Risk-based approach: Nations are operating within a comprehensive international framework that deters financial crime and terrorism in the first place; detects it when it happens and disrupts the activities of that responsible.11 Money laundering and terrorist finance measures are to be implemented in a way that makes maximum impact on the underlying threat. The risk-based approach12 bears important implications for deterring and controlling the money laundering and terrorist financing efforts.
In order to be successful in this regard:
— Understanding of the underlying threat should be increased continually and should direct action to mitigate it;
— Institutional barriers cannot be allowed to stand in the way of an effective response to the threat; and
— Systems should be designed to maximise their practical impact – and then assessed to ensure that they do.
Under this principle, all parties – law enforcement, Government departments, regulators and industry – focus their resources on the areas where the likelihood and impact of abuse is greatest.
Criminal and terrorist finance threats change constantly, and vary greatly across customers, jurisdictions, products, delivery channels, as well as over time. This means that the response to crime and terrorism needs to be as supple as the criminals and terrorists themselves. A prescriptive “tick-box” approach would miss its target and fail to deliver benefits that outweighed the costs of intervention.
Therefore proportionality demands:
— An understanding of risks of financial abuse; where such abuse is high, and initiated measures have the flexibility to adapt their approach to their particular circumstances;
— Standing between the need to protect citizens’ privacy and fundamental rights on the one hand and to ensure their ongoing security on the other; and
— For that administrative burdens fall on private sector and on the businesses, this should be as low as possible.
Unless the public and private sectors work together no attempt to root-out criminal and terrorist finance will succeed government, and policymakers should work closely with operational agencies and international partners.
Impact of engagement
The principles of engagement require that:
— Listen carefully to the views of those affected by the measures which the State introduces;
— Feedback and information sharing between state and the regulated sector be increased;
— Stakeholders should have clear roles, but must also work coherently; and
— Engagement with international partners needs to be robust, advancing operational and policy goals alike.13
The international framework necessary to do this has developed significantly in recent years as capital movements have become more fluid and the threats more sophisticated.14
In matching up to its international responsibilities, and reducing the harm caused by crime and terrorism at home, the states have to implement proposed measures in a way that the same are effective, proportionate and engages all those whose co-operation is essential to drive success.15
A comprehensive package of measures includes:
— Solid legal foundations that outlaw the financing of terrorism and money laundering;
— Financial safeguards applied by industry – backed-up by law; supervision and guidance that help identify and trace illicit funds;
— Measures to maximise the investigative and intelligence value of the financial information generated by criminals and terrorists as they move through the financial system; and
— An armory of measures to disrupt the flow of criminal or terrorist assets and hold those responsible to account.
FATF Recommendations, while not legally binding, incorporate elements of some treaties and conventions that are binding. UN agreements are integral to the international framework of action and include obligations in relation to:
— Drugs and crime, such as the 1988 Vienna Convention Against Drug Trafficking, which targeted drugs-related money laundering; and
— Terrorist finance, including the UN Convention for the Suppression of Terrorist Financing (1999) (which provides a framework for tackling the financing of terrorism); UNSCR 1373 (which set out a comprehensive package of prohibitions against the financing of terrorism); and UNSCR 1267 (which established a global asset freeze against al Qaeda and the Taliban).
UN and FATF requirements are being implemented. For example the important European Union legislation in this regard includes:
— The 3rd Money Laundering Directive, which came into effect in December 2007;
— Agreement was reached on how financial transactions made by using wire transfers should include information on the identity of the sender – building effective audit trails across borders;
— A regulation on the cross-border movement of cash, requiring substantial cash transfers to be declared, was agreed in line with FATF standards and came into effect in 2007; and
— Member States endorsed the need to strengthen capacity to identify and freeze assets both at the national and the EU level.
International standards reflect the fact that businesses that provide a gateway to the financial system play a key role in building a hostile environment against criminals and terrorists.
These controls must include measures to:
— Verify the identity of customers. By knowing that customers are who they say they are, and by understanding the nature of their business, institutions can thwart attempts to disguise financial audit trails and help assess the risk of money laundering in the first place;
— Keep proper financial records for five years. Allowing robust audit trails to be established across the international financial system;
— Training. The Regulations require that relevant staff are trained to identify the warning signs of money laundering and the key legal requirements to prevent it (such as customer due diligence; record keeping and reporting suspicious transactions); and
— Ensure that suspicious activities are reported.
As countries’ understanding of financial risks has developed, and the nature of the threat itself has evolved, these key safeguards have been applied to a wider number of firms in order to close loopholes and to leave criminal and terrorist finance increasingly isolated.16
These high-level regulatory requirements are enforced by supervisors in a risk-based way. These bodies require firms to have suitable systems and controls in place that reduce the opportunities for financial abuse. Significant penalties can be applied in cases where these are lacking – reflecting the opportunities that such failure provides for criminal and terrorist exploitation of the financial system as a whole.
Legislative actions have enhanced powers in order to ensure that criminals cannot exploit the confidentiality of the financial system to disguise their activity. These steps include:
— Production orders, which require a person or institution holding materials either to produce it or give access to it. This might include documents such as bank statements;
— Customer information orders, requiring banks or other financial institutions to identify any account held by a person connected to an investigation;
— Account monitoring orders, requiring banks or other financial institutions to provide transaction information on a suspect account for a specified period; and
— Disclosure orders, to require a person to answer questions; provide information or to produce documents.
These powers to identify and follow criminal and terrorist funds are supported by the private sector identifying and reporting the warning signs of financial abuse.
The FIU, which includes a specialist Terrorist Finance Team, provides critical analytical capacity to help exploit the financial intelligence provided by the private sector. Reports are to be assessed in order to develop intelligence packages against possible crime and terrorism, cross-referred to other datasets, and should be made directly available to law enforcement agencies to support ongoing enquiries.
In order to take more of the profit out of crime and dislocate criminal networks, effective legislations are to be enacted. The laws so made may provide for:
— Civil recovery. This scheme empowers the law enforcement agencies to sue by way of civil proceedings to recover the proceeds of crime
— Taxation. This measure may be used when there are reasonable grounds to suspect that the culprit has received his income from crimes.
— Seizure and forfeiture. This power is available to law enforcement agencies to seizure and forfeiture of proceeds of crime.
Law enforcement agencies, acting through the Courts, are to be equipped with powers to restrain and confiscate “terrorist property” as well as seize cash suspected of being connected to terrorism – in much the same way as applies for Proceeds of Crime powers.
There are good arguments, for example, for introducing a more practical definition of cash; extending the penalty for terrorist financing; and enabling the forfeiture of property in relation to all terrorist offences – not just ‘terrorist finance’ offences. This would help ensure that facilitators of terrorism are increasingly vulnerable to disruption by law enforcement.
Freezing and confiscation of assets
United Nations Security Council resolution 1267 requires Member States to freeze the funds, other financial assets and economic resources of persons listed at the UN on suspicion of association with al Qaeda or the Taliban. United Nations Security Council resolution 1373 requires similar action to be taken against persons suspected of committing, attempting to commit, participating in or facilitating acts of terrorism.
Asset freezing is therefore an important part of the international community’s counter-terrorist effort. Specifically, asset freezing can:
— Deny terrorists and their facilitators the ability to raise funds and to move them through the international system. This is the key disruptive effect of an asset freeze – equivalent to turning off their financial pipeline;
— Create a cordon around any funds which are already in the financial system – reflected in figures of funds frozen; and
— Harvest the entire financial system for lead financial intelligence on any funds held by the designated individual or group – which can help to provide valuable information on connections between individuals and groups and their activities.
Proceeds of crime recovery
Improving our performance in recovering the proceeds of crime is a key priority. Recovering criminal assets has a whole range of benefits, including:
— Depriving criminals of the ability to fund further illegal activity;
— Increasing risk and decreasing reward for criminals;
— Increasing the numbers of offences brought to justice;
— Improving confidence in the criminal justice system, by ensuring criminals are not able to benefit from their activity; and
— Returning money to the taxpayer or to incentivize further asset recovery work.
Terrorist’s finance activities can help to identify terrorists and hold them to account by equipping law enforcement agencies with the information contained in the financial system and with new avenues for prosecution.
But in order to create a more hostile environment for terrorism, law enforcement agencies should seek to identify and disrupt flows of funds linked to international terrorism – degrading the capacity of terrorist networks to sustain themselves and stage attacks.
Asset freezes not only cuts off the financial pipeline to suspected terrorists but in many cases, it can also trap funds already in the financial system and isolate these from listed groups and individuals.
Real dividends can be achieved from high quality financial intelligence and investigation. This should be a mainstream part of everyday law enforcement activity.
The law enforcement agencies should continue to explore the power of the Suspicious Activity Reporting system, and financial intelligence more generally.
SARs also play an important role in relation to terrorist finance enquiries. A reporting firm that identifies suspicious financial activity may have no way of knowing whether it relates to an attempt to disguise funds linked to acquisitive crime or to terrorism.
There remains considerable scope to make greater use of financial powers and intelligence, such as SARs. Breaking SARs down geographically suggest that a typical Basic Command Unit might expect to find out suspicious transactions. Anti-money laundering and terrorist finance activity can be made more effective by a focusing on:
— The collective understanding of criminal and terrorist activity; and
— The best possible use of financial tools to tackle crime and terrorism.
Activities can become increasingly proportionate when further steps are taken to:
— Entrench the risk-based approach by explicitly focusing effort in areas that are relatively more vulnerable to exploitation – and demonstrably mitigating the risk of abuse in these areas; and
— Reduce the burdens created by crime and security measures on citizens and business to the minimum required to protect their security.
In relation to money laundering associated with serious crime, there is an ongoing need to maximise performance on producing high quality financial intelligence and ensuring that this is acted on promptly. This requires that there should be a better understanding of the money laundering threat; of the risk perceived by perpetrators; and of how criminal markets are best disrupted.
To seize this opportunity, law makers and law enforcers should make the fullest use of the financial powers now available and seek enhancements to these where there is potential to reduce harm further. Senior managers in particular have a responsibility to make the financial fight against crime and terrorism a mainstream part of their efforts to protect the public – demanding the right skills, awareness and resources across their organisation.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates)
1. For example, FATF, IMF, EU, Basel Committee, and the Wolfsberg Group etc.
2. For example see, FATF Recommendations, CEC Convention 141, EC Directives, Commonwealth Model Law on AML, Convention on Combating Bribery of Foreign Officials in International Transactions (1997), UN Model Legislation on Laundering Confiscation and International Co-operation in Relation to Proceeds of Crime (1999), UN International Convention for the Suppression of the Financing of Terrorism (1999), UN Convention against Transitional Organised Crime (2000), The Wolfsberg Principles on Private Banking (2002), Wolfsberg AML Principles (2002), UN Convention against Corruption, FATF Recommendations (2003), Model Legislation on Money Laundering and Financing of Terrorism, IMF (2005), EU Directive (2005 and 2008), The Wolfsberg Group on PEPs (2008), Model Provisions on ML, TF Preventive Measures and Proceeds of Crime, (2009), The BSA AML Examination Manual (2010), FATF Recommendations (2012), 4th EU Directive (2013).
4. See FATF Recommendations relating to risk based approach.
5. Laws in this regard are defective in many countries and criminal gain benefit from such lope holes.
6. In many countries penalties are subject to a prolonged legal process, such regulations are defective and counter productive to deterrence efforts.
7. These include compliance program including the CIP, CDD, EDD, SAR, and Record Keeping.
8. To understand the concept of FIU, see IMF document on FIU, (2004).
9. Financial Institution’s Customer Identification Programs in this regard are useful and important for crime control.
10. Analysis of domestic laws on money laundering and terrorist financing is important so as to evaluate its vulnerabilities in the light of international institution’s recommendations.
11. See FATF Recommendations and Standards required for evaluation these objectives deliver successfully if the interventions of all those involved are driven by the three key principles of effectiveness, proportionality and engagement.
12. Id FATF Recommendations.
15. Id n1.
16. Sectors subject to money laundering controls include:
— the traditional financial sector
— bureaux de change
— cheque cashiers
— money transmitters
— high value dealers in cash
— estate agents,
— lawyers involved in financial and property transactions
— accountants and auditors
— company and trust formation agentsZafar Azim, "Crime and terrorism: Financial challenges – II," Business recorder. 2012-12-28.