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Anti-Money Laundering Toolkit

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Background

What is Money Laundering?

Money laundering is the conversion of property that is the proceeds of either all crimes or certain designated crimes into money or property that has the appearance of being legitimately obtained, to hide the true nature and origin of the money.

Illegal arms sales, smuggling and the activities of organized crime can generate huge profits. Bribery and international frauds can also produce large profits that must be laundered in order to have them return to the economy.

Terrorist financing is the use of legitimate money or laundered money for the support, advancement, or perpetration of acts of terrorism.

A country that does not have prevention and control mechanisms in place runs the risk of being vulnerable to money launderers and terrorists. They can use its systems to launder money, as they know that the chances of being caught will be small and the returns that can be achieved will be high. In well-regulated countries, a money launderer will find it difficult to launder money and will be discouraged by the low returns that are achieved. However, in a vulnerable country the possible returns are much higher on a percentage basis. Generally, developing countries that are vulnerable, although this is not always the case.

International standards

General Observations

In 1989 the Organization for Economic Cooperation and Development (OECD) established the Financial Action Task Force on money laundering (FATF) to establish international standards to be implemented in the fight against money laundering. The FATF currently has 34 member countries*.

The FATF is effectively represented in the Asia Pacific area by the Asia Pacific Group* on money laundering (APG).

In 1990, the FATF issued 40 Recommendations* in relation to money laundering. To these were added nine additional Recommendations* relating to the financing of terrorism. On 20 June 2003 the FATF issued its revised 40 Recommendations. These Recommendations essentially cover the following topics:

1. Legal regime requirements,
2. Financial system requirements,
3. The establishment of a Financial Intelligence Unit (FIU),

All FATF member countries are expected to comply with the core Recommendations covering the matters above.

Implications of not meeting the international standards

The FATF has undertaken assessments of a number of countries and is in the process of undertaking a pilot assessment scheme to be applied to most countries. In the early assessments the FATF found that some of those examined have made no or little effort to combat money laundering or the financing of terrorism (AML/CFT). Countries that do not comply with the Recommendations have been placed on the "Non cooperative Countries and Territories" (NCCT)1 list*. The FATF has put in place a regime of "counter measures" or sanctions for those countries that are on the NCCT list. These counter measures are introduced in the event of the listed NCCT not advancing its anti-money laundering regime in any meaningful way. Experience has shown that the FATF requires a country to implement a legal regime and to have it in an operational position within eighteen months of its enactment. This includes the establishment of a Financial Intelligence Unit or like body. Countries that have not been assessed have a period when they can implement the Recommendations. They will now be the subject of an FATF "mutual evaluation". Counter measures will most likely be applied only in the event of a refusal by a country to consider an AML/CFT regime. This is a preferred manner to progress. However, for a noncompliant country there is the risk of exposure to the effects of the USA Patriot Act [ PDF ].

This law was introduced in the USA a few months after 11 September 2001 and was a direct response to issues raised by money laundering and terrorist financing with respect to the bombing of the World Trade Center in New York. The Act has a direct effect upon the US banks and their dealings with banks outside the USA. US banks are not permitted to deal with banks in countries where there is a declared risk of money laundering, with banks that are, or have been, involved in money laundering or where the banks do not undertake proper procedures to know their customers and the like, to name just a few of the situations covered. Countries that are on the NCCT list are singled out for special treatment. Any sanctions or prohibitions under the USA Patriot Act are independent from the sanctions that may be imposed by the members of the FATF. A number of countries have already had US banks refuse to correspond with them. Both Indonesia and the Philippines are currently under threat of having this occur. Transfers of US dollars to and from these countries are greatly delayed. The effect of totally preventing correspondence in the US dollar is to halt trade, as corresponding in the US dollar is required for the use of letters of credit that are essential for the export and import of goods by a country.

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