On February 16, 2012, the Financial Action Task Force (“FATF”), the global standard-setter in the fight against money laundering and terrorist financing, made some important changes to its prior publication known as 40+9 Recommendations.
FATF was created in 1989. In 1990, FATF first issued 40 Recommendations as standards in the fight against money laundering. FATF revised the original 40 Recommendations in 1996 and again in 2003. Over time, FATF has issued various Interpretative Notes designed to clarify the 40 Recommendations.
In the aftermath of September 11, 2001, FATF issued eight Special Recommendations focused specifically on terrorism. In October, 2004, FATF issued its ninth Special Recommendation, dealing with cross-border transportation of currency and bearer instruments.
So, seven plus years after the last amendments, FATF has re-configured and expanded its Recommendations. For eas of reference, this writer will refer to the FATF Recommendations as “old” or “new.”
The most visible change is the fact that FATF has reduced the 40+9 Recommendations back down to 40. They seem to like that nice, round, number. Having done that, there is nonetheless very little that is lost from the original Recommendations – almost all of them, whether they deal with money laundering or terrorist financing, have been incorporated into the newly created 40 Recommendations. (Most of the exceptions to this, such as old Recommendations 19 and 20, dealt with precatory provisions (such as – consider the feasibility of a currency reporting system; and consider applying the FATF Recommendations to “businesses and professions, other than designated non-financial businesses and professions” (“NFBPs”).
There are, however, some important substantive changes that the banking and compliance community should be aware of. For instance, Recommendation 1 is brand new. It sets forth the need for a country-wide risk based approach to anti-money laundering and counter terrorist financing (“AML/CFT”) and is very instructive:
Countries should identify, assess, and understand the money laundering and terrorist financing risks for the country, and should take action, including designating an authority or mechanism to coordinate actions to assess risks, and apply resources, aimed at ensuring the risks are mitigated effectively. Based on the risk assessment, countries should apply a risk-based approach (RBA) to ensure measures to prevent or mitigate money laundering and terrorist financing are commensurate with the risks identified. This risk-based approach will be part of an essential foundation vital to efficient allocation of resources across the anti-money laundering and countering the financing of terrorism (“AML/CFT”) regime and the implementation of risk-based measures throughout the FATF Recommendations.
Recommendation 1 also calls for countries to require financial institutions and designated non-financial businesses and professions (“DNFBPs”) to conduct their own AML/CFT risk assessments. This may prove to be a very important change. Currently, not all financial institutions perform an institution-wide risk assessment, but it is a best practice and should be done.
Another important change is the expansion of the definition of money laundering to include tax crimes. Curiously, this was done not by a modification to a recommendation, but by an amendment to the Glossary and an internal reference to the Glossary by the Interpretative Notes to Recommendation 3. Regardless of its obscurity, this change has real significance as countries, including the United States, wrestle with this issue going forward.
An equally important change is the expansion of the term “politically exposed persons” (“PEPs”) to include not just foreign individuals, but also domestic PEPs, as well as people who have “been entrusted with a prominent function by an international organization.” While there has long been resistance to requiring enhanced due diligence of domestic PEPs (or, as § 312 of the USA PATRIOT Act terms it – “Senior Foreign Political Figures”), we must be mindful of the fact that there are politicians like former U.S. Representative William Jefferson from Louisiana who was convicted of corruption in a case that involved the discovery of $90,000 in cash in his freezer. In addition, while the New York charges against the former head of the International Monetary Fund, Dominique Strauss-Kahn, were dropped, he now faces additional inquiry in France for corruption involving a prostitution ring.
The new recommendations also include provisions dealing with weapons of mass destruction, specifically as set forth in new Recommendation 7.
There are also numerous efforts in the new recommendations to tighten the language of the standards. For instance, the terms “should not keep” and “should have been” typically changed to “should be prohibited” and “should be required.” However, having said that, the “Essential Criteria” in the old recommendations – the notes by which countries are judged whether they are in compliance with the recommendations – usually always contained the more stringent language.
Another terminology change was to substitute the verb “document” for the more substantive term “clearly understand.” This important change appears, for instance, in Recommendation 10, dealing with customer due diligence, and Recommendation 13, dealing with correspondent banking:
“Understanding and, as appropriate, obtaining information on the purpose and intended nature of the business relationship.” (new R. 10) instead of “Obtaining information on the purpose and intended nature of the business relationship.” (Old R. 5).
With regard to new technologies, the amended recommendations call for a risk assessment prior to the launching of new products and a requirement that financial institutions should identify and assess the money laundering and terrorist financing risks related to new products and technologies (new R. 15), as opposed to telling a financial institution that it should just “pay special attention to any money laundering threats that may arise from new or developing technologies . . .” (old R. 8). This new requirement dovetails with new R.1, mentioned above, which calls for country and financial institution risk assessments.
One particularly comforting change is the new requirement that financial institutions apply enhanced due diligence to transactions and institutions from countries identified by FATF as high risk (new R. 19), rather than implicitly requiring the financial institutions to figure out for themselves which countries are high-risk (old R. 21).
On a minor point, the notes FATF put out to accompany the new recommendations indicate that old Recommendations 18 and 37, dealing with (a) shell banks and (b) the fact that the lack of dual criminality between countries should not be an obstacle to international sharing, were dropped. However, these recommendations were in fact incorporated into new Recommendations 26 and 37.
In closing, there are some other changes, designed primarily to provide additional clarity and direction to the recommendations. Here are just three to point out: