1 PRESENTATION TO PCOF BACKGROUND TO SOUTH AFRICA’s PRESIDENCY OF THE FINANCIAL ACTION TASK FORCE (FATF) XVII 31 August 2005

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PRESENTATION TO PCOF

BACKGROUND TO SOUTH AFRICA’s PRESIDENCY

OF THE FINANCIAL ACTION TASK FORCE

(FATF) XVII

31 August 2005

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What is the Financial Action Task Force (FATF)?

• FATF is the International Standards-setting body to combat– Money laundering, and the – Financing of terrorism

• Creates a global network of +150 countries• Aim is to:

– Reduce the vulnerability of financial systems to subversion by proceeds of crime

– Assist in reducing money laundering and elimination of financing of terrorism

– Create tools for law enforcement to investigate & prosecute crimes involving proceeds

FINANCIAL ACTION TASK FORCE

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Benefits of this?

There are many benefits from implementing an AML/ CFT system -

• Prevents criminals from turning crime into profit• Prevents financial power being placed into the hands of

criminals• Ensures scarce resources are not diverted from a country’s

fiscus• Enables governments to fund socio-economic development• Maintains legitimacy for the integrity and stability of a

country’s financial system• Consolidates and protects democracy


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What are the objectives of the Financial Action Task Force (FATF)?

FATF sets & monitors international AML/CFT standards -

• 40 Recommendations on money laundering • 9 Special Recommendations combat financing of terrorism;• Conducts Mutual Evaluations of members; • Promotes worldwide awareness;• Encourages compliance by non-FATF members • Analyses and monitors methods and trends; and • Promotes international co-operation and coordination


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But what is the Financial Action Task Force (FATF) (2)

• Originally established in 1989 to prevent drug money from entering financial system

• Extended in 2001 to cover financing of terrorism• Revised Recommendations in 2003 seek to

prevent proceeds from wide range of crime entering financial systems and identifies non financial business (DNFBPs)


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FATF & associated membership

The FATF:• Today consists of 31 country members and 2 organisations• Membership by invitation only• Countries need to be “strategically important”

– RSA only country for African continent

• Importance of the FATF’s role was recently recognised by the UN Sec Council under Chapter VII of the Charter– New UNSC Res 1617 vs Al-qaida & Taliban “strongly

urges all Member States to implement the comprehensive, international standards embodied in the FATF 40+9”


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FATF membership


“Building a global network against money laundering & terror financing”

GAFISUD

CFATF

APGMoneyval

MENAFATF

GIABA

ESAAMLG

EAG

APG

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FSRBs and international institutions

FATF-style regional bodies (FSRBs) important extension of FATF work

• Endorse and seek to implement FATF standards and modus operandi

• Observers at FATF meetings

• Position will be taken in October 2005 – – likely “associate membership” for FSRBs which comply with standards

International institutions and organisations• IMF; World Bank – cooperate on Mutual Evaluations

• United Nations – CTC and UNODC

• Basel; IOSCO; IAIS – alignment of standards

• Interpol; Egmont Group – law enforcement


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What are the priority areas for an AML/ CFT system?

The 40+9 Recommendations are grouped into four broad priority categories:

• Criminal justice• Preventive• Administrative• International

• An effective AML/ CFT system requires the integration of these areas


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Ongoing FATF Work: Mutual Evaluations

1. Mutual Evaluations• All FATF members and FSRB members undergo regular

Mutual Evaluation assessments– Purpose is to monitor compliance

• Provide analysis of deficiencies for remedial action

– Reports impact on credit ratings and credit-worthiness

– New assessment methodology adopted in 2004• Very detailed and onerous

– New round of evaluations taking place • Assessments teams consist of experts in finance, legal, law

enforcement with two members of the secretariat

• 2-3 results are placed before each plenary for discussion


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Ongoing FATF work

Mutual Evaluations (2)

• Results shared with all FATF members and FSRB members– Also IMF and World Bank

• Published on FATF website– Published as ROSC on Bank website


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Ongoing: Working Group on Typologies

2. Typologies work• Typologies work undertaken to inform policy makers of

trends and methods• Working Group meets at Plenary meetings• Annual Workshop of about 300 people• Typologies now under discussion include

– Alternative remittance systems – Insurance sector vulnerabilities– Human being trafficking and illegal immigration – Methods and trends in money laundering and terrorist

financing, including the use of drug trafficking related to terrorist financing

– Wire transfers and terrorist financing techniques


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Ongoing: Working Group on Evaluations and Implementation

3. Evaluations and Implementation of standards• Training for assessors of Mutual Evaluations• Conduct of Mutual Evaluations• Methodology issues• Sharing, Reciprocity and Publication of reports• Improved dialogue with private sector

– Risk-based approach

– Politically exposed persons

– Beneficial ownership

– Money transfer systems

– Designated Non-Financial Businesses and Professionals (lawyer, accountants, estate agents, motor-car dealers, etc)


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Ongoing: Working Group on Financing of Terrorism

4. Ongoing assessment of 9 Special Recommendations & their implementation

• Guidance and best practice papers on SRs• SR VIII on Non-Governmental Organisations• SR VII Wire Transfers

– Thresholds

– E-money


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Ongoing: Non Co-operating Countries and Territories (NCCTs)

5. Original list of Non Cooperating Countries and Territories (NCCTs) developed in 2001

• 23 countries originally listed• Listing means enhanced scrutiny of all transactions and

financial relationships • Myanmar, Nauru and Nigeria remain listed• Countries under monitoring – Ukraine, Bahamas,

Guatamala


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Presidency

Presidency• Rotates between countries on an annual basis • Previously:

– France, Sweden, Germany

Why RSA?• Developing country• Displayed seriousness in its AML/ CFT implementation• Serious player in global financial system

• Cabinet appointed Prof Kader Asmal to this position from July 2005.


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SA Presidency priorities for FATF XVII

The SA Presidency seeks to highlight several priorities for FATF XVII

• Continue the work as set out previously by FATF• Ongoing Mutual Evaluations programme

SA objectives for FATF XVII: • Create space for developing country & LDC issues

– Cash-based economies

– Poorly developed financial sectors

– Sometimes fragile governmental and institutional arrangements


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SA Presidency priorities for FATF XVII (2)

Proposals for FATFXVII• Clarify membership status of FATF-Style Regional Bodies

– Develop and consolidate relationships with FSRBs (ESAAMLG, GIABA, EAG)

– Facilitate provision of technical assistance

– Provide training and sharing of information

• Ongoing facilitation of membership of China and India• Integrate corruption issues into FATF standards

– Emphasis on good governance and benefits that flow from this

– Social/ economic costs as result of diversion of resources

– Cross-reference to UN Conventions, etc in 40+9


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SA Presidency priorities for FATF XVII (2)

• Typologies/ trends– Consolidation of previous work

• Human trafficking• wire transfers • cash couriers

– Introduction of • Trade-based money laundering • customer due diligence practice and • trust & company service providers.

• Plenary meeting in Cape Town in February 2006• All of this is no small task!


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Summary

• The work of the FATF has become increasingly well-known and important around world

• Standards (40+9) have become integrated into the overall monitoring & supervision of a country’s financial systems

• Increasing global co-operation and sharing of information• RSA can play leading role:

– Liaising and integrating FSRBs into system

– Raising issues of Developing and Less Developed Countries

• Another example of RSA’s integration into the global financial and trading system.


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THANK YOU

31 AUGUST 2005


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Annexures


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FATF Membership

• Membership of 31 countries Argentina; Australia; Austria; Belgium; Brazil; Canada; Denmark Finland; France; Germany; Greece; Hong Kong, China; Iceland; Ireland; Italy; Japan; Luxembourg; Mexico; Netherlands; New Zealand; Norway; Portugal; Russian Federation; Singapore; South Africa; Switzerland; Spain; Sweden; Turkey; United Kingdom; United States.

• 2 regional organisations: European Commission & Gulf Co-operation Council.

• Newest members Russia & South Africa (both June 2003);• Peoples Republic of China and India remain to become members


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FATF- style regional bodies


Building a global network against money laundering & terror financing

GAFISUD-South American FATF

CFATF- Caribbean FATF

APG

Moneyval-European Union countries

MENAFATF- Middle East & North Africa FATFGIABA-

Groupe Inter-gov d’Action contre le Blanchiment en Afrique

ESAAMLGEastern & Southern Africa AML Group

EAG-East Asian Group

APG-Asia Pacific Group

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Typologies

1. Avoidance of customer due diligence procedures in deposit-taking institutions

• Study on how laundered money today enters the financial system• Deposit-taking are frontline defence against placement of

proceeds of crime• Seek to identify areas of vulnerability with due diligence

procedures;• Identify new methods and trends in placement techniques

– eg. ID theft and fraud; fronting; trusts; shells; unaffiliated ATMs, etc


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Typologies

2. Trust and Company service providers• Tightening of financial systems has meant criminals seek

alternative means to disguise and convert proceeds• Shell corporations used with complex ownership structures for

simple purpose or as multipurpose entities.• Identify areas of vulnerability and evidence of malpractice by shell

companies• Use of secrecy legislation

• Supervisory and monitoring aspects

• Beneficial ownership and control of legal persons

• Areas of greatest misuse etc


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Typologies:

3. Trade based money laundering • Financial sector entities increasingly subject to AML/ CFT

measures• Thus evidenced migration into non-financial sectors• Study to assess use of trade based systems for ML/ FT & address

shortcomings• Use of trade & customs data better

• Complement wire remittances work being done• Facilitate broad policy development: customs fraud; increase

revenues; quality of trade stats• Involve a number of countries (FATF & non-FATF)


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RSA Mutual Evaluation 2003

SA first Mutual Evaluation conducted for membership in 2003• Deficiencies identified by FATF included:

– Absence of measures to combat the financing of terrorism– Beneficial ownership of trusts – Supervisory issues– Implementation and prosecutions

• Since then POCDATARA has incorporated CFT measures

• Draft legislation in preparation on AML/CFT role for supervisory bodies, & provisions re beneficial ownership

• Extensive implementation taking place – consolidation


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Priority Areas for AML/ CFT system

Criminal Justice • R1 and SRI: Criminalise money laundering and financing of

terrorism• R3 and SRIII: Freezing and forfeiture of proceeds of crime

and terrorist related property


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Preventive measuresCustomer due diligence• R 5: Client identification• R6: Systems in financial institutions to deal with PEP’s• R10: Keeping records of transactions

Reporting• R13 and SRIV: Reporting of suspicious transactions on

money laundering and terrorist financing• R11: Attention to complex transactions• R4: Relax financial institution secrecy• R14: Protect persons making reports



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Administrative • R27: Mandate for investigating authorities• R28: Powers of investigating authorities to obtain

documents and information• R27: Mandate for investigating authorities• R28: Powers of investigating authorities to obtain

documents and information

• R23: Supervision of financial institutions• R26: Establish a Financial Intelligence Unit (FIU)


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International • R35 and SRI: Ratify UN Conventions and implement UNSC

Resolutions• R36 to 39: Offer mutual legal assistance and extradition.• R40: Other forms of co-operation


Documents

1 PRESENTATION TO PCOF BACKGROUND TO SOUTH AFRICA’s PRESIDENCY OF THE FINANCIAL ACTION TASK FORCE (FATF) XVII 31 August 2005