Anti-money laundering: tougher oversight required

Each year the developing world loses an estimated US$ 1 trillion to illicit financial flows, money that could better the lives of millions of citizens but ends up funding the lifestyles of the corrupt, criminals and tax abusers.

One of the institutions with a major role to play in stopping this is the Financial Action Task Force (FATF), an inter-governmental organisation with a specific mandate to fight money laundering and ensure governments implement laws designed to keep the financial system – as well as key business sectors such as real estate – safe from the proceeds of corruption and crime.

Over the next seven years the FATF committed to publish over 180 country specific reports on how well governments are doing to stop illicit financial flows and whether they have the requisite anti-money laundering mechanisms in place. Recommendations from these reports are supposed to strengthen national and global financial systems and prevent money laundering.

In 2013, FATF introduced a new methodology that promises to look at the practical effectiveness of a country’s frameworks, and not just whether laws are in place. At the time, FATF said that effectiveness had moved to the top of its agenda.

Spain in the spotlight

In light of the high expectations for this new round of assessments, the first report, which was released last week on Spain, is a disappointment.

The report is based on limited evidence, not thoroughly sourced, and its conclusions are largely unsupported by the evidence presented. For example, several chapters reference no bibliography and two rely on one bibliographic source: the Statistics Report of Spain’s Committee for the Prevention of Money Laundering and Monetary Offences (2013).

In 2014 numerous corruption scandals in Spain with top politicians and even members of the royal family accused of allegedly using shell companies to hide money have made money laundering a hot topic. So it may come as some surprise that the FATF gave Spain overall high marks for its anti-money laundering efforts, despite outlining weaknesses in the system including:

• Lack of dissuasive sanctions
• Significant gaps in the legal framework regarding wire transfers
• Lack of awareness of preventative due diligence by lawyers, notaries, real estate agents and vendors of luxury goods
• Weaknesses in the process for banks both in highlighting money laundering risks and reporting of suspicious transactions
• Weaknesses in implementation by financial institutions of due diligence requirements regarding domestic Politically Exposed Persons (PEPs).

Spain did introduce new anti-money laundering legislation in May but the FATF would not have been able to judge its effectiveness in practice, given that the visit by the assessment team to the country took place around the same time.

The strong way forward

In order to strengthen the results of the FATF country assessments, Transparency International recommends greater transparency and broader consultation in the assessment process. In particular:

• The FATF should convene an independent expert panel of private sector representatives, anti-money laundering practitioners, academics and non-governmental organisations to produce recommendations on the practical implementation of the FATF assessment methodology. The OECD, for example, has implemented similar consultations in the context of the OECD Convention against Foreign Bribery.
• FATF member countries should commit in advance to making the investments needed to implement the recommendations coming out of the independent panel and increase the transparency and inclusiveness of country assessments.
• Country assessments should include meaningful inputs from non-state actors, including civil society organisations, the private sector, academics and others. Again, this is an approach which other international frameworks such as the OECD Convention put in place.
• The FATF member countries should commit greater resources to supporting the implementation of assessments. In 2014, for example, the world’s richest countries contributed a total of just US$3.5 million to funding the FATF secretariat. To put this in context, just the security costs of the G20 summit in Brisbane this year came to over US$80 million.

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