Money laundering is a global problem that financial institutions continue to fight. Not really an easy war today, as digital and e-payments enter mainstream. Banks and other financial institutions have various local policies that help them to detect financial crimes - especially money laundering. But, there is an international organization called Financial Action Task Force (FATF) whose job is to formulate Anti-Money Laundering policy frame works which local financial operators adopt and modify in order to help them fight money laundering in their country.
The FATF anti-money laundering policies are called recommendations. Each was designed to provide a foundation or framework upon which financial institutions around the world could formulate local policies that will guide the prosecution of money laundering as a financial crime against the state.
The FATF recommendations was initially drawn up in 1996. Over the years, money laundering and financial crimes have taken up new shapes, especially with the invention of digital payments, cryptocurrencies and electronic money transfers. In order to stay up to date with the shifting landscape of financial crimes, the FATF recommendations have been periodically revised to reflect modern money laundering techniques and innovation. These recommendations that will be featured in this article are the most updated version which was last updated in February 2023.
Understanding some FATF policies/recommendations
We will try to look at each policy/recommendation and see how they affect various aspects of money laundering globally.
- money laundering should be identified and treated as a financial crime:
The second section of the Anti-Money Laundering recommendations creates the largest platform upon which money laundering should be viewed. It empowers countries to create a legal framework which will be utilized in identifying and dealing with money laundering as a financial crime. Below is a part of it:
Countries should criminalize money laundering on the basis of the Vienna Convention and the Palermo Convention source
The Vienna and Palermo conversions provided further insight into the nature, structure and tools that should be provided by various countries that are in the fight against money laundering. The provisions should basically empower financial institutions in the country to have the legal capacities and powers to fight money laundering without being limited by any means. All serious illegal financial operations should be handled under the Anti-money laundering act by that country.
- Confiscating laundered money/Property: Another of the Anti-Money laundering recommendations provides for the confiscation of money, property or other proceeds realized from or connected to money laundering. Here is an excerpt below:
Countries should adopt legislative measures, to enable their competent authorities to freeze or seize and confiscate laundered property/proceeds. source
The above recommendation should be adopted and expanded as a policy to fight money laundering by giving relevant government agencies the full authority to seize or confiscate money, property or any other valuables that are proceeds from illegal financial activities including money laundering. The recommendation also gives the legal powers to also confiscate any objects - money, property, etc - used or intended to be used for money laundering activities. This also involves confiscating legal properties owned by money laundering criminals, which has the same value as the money laundered. If they have any cash in any bank account, the banks involved should be ordered to freeze such funds until the individuals involved have been convicted or cleared of the financial crime. This aspect of the recommendations ensures that individuals involved in money laundering loose all proceeds from such criminal activity once they are not able to prove that such property or proceeds where obtained legally.
- Stopping money laundering before it happens: Banks and all financial institutions should ensure that proactive steps are taken to prevent individuals from carrying out money laundering acts. This includes making sure that all local policies of the bank or other financial institutions do not in any way prevent authorities from carrying our their legal jobs of identifying or prosecuting money laundering activities. Below is the part of FATF recommendation dealing on that:
Countries should ensure that financial institution secrecy laws do not inhibit implementation of the FATF Recommendations. source
There are local privacy policies that various institutions put in place which prevents authorities or other third party from accessing the financial records of any individual. While those policies might carry weight in other financial matters not relating to money laundering, it should not be a limitation. Banks and financial institutions are should be legally obligated to disclose the financial record of any individuals involved in financial crimes or money laundering.
- KYC: Another recommendation from the FATF requires a law to be made that mandates financial institutions to have a background knowledge of their customers and the type of transactions they do if there is something suspicious. It is called Customer Due Diligence. Below is an excerpt from it:
Financial institutions should be required to undertake customer due diligence (CDD) measures when there is a suspicion of money laundering or terrorist financing. The principle that financial institutions should conduct CDD should be set out in law. source
The above recommendation should be adapted and made into a financial law in each country. The principles should guide how banks and other financial institutions in each country handle suspicious financial activities by any individual. They really need to do background checks on the customer and identify who they are, the nature of their transactions and history of such similar transactions done in the past. They could try to identify a pattern in their financial transactions and use valid documents to verify the identity of the individual facilitating the transaction. These measures will help to determine the source of financial assets involved in the transaction.
The CDD should also reasonably and sufficiently cover the beneficiary of such transactions. The legal identity of of such beneficiaries should be established using valid documents. It is left for the countries and financial institutions involved to determine the extent of the CDD. While there is a well-defined boundary legally for the conducting of the CDD, each case is unique and could determine whether extra measures should be taken while trying to validate the identity of all parties involved in a suspicious financial transaction.
The above recommendation on CDD should not just apply to new customers. It should be extended to existing customers of each financial institution to ensure that they are not in any way involved in money laundering or other illegal financial activities defined by law. Each institution is allowed to determine how often CDD will be conducted on existing customers. But for new customers, it should be done before they are allowed to make their first financial transaction with the institution.
Conclusion
The FATF is a global body that has created a universal framework under which all financial institutions operate. Each country is allowed to build on these recommendations and build financial policies of institutions in their country. These laws, policies and recommendations are designed to prevent money laundering in countries around the world, and globally.