International Legal Framework to Combat Money Laundering and Terror Financing | BJ Moravek

Well, first off, good morning from New York City, and I'd like to personally thank the INDIC Researchers Forum for allowing me to participate in today's event. I'm humbled by the experience and most grateful that I can join such an esteemed group of experts. So today I'm going to talk to you from an individual who has actually created, supervised, maintained, audited, examined, International frameworks to combat money laundering and the terror of financing. So what's our charge? What is our mandate? Our mandate in the financial services sector is effective anti-money laundering and combating the financing of terrorism regimes are essential the integrity of markets and of the global financial framework as they help mitigate the factors that facilitate financial abuse. What role does the financial sector play? The financial sector must, number one, deter money laundering and the financing of terrorism. Number two, detect money laundering and the financing of terrorism. And number three, disrupt money laundering and the financing of terrorism. Now in order to do that, what must we understand? To inform our efforts, we must understand, number one, the ways terrorist organizations use funds. Funding specific terrorist operations such as direct costs associated with specific operations. Terrorist attacks are funded with as little as $10,000 U.S. The U.S. coal bombing and the Madrid train attack were funded for exactly That amount. Broader organizational costs to develop and maintain an infrastructure of organizational support and to promote the ideology of a terrorist organization. And by that we mean salaries and subsistence and communications, training, travel and logistics, shared funding. Many of these terrorist organizations share funds. Maintaining compromised or complicit charities. Many of these terrorist organizations actually maintain their own charities. And then mass media outlets, they are superlative self-promoters. What else must we understand? We have to understand the ways terrorists raise funds, raising funds from legitimate sources. We know that terrorists raise funds from charities, legitimate businesses, and self-funding. Many of them are self-funded. But more importantly, they raise funds from criminal proceeds, through drug trafficking, credit card and check fraud, extortion. Human trafficking and smuggling. And thirdly, we must understand the way the terrorists move funds. Formal financial sector to include banks and value transfer mechanisms, international trade, cash couriers, alternative remittance systems. Mr. Sandhu talked about Hawalas and Hundis and also charities and nonprofit organizations. So the current climate, the international community has made the fight against money laundering and the financing of terrorism a priority. Among the goals of this effort are protecting the integrity and stability of the international financial system, cutting off resources available to terrorists, and making it more difficult for those engaged in crime to profit from their criminal activities. Now, when we develop these programs, these legal programs. to combat anti-money laundering and the financing of terrorism. Who are the standard setters? They're listed here. First and foremost, and I'm going to go through each one of them here shortly, the Financial Action Task Force, the FATF, the Basel Committee on Banking Supervision, the European Union Directors on Money Laundering, the FATF Style Regional Bodies, the Egmont Group of Financial Intelligence Units, the World Bank and International Monetary Fund, and the Wolfsburg Group. We'll give you a little overview of each one of them. So with FATF, the pace of the international activity in the AML field accelerated in 1989 when the G7 nations launched FATF at its annual economic summit in Paris, with France serving as its first chair. This multinational group started working toward a coordinated effort against international money laundering. Originally referred to as the G7 Financial Action Task Force, today FATF serves as the vanguard in promulgating AML guidance to governmental bodies around the globe. FATF has brought significant changes to the ways in which financial organizations and businesses around the world conduct their affairs. It's also brought about changes in laws and government operations. This intergovernmental body is based at the OECD, the Organization for Economic Cooperation and Development, Paris. Where it has its own secretariat and FATF can be assessed online. So everything relative to FATF, its guidance is available online. So FATF's stated objectives are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. Starting with its own members, the FATF monitors countries' progress in implementing the FATF recommendations, reviews money laundering and terrorist financing techniques, and countermeasures, and promotes the adoption and implementation of the FATF recommendations globally. FATF fulfills these obligations, these objectives, by focusing on several important tasks, including spreading the AML message worldwide, monitoring implementation of the FATF recommendations among its members, reviewing money laundering trends and countermeasures. Now, the FATF 40 recommendations, this is really the preamble. This is what drives us in our creation of these global compliance programs. The key element of FATF's efforts is its detailed list of appropriate standards for countries to implement. These measures are detailed in the 40 recommendations which were first issued in 1990, and have since been revised. FATF has also issued various interpretive notes which are designed to clarify the application of specific recommendations and provide additional guidance. FATF recommendations have become the world's blueprint for effective national and international AML and counter financing terrorism controls. The IMF and the World Bank have recognized the FATF recommendations as the international standard for combating money laundering and terrorist financing. The IMF, World Bank, and FATF use a common methodology to assess compliance with the FATF recommendations. Of significance is that FATF identifies jurisdictions with strategic deficiencies in their AML and counter-financing terrorism regimes. 23 grey-listed countries lie on that list today, as well as those significant strategies with strategic significant deficiencies. Two blacklisted countries are on that list. Iran and North Korea are those two countries. The FATF 40 recommendations provide a complete set of countermeasures against money laundering and terrorist financing, covering the following elements, the identification of risk, development of appropriate policies, criminal justice and law enforcement, financial system and its regulation, transparency of legal persons and arrangements, and international cooperation. And again, 37 countries are members of the FATF, to include India. The Basel Committee on Banking Supervision. The Committee on Banking Supervision, established in 1974 by the central bank governors of the Group 10 countries, promotes sound supervisory standards worldwide. The committee is the primary global standard setter for the prudential regulation of banks and provides a forum for cooperation on banking supervision matters. Its mandate is to strengthen the regulation, supervision, and practices of banks worldwide to enhance financial stability the committee is best known for its landmark publications on capital adequacy Basel III and III and the committee's secretariat is located at the Bank for International Settlements in Basel, Switzerland and staffed by many professional supervisors on temporary assignment from member institutions in 1988 the Basel Committee issued a statement of principles called Prevention of Criminal Use of the Banking System for the purpose of money laundering In recognition of the vulnerability of the financial sector to misuse by criminals, this was the committee's first AML CFT commitment and a first step for preventing the use of the banking sector for money laundering. The statement set out principles with respect to customer identification, compliance with laws, conformity with high ethical standards and local laws and regulations, full cooperation with national law enforcement to the extent permitted without reaching customer confidentiality. Staff training, record-keeping, and audits. And in 1997, the Basel Committee issued its core principles for effective banking supervision, a basic reference for authorities worldwide. It stated that banking supervisors must determine that banks have adequate policies, practices, and procedures in place, including strict know-your-customer rules that promote high ethical and professional standards in the financial sector and prevent the bank from being used intentionally or unintentionally by criminal elements. In 2004 of October, the committee released another important publication on Know Your Customer, Consolidated KYC Risk Management, as a complement to its customer due diligence for banks issued in 2001 of October. The 2004 paper examines the critical elements of effective management. of Know Your Customer Risk throughout a banking group and addresses the need for banks to adopt a global approach and apply the elements necessary for a sound KYC program to both the parent bank or head office and all its branches and subsidiaries. And in 2014, the Basel Committee issued guidelines on sound management of risk related to money laundering and financing of terrorism. It supervised previous publications on customer due diligence for banks and Know Your Customer Risk management. The goal of the guidelines was to support banking supervisors and banks in the implementation of FATF recommendations concerning AML and counter-financing of terrorism within the wider contents of banking supervision standards drawing from the expertise of both organizations and working to avoid duplication. And the Reserve Bank of India is a member of the Basel Committee. The European Union directives on money laundering The directives are issued periodic by the European Parliament and implemented by member states as part of domestic legislation. The directives are intended to prevent money laundering and terrorist financing and establish a consistent regulatory environment across the European Union while allowing some flexibility based on local laws. And this is done by addressing the emerging money laundering and terrorist financing topologies, helping to close AML compliance gaps. The EU's first directive of the European Parliament and the Council was issued in June of 1991, and seven total directives have been issued by the Council to date. Like all directives adopted by the Council, it's required by Member States to achieve the specified results by amending national law if necessary. Now that the unique nature of the EU as a community of states makes it fundamentally different from other international organizations. The EU can adopt measures that have the force of law even without the approval of the national parliaments of their various member states. In addition, European law prevails over national law in the case of directives. In this respect, EU directives have far more weight than the voluntary standards issued by groups such as the Basel Committee or the FATF. Of course, the directives apply only to EU member states and not to other countries. Now the FATF-style regional bodies, there are nine FATF-style regional bodies which have similar forms and functions to that of FATF. They're also considered FATF associate members in setting standards. FATF depends on input from the FATF-style regional bodies as much as from its own members. However, FATF remains the only standard setting body. And many FATF member countries are also members of the nine FATF-style regional bodies. And India is a participating member in the Asia-Pacific group on money laundering, as well as the Eurasian group. FATF-Style Action Task Force of Latin America, Intergovernmental Action Group Against Money Laundering in West Africa, the Middle East and Northern African Action Task Force, and also the Task Force on Money Laundering in Central Africa comprise a complete list of FATF-Style regional bodies. The Egmont Group of Financial Intelligence Units. In 1995, several national financial intelligence units began working together in an informal organization known as the Egmont Group, named for the location of its first meeting. the Egmont Arenberg Palace in Brussels. The goal of the group is to provide a forum for financial intelligence groups around the world to improve cooperation and establish the environment needed to foster trust among countries to securely share sensitive information in the fight against money laundering and the financing of terrorism. The support provided by the Egmont and group includes serving as the operational arm of the international AMLCFT apparatus Providing a platform for the secure exchange of expertise and financial intelligence to combat money laundering and counter-financing of terrorism. Expanding and systemizing cooperation in the reciprocal exchange of information. Increasing the effectiveness of FIUs by offering training and promoting personal exchanges to improve the expertise and capabilities of personnel employed by FIUs. Fostering better and secure communications among FIUs through the application of technologies such as the Egmont Secure Web. Promoting the operational autonomy of FIUs and promoting the establishment of FIUs in conjunction with jurisdictions with an AMLCFT program in place or in areas with the program in the early stages of development. And the Financial Intelligence Unit India is a member of the Asia and Pacific Regional Group, which is comprised of FIUs from 28 member jurisdictions. And last but not least, the World Bank and the International Monetary Fund. They've become more active in combating money laundering by concentrating on money laundering over other forms of financial abuse, helping to strengthen financial supervision and regulation in countries, more closely interacting with the Organization for Economic Cooperation and Development and the Basel Committee on Banking Supervision, and insisting on the application of international AML standards in countries that require financial assistance. The World Bank and the IMF established a collaborative framework with FATF for conducting comprehensive assessments using a single global methodology of countries' compliance with FATF recommendations, and this assessment is carried out as part of the Financial Sector Assessment Program, as well in the report of the observance of standards and codes. In 2002, the World Bank and the IMF developed a reference guide for anti-money laundering and combating financing of terrorism in an effort to provide practical steps for countries implementing AML and CFT regimes in accordance with international standards. The guide describes the global problem of money laundering and terrorist financing under development agendas of individual countries and across regions, explains the basic elements required to build an effective AML and CFT legal and institutional framework, and summarizes the role of the World Bank and the IMF in those efforts. And then finally the Wolfsburg Group. Named after the castle in Switzerland where its first working session was held, the Wolfsberg Group is an association of global financial institutions including Banco Santander, Bank of America, Bank of Tokyo Mitsubishi, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Societe Generale, Standard Chartered Bank, and UBS. In 2000, along with Transparency International and experts worldwide, the institutions developed global anti-money laundering guidelines for international private banks. Since then, it's issued several other guidelines on correspondent banking and terrorist financing, among others. So what have the standards provided us? The standards provide a complete set of counter measures against money laundering and terrorist financing, covering the following elements. It defines the terms money laundering and terrorist financing, which are distinctly different. Mr. Sandhu talked about those differences. It identifies topologies used by money launderers and terror financiers. It identifies higher risk customers, products, services, and geographies. It develops appropriate policies. It requires the performance of adequate customer due diligence, commensurate with risk. It creates financial system regulation. It creates transparency of legal persons and arrangements and the identification and verification of customers and beneficial owners. It promotes international activity and cooperation. It provides technical assistance. And most importantly, the standards require the reporting of suspicious activity to national FIUs. And with that, I'm completed. And hopefully I kept within the time period.