BIS Updates its Guidelines for the Management of AML/CFT

This month the BIS released an update to its January 2014 publication “Guidelines: Sound management of risks related to money laundering and financing of terrorism.“

The updates focus on the need for increased communication/interaction and co-operation between a nation’s financial institution supervisory agency (prudential supervision) and other domestic national agencies charged with anti-money laundering and countering the financing of terrorism.

As well the BIS advocates similar cross-border interaction and cooperation.

It’s important to note once again that the BIS does not have the authority to force countries to accept its guidelines. It does not legislate, it recommends.

Individual countries may accept or reject BIS guidance in full or in part. And are free to set the details of how a principle they accept will be applied. 

That being said, it is rare that countries reject BIS suggestions in toto.

What are the changes?

The addition of paragraph 96 to the main body of the guidelines and a new Annex 5 outlining best practices.

Paragraph 96 sums up the BIS’s intent.

“Prudential and AML/CFT supervisors should establish an effective cooperation mechanism regardless of the institutional setting, as set out in Annex 5, to ensure that ML/FT risks are adequately supervised in the domestic and cross-jurisdictional context for the benefit of the two functions.“

Annex 5 contains what I’d consider some rather self-evident points. But many regulations do state what is obvious. And that’s done for good reasons.

License Authorization

1. Prudential Supervisors should consult with AML/CFT supervisors to identify any AML/CFT risks posed by the bank’s proposed business model for a new bank or such risks for an existing foreign bank seeking a license in its jurisdiction.
2. They should also consider the bank’s AML/CFT policies and procedures, risk management structure and risk mitigation systems.

Assessment of Major Shareholders, Acquisitions, and Major Holdings

1. Similar to the above with a focus on how these affect the proposed licensee’s AML/CFT risk as well as cases when new shareholders are proposed.
2. Part of this assessment is a review of the history of the proposed major shareholders, acquisitions, and major holdings for evidence of AML/CFT risks, vulnerabilities or transgressions.
3. This assessment requires cross border interchange and co-operation to obtain information from other national regulatory agencies.

International Co-Operation

1. This can be established via bi-lateral agreements (MoUs) for exchange or “prudential colleges” where a group of supervisory or regulatory agencies agree to exchange information. Link to information on EU “prudential college”.
2. The FATF has published guidelines on the exchange of AML/CFT information both domestically and internationally. Last update in 2017.PP

IMF FSAP Technical Note on the AML/CFT Regime in France

More than just Tracfin Covered by FSAP

Last week the IMF released its Technical Note- Anti-Money Laundering and Combating the Financing of Terrorism Regime in France undertaken as part of the 2019 FSAP for France.

What’s a FSAP? All you’re likely to want to know courtesy of the IMF.

There are many interesting points in this publication.

1. An analysis of the current state of France’s AML/CTF regime.

2. Identification of areas for improvement. An interesting topic as we mostly focus on non OECD jurisdictions' shortcomings and recommendations for improvement.

3. Statistics related to inspection and enforcement (Tables 2 through 7 on page 3.  AA found these and the accompanying discussions the most interesting.  Regulations are one thing. They provide the basis for action. But inspections and enforcement measures are clearly more important in assessing actual implementation.

Some further thoughts and observations.

First, it's important to understand that banks have an incentive to file STRs.  One of the best defenses against enforcement actions is to demonstrate that one’s institution has a robust AML/TF system.

If a bank files no STRs and one of its customers is found to be a money launderer or terrorist financier, it has less of an argument than if it has filed 100 reports.

So increases in STRs are not necessarily related to increased illegal activity.  Note the “not necessarily” caveat.

Second, those seeking to conduct illicit financial transactions will look for weak points, e.g., industries and geographies not inspected by the relevant bodies. You can see some familiar industries mentioned here where increased efforts are recommended.

France’s Overseas Territories (Table 2) may be such a geographical vulnerability.

That being said, it should be fairly easy for regulators to spot individual financial transactions or aggregate flows of transactions which exceed normal economic activity.

In analyzing RMB flows in Africa attributed by SWIFT RMB Tracker to the Republic of South Africa three years ago  it didn’t take AA very long to find easily available information that indicated that it was highly likely that a good portion of these transactions were from other African countries not just the RSA alone.

AA also identified an outsize RMB transaction in Mauritius which didn’t seem to fit normal commercial activity.  And AA does not have access to the information that national regulators have, some of which is acquired through clandestine means.

That being said, for some unknown reason, massive transaction flows through the branch of a Danish bank is Estonia flew under the radar both at the bank’s HO and at regulators in both Estonia and Denmark.

On very good authority it is said, “There is always enough light for one who wishes to see”.  “هناك دائما ما يكفي من الضوء لمن يرغب في رؤية “