a record
must be kept for five years by the receiving intermediary financial institution
of all the information received from the ordering financial institution.



BENEFICIARY FINANCIAL INSTITUTION


14. Beneficiary financial institutions should have effective risk-based proce-
dures in place to identify wire transfers lacking complete originator informa-
tion. The lack of complete originator information may be considered as a fac-
tor in assessing whether a wire transfer or related transactions are suspicious
and, as appropriate, whether they are thus required to be reported to the
financial intelligence unit or other competent authorities. In some cases, the
beneficiary financial institution should consider restricting or even terminat-



16. See footnote 2.




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450 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              ing its business relationship with financial institutions that fail to meet SRVII
              standards.



              ENFORCEMENT MECHANISMS FOR FINANCIAL INSTITUTIONS THAT DO NOT COMPLY WITH WIRE TRANS-
              FER RULES AND REGULATIONS



              15. Jurisdictions should adopt appropriate measures to monitor effectively
              the compliance of financial institutions with rules and regulations governing
              wire transfers. Financial institutions that fail to comply with such rules and
              regulations should be subject to civil, administrative or criminal sanctions.



              Guidance Notes


              1.The Eight Special Recommendations on terrorist financing were adopted
              by the FATF in October 2001. Immediately following their adoption,
              the FATF undertook to assess the level of implementation of the Special
              Recommendations through a self-assessment exercise. A self-assessment ques-
              tionnaire on terrorist financing (SAQTF) was developed with a series of ques-
              tions for each Special Recommendation. The questions were designed to elicit
              details that would help determine whether a particular jurisdiction has in fact
              implemented a particular Special Recommendation.


              2. Since the adoption of the Special Recommendations, the FATF has had
              little time to develop interpretations based on the experience of implement-
              ing these measures. Upon completion of the initial phase of this exercise by
              FATF members, it was therefore decided that additional guidance would be
              drafted and published to assist non-FATF members in understanding some of
              the concepts contained in the Special Recommendations on terrorist financ-
              ing and to clarify certain parts of the SAQTF. This document therefore con-
              tains additional clarification of the Eight Special Recommendations and the
              SAQTF.


              3. It should be emphasised at the start that the information presented here is
              meant primarily to serve as a guide to jurisdictions attempting to fill in and




     Annex VI-22
   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations       451

submit the SAQTF. For this reason, they should not be considered exhaustive
or definitive. Any questions on particular interpretations or implications of
the Special Recommendations should be directed to the FATF Secretariat at
contact@fatf-gafi.org.



SR I: Ratification and implementation of UN instruments


4. This Recommendation contains six elements:


   • Jurisdictions should ratify and fully implement the 1999 United
      Nations International Convention for the Suppression of the Financing
      of Terrorism, and
   • Jurisdictions should implement five UN Security Council Resolutions:
      S/RES/1267(1999), S/RES/1269(1999), S/RES/1333(2000), S/
      RES/1373(2001) and S/RES/1390(2001).


5. For the purposes of this Special Recommendation, ratification means hav-
ing carried out any necessary national legislative or executive procedures
to approve the UN Convention and having delivered appropriate ratifica-
tion instruments to the United Nations. Implementation as used here means
having put measures in place to bring the requirements indicated in the UN
Convention and UNSC Resolutions into effect. The measures may be estab-
lished by law, regulation, directive, decree, or any other appropriate legisla-
tive or executive act according to national law.


6. The UN Convention was open for signature from 10 January 2000 to 31
December 2001, and upon signature is subject to ratification, acceptance or
approval. Ratification, acceptance or approval instruments must be deposited
with the Secretary-General of the United Nations in New York. Those coun-
tries that have not signed the Convention may accede to it (see Article 25 of
the Convention). The full text of the UN Convention may be consulted at
http://untreaty.un.org/English/Terrorism/conv12.pdf. As of 19 March 2002,
132 countries have signed, and 24 have deposited ratification instruments.
On 10 March 2002, the UN Convention reached the minimum number of
ratifications (22) stipulated as necessary for it to come into effect. The effec-




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452 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              tive date of the Convention is 10 April 2002. The web page containing
              information on the status of the Convention is located on the UN website at
              http://untreaty.un.org/ENGLISH/status/Chapter_xviii/ treaty11.asp. For gen-
              eral information about UN treaties, see http://untreaty. un.org/english/guide.
              asp and the Treaty Handbook of the UN Office of Legal Affairs at http://
              untreaty.un.org/English/TreatyHandbook/hbframeset.htm. The texts of the
              relevant UN Security Council Resolutions may be consulted on the UN web-
              site at http://www.un.org/documents/scres.htm.



              SR II: Criminalising the financing of terrorism and associated money laundering


              7. This Recommendation contains two elements:


                   • Jurisdictions should criminalise “the financing of terrorism, of terrorist
                      acts and of terrorist organisations”; and
                   • Jurisdictions should establish terrorist financing offences as predicate
                      offences for money laundering.


              8. In implementing SR II, jurisdictions must either establish specific criminal
              offences for terrorist financing activities, or they must be able to cite exist-
              ing criminal offences that may be directly applied to such cases. The terms
              financing of terrorism or financing of terrorist acts refer to the activities
              described in the UN Convention (Article 2) and S/RES/1373(2001), para-
              graph 1b (see the UN website at http://www.un.org/documents/scres.htm for
              text of this Resolution). It should be noted that each jurisdiction should also
              ensure that terrorist financing offences apply as predicate offences even when
              carried out in another State. This corollary interpretation of SR II is then
              consistent with FATF Recommendation 4.


              9. FATF Recommendation 4 already calls for jurisdictions to designate “seri-
              ous offences” as predicates for the offence of money laundering. SR II builds
              on Recommendation 4 by requiring that,given the gravity of terrorist financ-
              ing offences, terrorism financing offences should be specifically included
              among the predicates for money laundering. For the full text of the FATF




     Annex VI-24
   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations         453

Forty Recommendations, along with their Interpretative Notes, see the FATF
website at http://www.fatfgafi.org/40Recs_en.htm.


10. Finally, as in general with other predicates for money laundering, juris-
dictions should ensure that terrorist financing offences are predicate offences
even if they are committed in a jurisdiction different from the one in which
the money laundering offence is being applied.



SR III: Freezing and confiscating terrorist assets


11. This Recommendation contains three major elements:


    • Jurisdictions should have the authority to freeze funds or assets of (a)
       terrorists and terrorist organisations and (b) those who finance terrorist
       acts or terrorist organisations;
    • They should have the authority to seize (a) the proceeds of terrorism or
       of terrorist acts, (b) the property used in terrorism, in terrorist acts or
       by terrorist organisations and (c) property intended or allocated for use
       in terrorism, in terrorist acts or by terrorist organisations; and
    • They should have the authority to confiscate (a) the proceeds of terror-
       ism or of terrorist acts, (b) the property used in terrorism, in terrorist
       acts or by terrorist organisations and (c) property intended or allocated
       for use in terrorism, in terrorist acts or by terrorist organisations.


12. The term measures, as used in SR III, refers to explicit (legislative or
regulatory) provisions or “executive powers” that permit the three types
of action. As with the preceding Recommendation, it is not necessary that
the texts authorising these powers mention terrorist financing in particular.
However, jurisdictions with already existing laws must be able to cite specific
provisions that permit them to freeze, to seize or to confiscate terrorist related
funds and assets within the national legal/judicial context.


13. The definitions of the concepts of freezing, seizure and confiscation vary
from one jurisdiction to another. For the purposes of general guidance, the
following descriptions of these terms are provided:




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454 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              14. Freezing: In the context of this Recommendation, a competent govern-
              ment or judicial authority must be able to freeze, to block or to restrain spe-
              cific funds or assets and thus prevent them from being moved or disposed of.
              The assets/funds remain the property of the original owner and may continue
              to be administered by the financial institution or other management arrange-
              ment designated by the owner.


              15. Seizure: As with freezing, competent government or judicial authorities
              must be able to take action or to issue an order that allows them to take con-
              trol of specified funds or assets. The assets/funds remain the property of the
              original owner, although the competent authority will often take over posses-
              sion, administration or management of the assets/funds.


              16. Confiscation (or forfeiture): Confiscation or forfeiture takes place when
              competent government or judicial authorities order that the ownership of
              specified funds or assets be transferred to the State. In this case, the original
              owner loses all rights to the property. Confiscation or forfeiture orders are
              usually linked to a criminal conviction and a court decision whereby the
              property is determined to have been derived from or intended for use in a
              violation of the law.


              17. With regard to freezing in the context of SR III, the terms terrorists,
              those who finance terrorism and terrorist organisations refer to individu-
              als and entities identified pursuant to S/RES/1267 (1999) and S/RES/1390
              (2002), as well as to any other individuals and entities designated as such by
              individual national governments.



              SR IV: Reporting suspicious transactions related to terrorism


              18. This Recommendation contains two major elements:


                   • Jurisdictions should establish a requirement for making a report to
                     competent authorities when there is a suspicion that funds are linked
                     to terrorist financing; or




     Annex VI-26
   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations     455

    • Jurisdictions should establish a requirement for making a report to
       competent authorities when there are reasonable grounds to suspect
       that funds are linked to terrorist financing.


19. For SR IV, the term financial institutions refers to both banks and non-
bank financial institutions (NBFIs). In the context of assessing implementa-
tion of FATF Recommendations, NBFIs include, as a minimum, the following
types of financial services: bureaux de change, stockbrokers, insurance com-
panies and money remittance/transfer services. This definition of financial
institutions is also understood to apply to SR IV in order to be consistent
with the interpretation of the FATF Forty Recommendations. With regard
specifically to SR IV, if other types of professions, businesses or business
activities currently fall under anti-money laundering reporting obligations,
jurisdictions should also extend terrorist financing reporting requirements to
those entities or activities.


20. The term competent authority, for the purposes of SR IV, is understood to
be either the jurisdiction’s financial intelligence unit (FIU) or another central
authority that has been designated by the jurisdiction for receiving disclosures
related to money laundering.


21. With regard to the terms suspect and have reasonable grounds to suspect,
the distinction is being made between levels of mental certainty that could
form the basis for reporting a transaction. The first term—that is, a require-
ment to report to competent authorities when a financial institution suspects
that funds are derived from or intended for use in terrorist activity—is a
subjective standard and transposes the reporting obligation called for in FATF
Recommendation 15 to SR IV. The requirement to report transactions when
there are reasonable grounds to suspect that the funds are derived from or
intended for use in terrorist activity is an objective standard, which is consis-
tent with the intent of Recommendation 15 although somewhat broader. In
the context of SR IV, jurisdictions should establish a reporting obligation that
may be based either on suspicion or on having reasonable grounds to suspect.




                                                                                Annex VI-27
456 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              SR V: International Co-operation

              22. This Recommendation contains five elements:


                   • Jurisdictions should permit the exchange of information regarding
                     terrorist financing with other jurisdictions through mutual legal assis-
                     tance mechanisms;
                   • Jurisdictions should permit the exchange of information regarding ter-
                     rorist financing with other jurisdictions by means other than through
                     mutual legal assistance mechanisms;
                   • Jurisdictions should have specific measures to permit the denial of
                     “safe haven” to individuals involved in terrorist financing;
                   • Jurisdictions should have procedures that permit the extradition of
                     individuals involved in terrorist financing; and
                   • Jurisdictions should have provisions or procedures to ensure that
                     “claims of political motivation are not recognised as a ground for
                     refusing requests to extradite persons alleged to be involved in terrorist
                     financing.”

              23. To obtain a clear picture of the situation in each jurisdiction through the
              self-assessment process, an artificial distinction has been made for some ques-
              tions in the SAQTF between international co-operation through mutual legal
              assistance mechanisms on the one hand and information exchange through
              means other than through mutual legal assistance.

              24. For the purposes of SR V, the term mutual legal assistance means the
              power to provide a full range of both non-coercive legal assistance, including
              the taking of evidence, the production of documents for investigation or as
              evidence, the search and seizure of documents or things relevant to criminal
              proceedings or to a criminal investigation, the ability to enforce a foreign
              restraint, seizure, forfeiture or confiscation order in a criminal matter. In this
              instance, mutual legal assistance would also include information exchange
              through rogatory commissions (that is, from the judicial authorities in one
              jurisdiction to those in another).




     Annex VI-28
   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations       457

25. Exchange of information by means other than through mutual legal assis-
tance includes any arrangement other than those described in the preceding
paragraph. Under this category should be included exchanges that take place
between FIUs or other agencies that communicate bilaterally on the basis of
memoranda of understanding (MOUs), exchanges of letters, etc.

26. With regard to the last three elements of SR V, these concepts should
be understood as referred to in the relevant UN documents. These are
S/RES/1373 (2001), paragraph 2c (for denial of safe haven); the UN
Convention, Article 11 (for extradition); and the UN Convention, Article
14 (for rejection of claims of political motivation as related to extradition).
The text of the UN Convention may be consulted at http://untreaty.un.org/
English/Terrorism.asp; the text of S/RES/1373 (2001) may be accessed at
http://www.un.org/documents.scres.htm.

27. The term civil enforcement as used in SR V is intended to refer only to
the type of investigations, inquiries or procedures conducted by regulatory or
administrative authorities that have been empowered in certain jurisdictions
to carry out such activities in relation to terrorist financing. Civil enforcement
is not meant to include civil procedures and related actions as understood in
civil law jurisdictions.



SR VI: Alternative Remittance


28. This Recommendation consists of three major elements:

   • Jurisdictions should require licensing or registration of persons or legal
     entities providing money/value transmission services, including through
     informal systems or networks;
   • Jurisdictions should ensure that money/value transmission ser-
     vices, including informal systems or networks, are subject to FATF
     Recommendations 10–12 and 15; and
   • Jurisdictions should be able to impose sanctions on money/value trans-
     mission services, including informal systems or networks, that fail to




                                                                                  Annex VI-29
458 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                     obtain a license/register and that fail to comply with relevant FATF
                     Recommendations.


              29. Money or value transfer systems have shown themselves vulnerable to
              misuse for money laundering or terrorist financing purposes. The intention of
              SR VI is to ensure that jurisdictions impose anti-money laundering and coun-
              ter-terrorist financing measures on all forms of money/value transfer systems.
              To obtain a clear picture of the situation in each jurisdiction through the
              selfassessment process, an artificial distinction has been made between formal
              and informal transfer systems in some questions.


              30. The term money remittance or transfer service refers to a financial
              service—often provided by a distinct category of non-bank financial institu-
              tions—whereby funds are moved for individuals or entities through a dedi-
              cated network or through the regulated banking system. For the purposes
              of assessing compliance with the FATF Recommendations, money remitter/
              transfer services are included as a distinct category of NBFI and are thus con-
              sidered part of the regulated financial sector. Nevertheless, such services are
              used in some laundering or terrorist financing operations, often as part of a
              larger alternate remittance or underground banking scheme.


              31. The term informal money or value transfer system also refers to a finan-
              cial service whereby funds or value are moved from one geographic loca-
              tion to another. However, in some jurisdictions, these informal systems have
              traditionally operated outside the regulated financial sector in contrast to
              the “formal” money remittance/transfer services described in the preceding
              paragraph. Some examples of informal systems include the parallel banking
              system found in the Americas (often referred to as the “Black Market Peso
              Exchange”), the hawala or hundi system of South Asia, and the Chinese or
              East Asian systems. For more information on this topic, see the FATF-XI
              Typologies Report (3 February 2000), available through the FATF website at
              http://www.fatfgafi.org/FATDocs_en.htm#Trends, or the Asia Pacific Group
              Report on Underground Banking and Alternate Remittance Systems (18
              October 2001), available through the APG website at http://www.apgml.org/.




     Annex VI-30
   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations         459

32. Where licensing or registration are indicated in the questionnaire,
either licensing or registration is considered sufficient to meet the require-
ments of the Recommendation. Licensing in this Recommendation means a
requirement to obtain permission from a designated government authority
in order to operate a money/value transmission service. Registration in this
Recommendation means a requirement to register or declare the existence
of a money/value transmission service in order for the business to operate. It
should be noted that the logical consequence of the requirements of SR VI is
that jurisdictions should designate a licensing or registration authority and
an authority to ensure compliance with FATF Recommendations for money/
value transmission services, including informal systems or networks. This
corollary interpretation of SR VI (i.e., the need for designation of competent
authorities) is consistent with FATF Recommendation 26. 33. The reference
to “all FATF Recommendations that apply to banks and non-bank financial
institutions” includes as a minimum Recommendations 10, 11, 12, and 15.
Other applicable Recommendations include Recommendations 13, 14, 16–21
and 26–29. The full text of these and all other FATF Recommendations may
be consulted on the FATF website http://www.fatfgafi.org/40Recs_en.htm.



SR VII: Wire transfers


34. This Recommendation consists of three elements:


   • Jurisdictions should require financial institutions to include originator
       information on funds transfers sent within or from the jurisdiction;
   • Jurisdictions should require financial institutions to retain informa-
       tion on the originator of funds transfers, including at each stage of the
       transfer process; and
   • Jurisdictions should require financial institutions to examine more
       closely or to monitor funds transfers when complete originator infor-
       mation is not available.


35. For the purpose of SR VII, three categories of financial institution are spe-
cifically concerned (banks, bureaux de change, and money remittance/transfer




                                                                                    Annex VI-31
460 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              services), although other financial services (for example, stockbrokers, insurance
              companies, etc.) may be subject to such requirements in certain jurisdictions.


              36. The list of types of accurate and meaningful originator information indi-
              cated in the Special Recommendation (that is, name, address and account
              number) is not intended to be exhaustive. In some instances—in the case of
              an occasional customer, for example—there may not be an account number.
              In certain jurisdictions, a national identity number or a date and place of
              birth could also be designated as required originator information.
              37. The term enhanced scrutiny for the purposes of SR VII means examin-
              ing the transaction in more detail in order to determine whether certain
              aspects related to the transaction could make it suspicious (origin in a coun-
              try known to provide safe haven to terrorists or terrorist organisations, for
              example) and thus warrant eventual reporting to the competent authority.



              SR VIII: Non-profit organisations


              38. The intent of SR VIII is to ensure that legal entities (juridical persons),
              other relevant legal arrangements, and in particular non-profit organisations
              may not be used by terrorists as a cover for or a means of facilitating the
              financing of their activities. This Recommendation consists of two elements:

                   • Jurisdictions should review the legal regime of entities, in particular
                      non-profit organisations, to prevent their misuse for terrorist financing
                      purposes; and
                   • With respect specifically to non-profit organisations, jurisdictions
                      should ensure that such entities may not be used to disguise or facili-
                      tate terrorist financing activities, to escape asset freezing measures or
                      to conceal diversions of legitimate funds to terrorist organisations.


              39. As stated above, the intent of SR VIII is to ensure that legal entities,
              other relevant legal arrangements, and non-profit organisations may not be
              misused by terrorists. Legal entities have a variety of forms that differ from
              one jurisdiction to another. The degree to which a particular type of entity
              may be vulnerable to misuse in terrorist financing may also vary from one




     Annex VI-32
   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations        461

jurisdiction to another. For this reason, a selection of types of legal entities
and other legal arrangements has been presented in the SAQTF in an attempt
to obtain a clear picture of the situation in individual jurisdictions. The selec-
tion is based on types of entities that have been observed as being involved in
money laundering and/or terrorist financing activities in the past. Individual
categories may overlap, and in some instances, a jurisdiction may not have all
the categories indicated in the SAQTF.


40. Similarly it should be pointed out that non-profit organisations, a partic-
ular focus of SR VIII, may exist in legal forms that vary from one jurisdiction
to another. Again, the selection of entity types in the SAQTF has been made
with the intention of permitting jurisdictions to find entities or arrangements
that correspond to their individual situation. The term non-profit organisa-
tion can be generally understood to include those types of entities that are
organised for charitable, religious, educational, social or fraternal purposes,
or for the carrying out of other types of “good works”. In addition, the
earnings of such entities or activities should normally not benefit any private
shareholder or individual, and they may be restricted from direct or substan-
tial involvement in political activities. In many jurisdictions, non-profit orga-
nizations are exempt from fiscal obligations.


41. In the SAQTF, the term offshore companies refers to what are usually
established as limited liability juridical persons in certain jurisdictions and
which often fall under a separate or privileged regulatory regime. Such enti-
ties may be used to own and operate businesses (a shell or holding company),
issue shares or bonds, or raise capital in other manners. They are generally
exempt from local taxes or subject to a preferential rate and may be prohibit-
ed from doing business in the jurisdiction in which they are incorporated. The
International Business Corporation (IBC) is an example of such an entity. In
the SAQTF, jurisdictions should only respond to relevant offshore questions if
they have an offshore sector within their jurisdiction.


42. The SAQTF also includes a category “Trusts and/or foundations” under
SR VIII. Trusts are legal arrangements available in certain jurisdictions.
Although they are not strictly speaking legal entities, they are used as a means
for holding or transmitting assets and may, as with certain legal entities, be




                                                                                   Annex VI-33
462 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              misused as a means for hiding or disguising true ownership of an asset. The
              term foundations refers primarily to “private foundations or establishments”
              that exist in some civil law jurisdictions and which may engage in commercial
              and/or non-profit activities. Some examples of these include Stiftung, sticht-
              ing, Anstalt, etc.



              Interpretative Note to Special Recommendation IX: Cash Couriers

              Objectives

              1. FATF Special Recommendation IX was developed with the objective of
              ensuring that terrorists and other criminals cannot finance their activities or
              launder the proceeds of their crimes through the physical cross-border trans-
              portation of currency and bearer negotiable instruments. Specifically, it aims
              to ensure that countries have measures 1) to detect the physical cross-border
              transportation of currency and bearer negotiable instruments, 2) to stop or
              restrain currency and bearer negotiable instruments that are suspected to be
              related to terrorist financing or money laundering, 3) to stop or restrain cur-
              rency or bearer negotiable instruments that are falsely declared or disclosed,
              4) to apply appropriate sanctions for making a false declaration or disclosure,
              and 5) to enable confiscation of currency or bearer negotiable instruments
              that are related to terrorist financing or money laundering. Countries should
              implement Special Recommendation IX subject to strict safeguards to ensure
              proper use of information and without restricting either: (i) trade payments
              between countries for goods and services; or (ii) the freedom of capital move-
              ments in any way.



              Definitions

              2. For the purposes of Special Recommendation IX and this Interpretative
              Note, the following definitions apply.

              3. The term bearer negotiable instrument includes monetary instruments in
              bearer form such as: travellers cheques; negotiable instruments (including




     Annex VI-34
    Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations                         463

cheques, promissory notes and money orders)that are either in bearer form,
endorsed without restriction, made out to a fictitious payee, or other wise
in such form that title thereto passes upon delivery; incomplete instruments
(including cheques, promissory notes and money orders) signed, but with the
payee’s name omitted.17

4. The term currency refers to banknotes and coins that are in circulation as a
medium of exchange.

5. The term physical cross-border transportation refers to any in-bound or
out-bound physical transportation of currency or bearer negotiable instru-
ments from one country to another country. The term includes the following
modes of transportation: (1) physical transportation by a natural person, or
in that person’s accompanying luggage or vehicle; (2) shipment of currency
through containerized cargo or (3) the mailing of currency or bearer nego-
tiable instruments by a natural or legal person.

6. The term false declaration refers to a misrepresentation of the value of cur-
rency or bearer negotiable instruments being transported, or a misrepresenta-
tion of other relevant data which is asked for in the declaration or otherwise
requested by the authorities. This includes failing to make a declaration as
required.


7. The term false disclosure refers to a misrepresentation of the value of cur-
rency or bearer negotiable instruments being transported, or a misrepresenta-
tion of other relevant data which is asked

8. When the term related to terrorist financing or money laundering is used
to describe currency or bearer negotiable instruments, it refers to currency
or bearer negotiable instruments that are: (i) the proceeds of, or used in, or


17. For the purposes of this Interpretative Note, gold, precious metals and precious stones are not
    included despite their high liquidity and use in certain situations as a means of exchange or trans-
    mitting value. These items may be otherwise covered under customs laws and regulations. If a
    country discovers an unusual cross-border movement of gold, precious metals or precious stones,
    it should consider notifying, as appropriate, the Customs Service or other competent authorities
    of the countries from which these items originated and/or to which they are destined, and should
    co-operate with a view toward establishing the source, destination, and purpose of the movement
    of such items and toward the taking of appropriate action.




                                                                                                     Annex VI-35
464 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

              intended or allocated for use in, the financing of terrorism, terrorist acts or
              terrorist organisations; or (ii) laundered, proceeds from money laundering
              or predicate offences, or instrumentalities used in or intended for use in the
              commission of these offences.



              The types of systems that may be implemented to address the issue of cash
              couriers

              9. Countries may meet their obligations under Special Recommendation IX
              and this Interpretative Note by implementing one of the following types of
              systems; however, countries do not have to use the same type of system for
              incoming and outgoing cross-border transportation of currency or bearer
              negotiable instruments:

                   a. Declaration system: The key characteristics of a declaration system are
                     as follows. All persons making a physical cross-border transportation
                     of currency or bearer negotiable instruments, which are of a value
                     exceeding a pre-set, maximum threshold of EUR/USD 15,000, are
                     required to submit a truthful declaration to the designated competent
                     authorities. Countries that implement a declaration system should
                     ensure that the pre-set threshold is sufficiently low to meet the objec-
                     tives of Special Recommendation IX.
                   b. Disclosure system: The key characteristics of a disclosure system are
                      as follows. All persons making a physical cross-border transportation
                      of currency or bearer negotiable instruments are required to make
                      a truthful disclosure to the designated competent authorities upon
                      request. Countries that implement a disclosure system should ensure
                      that the designated competent authorities can make their inquiries on
                      a targeted basis, based on intelligence or suspicion, or on a random
                      basis.




     Annex VI-36
   Annex VI: FATF Interpretative Notes and Guidance Notes for the Special Recommendations          465

Additional elements applicable to both systems

10.        Whichever system is implemented, countries should ensure that their
system incorporates the following elements:

      a. The declaration/disclosure system should apply to both incoming and
         outgoing transportation of currency and bearer negotiable instruments.
      b. Upon discovery of a false declaration/disclosure of currency or bearer
        negotiable instruments or a failure to declare/disclose them, designated
        competent authorities should have the authority to request and obtain
        further information from the carrier with regard to the origin of the
         currency or bearer negotiable instruments and their intended use.
      c. Information obtained through the declaration/disclosure process should
        be available to the financial intelligence unit (FIU) either through a
        system whereby the FIU is notified about suspicious cross-border trans-
        portation incidents or by making the declaration/disclosure information
        directly available to the FIU in some other way.
      d. At the domestic level, countries should ensure that there is adequate co-
        ordination among customs, immigration and other related authorities
        on issues related to the implementation of Special Recommendation IX.
      e. In the following two cases, competent authorities should be able to
         stop or restrain cash or bearer negotiable instruments for a reasonable
         time in order to ascertain whether evidence of money laundering or ter-
        rorist financing may be found: (i) where there is a suspicion of money
        laundering or terrorist financing; or (ii) where there is a false declara-
        tion or false disclosure.
      f. The declaration/disclosure system should allow for the greatest possible
         measure of international co-operation and assistance in accordance
         with Special Recommendation V and Recommendations 35 to 40. To
         facilitate such co-operation, in instances when: (i) a declaration or
         disclosure which exceeds the maximum threshold of EUR/USD 15,000
        is made, or (ii) where there is a false declaration or false disclosure,
        or (iii) where there is a suspicion of money laundering or terrorist
        financing, this information shall be retained for use by the appropriate
        authorities. At a minimum, this information will cover: (i) the amount




                                                                                     Annex VI-37
466 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                     of currency or bearer negotiable instruments declared / disclosed or
                     otherwise detected; and (ii) the identification data of the bearer(s).



              Sanctions

              11. Persons who make a false declaration or disclosure should be subject to
              effective, proportionate and dissuasive sanctions, whether criminal civil or
              administrative. Persons who are carrying out a physical cross-border trans-
              portation of currency or bearer negotiable instruments that are related to ter-
              rorist financing or money laundering should also be subject to effective, pro-
              portionate and dissuasive sanctions, whether criminal, civil or administrative,
              and should be subject to measures, including legislative ones consistent with
              Recommendation 3 and Special Recommendation III, which would enable
              the confiscation of such currency or bearer negotiable instruments.




     Annex VI-38
                                                          467


Annex VII

Cross-Reference of The Forty
Recommendations to Reference Guide




Recommendation   Reference Guide


     1           Chapter I, footnote 8
                 Chapter V, footnotes 4, 20–22, 25–27
                 Chapter VIII, footnote 7

     2           Chapter V, footnotes 38, 39

     3           Chapter V, footnotes 51, 53, 55, 58–60


     4           Chapter   V, footnotes 57, 80
                 Chapter   VI, footnotes 75
                 Chapter   VII, footnotes 14–20, 33
                 Chapter   IX, footnote 58




                        Annex VII-1
468 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                     5                  Chapter V, footnotes 67–68
                                        Chapter VI, footnotes 5, 17–19, 21–22, 41
                                        Chapter IX, footnote 58


                     6                  Chapter V, footnote 67–68
                                        Chapter VI, footnote 41
                                        Chapter IX, footnote 58


                     7                  Chapter V, footnotes 67–68
                                        Chapter VI, footnote 32
                                        Chapter IX, footnote 58

                     8                  Chapter V, footnotes 67–68
                                        Chapter VI, footnotes 35, 41
                                        Chapter IX, footnote 58


                     9                  Chapter V, footnotes 67–68
                                        Chapter VI, footnotes 36, 41
                                        Chapter IX, footnote 58


                     10                 Chapter V, footnote 67–68
                                        Chapter VI, footnotes 41, 46–48, 59
                                        Chapter VII, footnote 5
                                        Chapter IX, footnote 58

                     11                 Chapter   V, footnotes 67–68
                                        Chapter   VI, footnotes 37, 41, 60
                                        Chapter   VII, footnote 4
                                        Chapter   IX, footnote 58

                     12                 Chapter V, footnotes 67–68
                                        Chapter VI, footnotes 42–45, 55
                                        Chapter VII, footnote 4
                                        Chapter IX, footnote 58




     Annex VII-2
     Annex VII: Cross-Reference of the Forty Recommendations to the Reference Guide   469

13                  Chapter V, footnotes 67–68, 79
                    Chapter VI, footnote 56
                    Chapter VII, footnotes 4, 12
                    Chapter IX, footnotes 39, 58


14                  Chapter V, footnotes 67–68
                    Chapter VI, footnotes 58, 62
                    Chapter VII, footnote 4
                    Chapter IX, footnote 58

15                  Chapter V, footnotes 67–68
                    Chapter VI, footnotes 76, 77, 79
                    Chapter VII, footnote 4
                    Chapter IX, footnote 58

16                  Chapter V, footnotes 67–68
                    Chapter VI, footnotes 65, 66, 68, 69
                    Chapter VII, footnote 4
                    Chapter IX, footnote 58


17                  Chapter V, footnotes 67–68
                    Chapter VII, footnote 4
                    Chapter IX, footnote 58


18                  Chapter   V, footnotes 67–68
                    Chapter   VI, footnote 34
                    Chapter   VII, footnotes 4, 12
                    Chapter   IX, footnote 58


19                  Chapter V, footnotes 67–68
                    Chapter VI, footnotes 70, 73
                    Chapter VII, footnotes 4, 12
                    Chapter IX, footnote 58




                                                                       Annex VII-3
470 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                     20                 Chapter V, footnotes 67–68, 74
                                        Chapter VI, footnote 74
                                        Chapter VII, footnote 4
                                        Chapter IX, footnote 58


                     21                 Chapter V, footnotes 67–68
                                        Chapter VI, footnote 38
                                        Chapter VII, footnote 4
                                        Chapter IX, footnote 58

                     22                 Chapter V, footnotes 67–68
                                        Chapter VI, footnotes 9, 10
                                        Chapter VII, footnote 4
                                        Chapter IX, footnote 58

                     23                 Chapter V, footnotes 67–68, 76–78
                                        Chapter IX, footnotes 58, 59, 60


                     24                 Chapter V, footnotes 67–68
                                        Chapter IX, footnote 58


                     25                 Chapter V, footnotes 67–68
                                        Chapter VI, footnote 61
                                        Chapter VII, footnote 38
                                        Chapter IX, footnote 58


                     26                 Chapter VII, footnotes 3, 9

                     27                 Chapter V, footnote 82
                                        Chapter VIII, footnotes 27, 29


                     28                 Chapter VI, footnotes 59, 74, 75

                     29                 Chapter V, footnotes 76, 77


                     30                 Chapter V, footnote 84




     Annex VII-4
     Annex VII: Cross-Reference of the Forty Recommendations to the Reference Guide   471

31                  Chapter V, footnote 81
                    Chapter VII, footnotes 9, 20

32                  Chapter V, footnote 85
                    Chapter VII, footnote 39

33                  Chapter VI, footnotes 80, 81


34                  Chapter VI, footnotes 82, 83

35                  Chapter VIII, footnote 3, 8

36                  Chapter VII, footnote 8
                    Chapter VIII, footnotes 9, 11, 24, 28

37                  Chapter V, footnote 28
                    Chapter VII, footnote 8


38                  Chapter VIII, footnotes 26, 30


39                  Chapter VIII, footnote 31

40                  Chapter VII, footnote 8
                    Chapter VIII, footnotes 10, 11, 13, 15, 25, 40




                                                                       Annex VII-5
                                                                       473


Annex VIII

Cross-Reference of the Special
Recommendations to Reference Guide




Recommendation   Reference Guide


     I           Chapter I, footnote 12
                 Chapter VIII, footnote 7
                 Chapter IX, footnotes 8, 10, 21

     II          Chapter I, footnotes 13, 14, 15
                 Chapter V, footnotes 24, 48, 49
                 Chapter IX, footnotes 23–26, 35


     III         Chapter IX, footnotes 6, 27, 28, 29, 30, 31, 32, 33

     IV          Chapter IX, footnote 36

     V           Chapter IX, footnotes 41, 42




                        Annex VIII-1
474 Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism

                     VI                 Chapter I, footnote 17
                                        Chapter V, footnote 69
                                        Chapter IX, footnotes 6, 51, 52, 53


                     VII                Chapter V, footnote 69
                                        Chapter IX, footnotes 61, 62–67

                     VIII               Chapter I, footnote 16
                                        Chapter IX, footnotes 6, 68, 69, 70

                     IX                 Chapter IX, footnotes 72–92




     Annex VIII-2
                         1    2            15        16     17        18
                                                                           475
      3        4         5    6            19        20     21        22


      7        8         9    10           23        24     25        26


  11           12        13   14           27        28     29        30


1.        Colombia                       15.    Zambia
2.        Botswana                       16.    Thailand
3.        Singapore                      17.    Brazil
4.        China                          18.    Trinidad and Tobago
5.        New Zealand                    19.    United States
6.        India                          20.    Malaysia
7.        Norway                         21.    Ethiopia
8.        Tanzania                       22.    Republic of Korea
9.        Costa Rica                     23.    Czech Republic
10.       Turkey                         24.    Dominican Republic
11.       Sri Lanka                      25.    BCEAO
12.       Ecuador                        26.    European Union
13.       Austria                        27.    England
14.       South Africa                   28.    Kuwait
                                         29.    Finland
                                         30.    Japan




                              Design and layout by James Quigley
                    Reference Guide to
           Anti-Money Laundering and
   Combating the Financing of Terrorism
                                 Second Edition
                             and Supplement on
                    Special Recommendation IX




www.amlcft.org


                                                  ISBN 0-8213-6513-4
               

       
            
                                                    
   
                                   
               
   


                                   
      
                                   
     
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