Second Review of Enhancing the Asian Development Bank’s

November 2012

Second Review of Enhancing the Asian Development Bank’s Role in Combating Money Laundering and the Financing of Terrorism

ABBREVIATIONS

ADB – Asian Development Bank AML/CFT – anti-money laundering and combating the financing of terrorism APG – Asia/Pacific Group on Money Laundering CoP – community of practice COSO – Central Operations Services Office DMC – developing member country EAG – Eurasian Group on Combating Money Laundering and the

Financing of Terrorism FATF – Financial Action Task Force FIU – financial intelligence unit FSRB – FATF-style regional body ICRG – International Cooperation Review Group IMF – International Monetary Fund Lao PDR – Lao People’s Democratic Republic OAI – Office of Anticorruption and Integrity OGC – Office of the General Counsel PRC – People’s Republic of China TA – technical assistance UN – United Nations UNODC – United Nations Office on Drugs and Crime Vice-President T. de Longuemar, Finance and Administration Officer-in-Charge M. A. Birken, Office of the General Counsel (OGC) Team leader C. Png, Senior Counsel, OGC Team members M. Greenhow, Senior Counsel, OGC D. Ezzy, Integrity Specialist, Office of Anticorruption and Integrity

(OAI) J. Sanchez, Integrity Officer, OAI

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page I. BACKGROUND 1

II. SYNOPSIS OF AML/CFT DEVELOPMENTS IN DEVELOPING MEMBER COUNTRIES AND INTERNATIONALLY FROM APRIL 2008 TO SEPTEMBER 2012 1

III. KEY AREAS OF ADB ACTIVITIES FROM APRIL 2008 TO SEPTEMBER 2012 5

IV. FURTHER IMPLEMENTATION OF THE POLICY 9

APPENDIXES

1. Key Requirements of the Financial Action Task Force 40 Recommendations on Money Laundering and Special Recommendations on Terrorist Financing

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2. Overview of the Outcome of Mutual Evaluations and Assessments for ADB Developing Member Countries and FATF Members

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2. ADB Projects and Technical Assistance with AML/CFT Components Approved or Implemented from April 2008 to September 2012

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I. BACKGROUND

1. The Asian Development Bank (ADB) Board of Directors adopted the Policy on Combating Money Laundering and the Financing of Terrorism on 1 April 2003.1

The policy calls on ADB to (i) assist developing member countries (DMCs) in establishing and implementing effective legal and institutional systems to combat money laundering and the financing of terrorism; (ii) increase collaboration with other international organizations; (iii) strengthen internal controls to safeguard ADB funds; and (iv) upgrade ADB’s staff capacity.

2. As required by the policy, a comprehensive review of its implementation was carried out in 2008, covering activities from April 2003 to March 2008. The resulting Board information paper, Review of Enhancing the Asian Development Bank’s Role in Combating Money Laundering and the Financing of Terrorism, was circulated to the Board in April 2008.2 The paper also envisaged a periodic review of ADB’s work under the policy, taking into account developments in international law and standards, as well as demand from its DMCs.3

This paper is the second periodic review, covering ADB’s activities under the policy from April 2008 to September 2012.

II. SYNOPSIS OF AML/CFT DEVELOPMENTS IN DEVELOPING MEMBER COUNTRIES AND INTERNATIONALLY FROM APRIL 2008 TO SEPTEMBER 2012

A. Implementation of the International Standard in Developing Member Countries

3. The Financial Action Task Force (FATF) is an intergovernmental body established at the Group of Seven summit in July 1989 to develop and promote international standards for anti-money laundering activities.4 The main concerns at that time were the proliferation of drug production and drug-related activities, including the laundering of drug proceeds, and the need for national and international action. Following the terrorist attacks of 11 September 2001 in the United States, the FATF’s mandate was extended to cover combating the financing of terrorism. The FATF 40 Recommendations on Money Laundering and Special Recommendations on Terrorist Financing (FATF 40+9 Recommendations) have since become the international standard for anti-money-laundering and combating the financing of terrorism (AML/CFT). 5

ADB’s Policy on Combating Money Laundering and the Financing of Terrorism also adopted these as the primary international standard to guide ADB operations. Appendix 1 presents the key requirements of the FATF 40+9 Recommendations.

1 ADB. 2003. Enhancing the Asian Development Bank’s Role in Combating Money Laundering and the Financing of

Terrorism. Manila. 2 ADB. 2008. Review of Enhancing the Asian Development Bank’s Role in Combating Money Laundering and the

Financing of Terrorism. Manila. 3 ADB. 2008. Review of Enhancing the Asian Development Bank’s Role in Combating Money Laundering and the

Financing of Terrorism. Manila (para. 42). 4 The FATF comprises 34 members and 2 regional organizations. The members are Argentina; Australia; Austria;

Belgium; Brazil; Canada; the People’s Republic of China (PRC); Denmark; Finland; France; Germany; Greece; Hong Kong, China; Iceland; India; Ireland; Italy; Japan; the Republic of Korea; Luxembourg; Mexico; the Netherlands; New Zealand; Norway; Portugal; Russia; Singapore; South Africa; Spain; Switzerland; Sweden; Turkey; the United Kingdom; and the United States. The regional organizations are the European Commission and the Gulf Cooperation Council. Like the International Monetary Fund and the World Bank, ADB is an observor member of the FATF. Financial Action Task Force. http://www.fatf-gafi.org/

5 The FATF 40+9 Recommendations are not mandatory under international law, although they have incorporated by reference applicable UN conventions and UN Security Council resolutions. Countries are expected to implement them, and are subject to country-level mutual evaluations or assessments (para. 4).

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4. An important feature of the implementation of the international standard is the examination of countries’ level of implementation through (i) mutual evaluations carried out by the FATF and its regional associate bodies, commonly referred to as FATF-styled regional bodies (FSRBs); or (ii) assessments by the International Monetary Fund (IMF) and the World Bank.6

The FATF–FSRB mutual evaluations and the IMF–World Bank assessments are similar exercises carried out using a common methodology developed by the FATF, the IMF, and the World Bank for assessing compliance with the FATF 40+9 Recommendations.

5. From April 2003 to September 2012, 40 DMCs completed mutual evaluations or assessments. In 2011, staff did a review on the level of compliance of 24 DMCs based on their published mutual evaluation or assessment reports. 7 It was updated in September 2012 to include 16 more DMCs. This review also provided a comparison with 29 FATF members, and was updated to include 5 more FATF members. 8

Appendix 2 provides an overview of the outcome of these mutual evaluations and assessments.

6. The 2011 review identified three factors that should be taken into account when considering the DMCs’ level of compliance with the FATF 40+9 Recommendations (footnote 7). First, implementation of this standard is (i) complex as it covers a broad range of areas, which makes it harder to achieve implementation at the national level; and (ii) rigorously evaluated based on the FATF methodology, which provides a series of criteria to be met for each recommendation. Second, DMCs generally perceive combating money laundering and financing of terrorism as concerns of the more developed countries, which makes it more difficult for national authorities to prioritize AML/CFT developments. Third, many developing countries, including ADB’s DMCs, have capacity constraints both in the level of human resources employed at the national authorities and their technical expertise. In addition, a broader observation is that AML/CFT development is a concern not only for DMCs. For example, FATF members are required to submit progress reports to the FATF on a periodic basis on those FATF Recommendations for which they were rated partially compliant or non-compliant. B. Financial Action Task Force Public Statements on Countries with Strategic

Deficiencies 7. The FATF established the International Cooperation Review Group (ICRG) in 2006 to identify, examine, and engage with countries with significant deficiencies in their AML/CFT regimes. 9

This includes taking action, such as requiring FATF members to impose countermeasures when a country chooses not to engage with the FATF or relevant FSRB, or refuses to improve its AML/CFT regime.

8. A key feature of this work is the issuance of public statements by the FATF on countries with strategic deficiencies in their AML/CFT regimes, which they have been doing since 2008. Unlike mutual evaluations or assessments carried out based on the FATF methodology, which cover the entire range of requirements in the FATF 40+9 Recommendations, the ICRG examines countries based on 16 core and key FATF Recommendations. The focus is on

6 This is a unique aspect of the implementation of the standard at the international level, given the level of public

scrutiny through the peer review and public disclosure of the reports of the mutual evaluations or assessments. It is notwithstanding that countries are not compelled to have assessments or mutual evaluations.

7 N. Jensen and C. Png. 2011. Implementation of the FATF 40+9 Recommendations: A Perspective from Developing Countries. Journal of Money Laundering Control. (14) 2, pp. 110–120.

8 Five DMCs are also FATF members: Hong Kong, China; India; the Republic of Korea; the PRC; and Singapore. Their ratings are included as part of the ratings in both tables in Appendix 2.

9 Financial Action Task Force. High Risk and Non-Cooperative Jurisdictions. http://www.fatf-gafi.org/topics/ high-riskandnon-cooperativejurisdictions/

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The views expressed herein are those of the consultant and do not necessarily represent those of ADB’s members, Board of Directors, Management, or staff, and may be preliminary in nature.

countries with low levels of compliance with the fundamental aspects of the international standard, such as the criminal law and procedures for combating money laundering and the financing of terrorism, implementation of financial sanctions imposed by the United Nations (UN) Security Council, and regulatory and supervisory oversight of the financial sector.

9. As part of the FATF plenary and working group meetings that take place three times a year, the ICRG discusses the status of countries with strategic deficiencies at the working level, and its findings and recommendations are endorsed at the relevant FATF plenary. The latest public statements were issued following the FATF plenary on 19 October 2012. Based on these public statements, six DMCs are regarded as jurisdictions with strategic deficiencies that have not made sufficient progress to address them or have not committed to an action plan developed with FATF to address them.10 In addition, eight DMCs are currently regarded as jurisdictions with strategic deficiencies.11

C. Revised International Standard 10. The FATF initiated a review of the FATF 40+9 Recommendations in June 2009.12 The review took into account the experiences of FATF members in implementing the recommendations as well as emerging threats. It was intended to be a limited and focused exercise aimed at addressing areas of weaknesses that were identified during the mutual evaluations and assessments carried out based on the FATF 40+9 Recommendations. The review also included the issuance of two public consultation papers (in October 2010 and June 2011) and two private sector consultation forums (in November 2010 and December 2011).13

11. The FATF plenary adopted the revised international standard—entitled International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation: the FATF Recommendations (Revised FATF Recommendations)—on 16 February 2012.14

The Revised FATF Recommendations include six new focus areas, which are summarized in Box 1. The FATF also revised the structure of the international standard to streamline the FATF 40+9 Recommendations into a single set of 40 recommendations.

10 The DMCs are Indonesia, Myanmar, Pakistan, Sri Lanka, Thailand, and Viet Nam. This is the so-called black list

where these DMCs are part of 19 countries in the public statement. The FATF calls upon its members to consider the risks arising from the deficiencies associated with each jurisdiction, as described in the public statement.

11 The DMCs are Afghanistan, Bangladesh, Cambodia, Kyrgyz Republic, Mongolia, Nepal, the Philippines, and Tajikistan. This is the so-called grey list where these DMCs are part of 23 countries in the public statement. The FATF monitors the implementation of the action plans of these jurisdictions.

12 Financial Action Task Force. Review of the FATF Standards. http://www.fatf-gafi.org/topics/fatfrecommendations/ key/reviewofthefatfstandards.html

13 Financial Action Task Force. 2012. FATF’s Response to the Public Consultation on the Revision of the FATF Recommendations. http://www.fatf-gafi.org/topics/fatfrecommendations/documents/

fatfsresponsetothepublicconsultationontherevisionofthefatfrecommendation.html 14 Financial Action Task Force. FATF Recommendations. http://www.fatf-gafi.org/topics/fatfrecommendations/

documents/internationalstandardsoncombatingmoneylaunderingandthefinancingofterrorismproliferation-the fatfrecommendations.html

http://www.fatf-gafi.org/topics/fatfrecommendations/documents/�

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Box 1: Additional Requirements from the International Standard on Combating Money Laundering and the Financing of Terrorism and Proliferation:

the Financial Action Task Force Recommendations In addition to the key requirements described in Appendix 1, countries are required to do the following: 1. Apply a risk-based approach on the risks associated with money laundering and the financing of terrorism that affect them. This is a significant change as countries are now expected to apply a risk-based approach in their design and implementation of measures to combat money laundering and the financing of terrorism. This requires countries to identify and assess risks—whether at the national, regional or sector level—and apply measures (including allocating resources) to mitigate these risks. Moreover, countries are expected to require financial institutions and specific non-financial businesses and professional to identify, assess, and take effective measures to mitigate their money laundering and terrorism financing risks. 2. Pay attention to countries with higher risks associated with money laundering and the financing of terrorism, and require financial institutions to apply enhanced due diligence to business relationships and transactions involving these countries. The type of enhanced due diligence to be applied should be proportionate to the risks. The countries should also be able to apply countermeasures when called upon by the Financial Action Task Force. 3. Implement financial sanctions of the United Nations Security Council on proliferation of weapons of mass destruction and related financing. This requires countries to freeze without delay the funds or other assets of, and to ensure that no funds or other assets are made available (directly or indirectly), to or for the benefit of persons and entities designated by the United Nations Security Council pursuant to Chapter VII of the Charter of the United Nations (c.f. Security Council Resolutions 1718/2006, 1737/2006, 1747/2007, 1803/2008 and 1929/2010). 4. Include tax crimes in the list of “underlying” crimes that give rise to money laundering under their national law. This enables countries to prosecute laundering of proceeds arising from tax crimes (in addition to other criminal activities, such as drug trafficking or fraud), and support the efforts of national revenue administrations in this respect. 5. Strengthen the emphasis on the connection between fighting corruption and combating money laundering and the financing of terrorism. This includes the requirement for financial institutions to pay attention to an expanded scope of individuals that are entrusted with prominent public functions (i.e., “politically-exposed persons”). Financial institutions are required to take reasonable measures when carrying out due diligence to determine whether customers are domestic individuals that are entrusted with prominent public functions or individuals that are entrusted with those functions by an international organization (in addition to individuals that are entrusted with prominent public functions by a foreign government under the FATF 40+9 Recommendations), and take additional steps using a risk-based approach before establishing business relationships with these customers. 6. Strengthen the emphasis on transparency in connection with the beneficial ownership and control of legal persons and arrangements. Countries are required to take measures to prevent the misuse of legal persons and arrangements to launder money and/or finance terrorism. This includes ensuring that adequate information on the beneficial ownership and control of such persons and arrangements can be obtained or accessed in a timely manner by national authorities. Source: Asian Development Bank.

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12. The FATF is developing a new methodology for conducting mutual evaluations or assessments on compliance with the Revised FATF Recommendations. This new methodology is expected to be finalized by the first quarter of 2013. An additional feature of the new methodology is that the assessor body—the FATF or an FSRB for a mutual evaluation; the IMF or the World Bank for an assessment—will conduct a broader examination of the overall level of effectiveness of a national AML/CFT regime.15

This will take into account the money laundering and terrorism financing risk profile of the country, and the measures taken to mitigate such risks (Box 1). It is in addition to the evaluation on the level of compliance with each of the Revised FATF Recommendations, which is the approach under the current methodology.

III. KEY AREAS OF ADB ACTIVITIES FROM APRIL 2008 TO SEPTEMBER 2012

A. Assisting Developing Member Countries in Establishing and Implementing Legal and Institutional Systems to Combat Money Laundering and the Financing of Terrorism

13. The key aspect to assisting DMCs in developing their AML/CFT regimes is policy dialogue between ADB and individual DMCs in developing financial sector and governance-related projects and technical assistance (TA). By incorporating AML/CFT components into reform programs, ADB supports the authorities in the design and implementation of AML/CFT policies. Such efforts can be complemented by TAs. Stand-alone TAs are also helpful for providing policy advice and capacity development. The provision of such support to DMCs is also consistent with ADB’s Financial Sector Operational Plan.16

14. From April 2008 to September 2012, AML/CFT components were included in a total of nine programs, three associated TAs for the programs, and five stand-alone TAs that were approved and/or implemented. The programs included a sector development program for Bhutan, two program clusters or programmatic approaches for Cambodia (the first comprising four subprograms and the second comprising three subprograms), a program cluster for Indonesia (comprising two subprograms), a program for Mongolia, a program cluster for Pakistan (comprising four subprograms), a program cluster for the Philippines (comprising two subprograms), a program for Sri Lanka, and a program cluster for Viet Nam (comprising two subprograms). The stand-alone TAs were for Cambodia, the People’s Republic of China (PRC), Lao People’s Democratic Republic (Lao PDR), Mongolia, Pakistan, and Viet Nam. Appendix 3 provides details on these programs and TA projects.

15. In general, the AML/CFT components of these programs cover (i) development of AML/CFT legislation; (ii) strengthening the regulatory and supervisory framework for the financial sector, particularly nonbank financial institutions; (iii) capacity development for financial regulators and financial institutions; and (iv) establishment of and capacity development for financial intelligence units (FIUs). The general scope of the TAs is similar. In addition, the TA for Lao PDR assisted the authorities in preparing for the mutual evaluation by the Asia/Pacific Group on Money Laundering (APG). The TAs for the PRC assisted the authorities in addressing deficiencies identified by the FATF in its mutual evaluation.17

15 The FATF still needs to decide whether the evaluation of effectiveness will include a rating for the country.

The prioritization of recent TAs also took into account DMCs that are listed in the FATF public statements (para. 9), such as the TA that was approved for Cambodia in November 2011 and the processing of a TA for Mongolia.

16 ADB. 2011. Financial Sector Operational Plan. Manila (para. 4.22). 17 Based on a recent review on TAs for legal development in the PRC, these were identified as two that provided

strategic support for the PRC’s participation at the international level. ADB. 2012. Technical Assistance for Legal Development in the People’s Republic of China: A Review. Manila (para. 74).

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16. Preparation and implementation of these programs and TAs typically involve staff from ADB’s Regional Departments with input from the Office of the General Counsel (OGC), as AML/CFT is one of the key areas of OGC’s law, justice, and development activities.18

OGC was also responsible for the design and implementation of the two TAs for the PRC, and is processing the TA for Mongolia with the support of the East Asia Regional Department.

17. On 30 June 2004, ADB’s Board of Directors approved the Cooperation Fund for Regional Trade and Financial Security Initiative to support TAs for enhancing port security and AML/CFT activities. 19

The fund received contributions from the governments of Australia (A$1,500,000), Japan ($1,000,000), and the United States ($1,000,000), with a total contribution of about $3.1 million. The fund, which is administered by ADB, has supported seven TAs, including two regional ones. Of these seven TAs, two (for Cambodia and Lao PDR) are within the review period of this paper and included in Appendix 3. The remaining uncommitted balance of the fund is about $1.1 million. The latest progress report for the fund, which covers the period from July 2011 to June 2012, was submitted to the donors in August 2012 and is available upon request.

B. Increasing Collaboration with Other International Organizations 18. To keep abreast of AML/CFT developments, ADB is an observor member of the FATF and two FSRBs: the APG and the Eurasian Group on Combating Money Laundering and the Financing of Terrorism (EAG).20

At the FATF, ADB participates in the periodic plenary and working group meetings. ADB’s focus is on (i) DMCs that are regarded as jurisdictions with strategic deficiencies and listed in the FATF public statements in order to be informed about the issues pertaining to these DMCs; (ii) implementation of the international standard for AML/CFT, including new issues and trends; and (iii) coordination with the IMF, the World Bank, the UN Counter-Terrorism Executive Directorate, and the UN Office on Drugs and Crime (UNODC) from the policy and TA coordination perspectives.

19. In the FSRBs, ADB participates in the periodic plenary and working group meetings of the APG and EAG. ADB’s focus is on (i) AML/CFT developments at the regional level and in the DMCs, including new issues and trends; and (ii) coordination with multilateral development partners such as the IMF, the World Bank, and UNODC, as well as bilateral partners such as the governments of Australia, New Zealand, the United Kingdom, and the United States. Coordination in these regional forums has helped to ensure that staff are aware of the TA activities of other development partners and avoid duplication of efforts. 20. Information from participation in these plenary and working group meetings is routinely shared with concerned departments and offices. An example of a more topical update was the ADB-wide presentation on the Revised FATF Recommendations and DMCs that are listed in the FATF public statements, which took place in August 2012.

18 In line with Strategy 2020, OGC has prioritized its law, justice, and development activities in five key areas:

infrastructure law and regulation, environmental law and clean energy, financial law and regulation (which includes combating money laundering and the financing of terrorism), private sector development, and inclusive growth.

19 ADB. 2004. Cooperation Fund for Regional Trade and Financial Security Initiative. Manila. 20 Most DMCs from the East Asia Department, Pacific Department, South Asia Department, and Southeast Asia

Department are APG members, while most DMCs from the Central and West Asia Department are EAG members. The Asia/Pacific Group on Money Laundering. http://www.apgml.org/ and the Eurasian Group on Combating Money Laundering and Financing of Terrorism. http://www.eurasiangroup.org/

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21. ADB also contributed to the work of the UN Counter-Terrorism Executive Directorate by participating as legal experts in their assessments of Cambodia and Lao PDR in 2008. By way of background, the executive directorate conducts country assessments on the implementation of UN Security Council Resolution 1373/2001 on combating the financing of terrorism and related financial sanctions. ADB was originally invited to participate in these assessments for Bangladesh and Viet Nam in 2007. C. Strengthening Internal Controls to Safeguard ADB Funds 22. ADB’s approach to strengthening internal controls continues to focus on ensuring that its operations, including its nonsovereign investments and treasury operations, have adequate procedures in place against risks associated with integrity, money laundering, and terrorism financing. These procedures are aligned with ADB’s efforts to strengthen internal controls against the risk of corruption, and recognize the connection between fighting corruption and AML/CFT activities, as emphasized by the Revised FATF Recommendations. ADB's annual audit of internal controls over financial reporting was expanded in 2011 to include a comprehensive annual fraud risk assessment. This assessment is prepared by a working group representing relevant departments and offices, and specifically includes the risk of money laundering. The results of the assessment are provided to ADB’s external auditors as part of their annual audit. 23. There has been an increasing emphasis on governance risk assessment and risk management plans, covering public financial management, procurement, and combating corruption, in the preparation of ADB’s country partnership strategies and projects, which is guided by ADB’s Second Governance and Anti-Corruption Action Plan.21 This is supplemented at the project-level by the preparation of financial management assessments of project executing agencies. 22 The emphasis on ADB’s financial management activities was strengthened by the establishment of a dedicated financial management unit in the Central Operations Services Office (COSO) in September 2012. 23

The unit’s responsibilities include (i) working with operations departments on such assessments of ADB projects; and (ii) providing advice on country- and sector-level financial management system assessments, which include identification of areas for capacity development and risk mitigation measures. Such risks may include corruption, money laundering, and terrorism financing, where appropriate. This is complemented by the ongoing appointment by each regional department of a dedicated financial management specialist to increase ADB’s financial management capacity.

24. For nonsovereign operations, the integrity due diligence guidelines have been revised to ensure that ADB’s guidelines continue to reflect best international practice in relation to anticorruption, AML/CFT and other integrity issues.24

ADB continues to liaise closely with other multilateral development banks on these issues.

25. A key development in connection with addressing risks associated with integrity, money laundering and financing of terrorism in ADB operations is the establishment of a designated advisory function in the Office of Anticorruption and Integrity (OAI), which provides Management and staff specialized and independent advice on these risks and related procedural

21 ADB. 2006. Second Governance and Anti-Corruption Action Plan. Manila. 22 ADB. 2006. Handbook for Borrowers on the Financial Management and Analysis of Projects. Manila. 23 Memorandum on Establishment of a Dedicated Financial Management Unit in COSO, dated 18 September 2012

and approved by Management on 21 September 2012. 24 ADB. 2012. Nonsovereign Operations. Operations Manual. OM D10/OP. Manila (para. 32).

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requirements.25

Locating the advisory function within OAI allows ADB to benefit from OAI’s existing skills mix and resources. To avoid conflicts of interest, the advisory function is segregated from the investigative function of OAI. Box 2 summarizes the new advisory function.

Box 2: Designated Advisory Function for Integrity Due Diligence and the Risks Associated with Money Laundering and Financing of Terrorism

As part of routine due diligence for nonsovereign and applicable sovereign (notably financial intermediation loans) projects, Asian Development Bank (ADB) project teams conduct due diligence to ascertain risks, including client-related integrity, money laundering, and terrorism financing risks. On some occasions, the absence of a designated focal point and advisory function within ADB to provide advice on the handling of such risks in connection with ADB-financed activities resulted in uncertainty for project teams on ADB’s risk tolerance for such matters. This led to interdepartmental discussions on setting up a designated advisory function to provide specialized and independent advice to Management and staff on the handling of these risks. On 7 November 2011, Management approved the establishment of a new designated advisory function in the Office of Anticorruption and Integrity (OAI) to provide Management and staff specialized and independent advice on integrity, money laundering, and terrorism financing risks, and related procedural requirements, as appropriate. Such advice may be provided at any stage of a project cycle, including at Investment Committee Meetings, Management Review Meetings, or Staff Review Meetings, and includes investigations for assessing significant concerns about integrity, money laundering or terrorism financing. The decision on whether to proceed with the project in question remains with Management and the concerned departments. Moreover, the advisory function is not expected to be involved in every transaction or project. It should only be called upon where Management or concerned departments consider the issues to be significant, or the transaction or project involves high-risk sectors and/or persons, such as extractive industries and “politically-exposed persons.” For the first three quarters of 2012, OAI has provided substantial advice on 13 nonsovereign and financial intermediation projects, and day-to-day advice on numerous others. Source: Asian Development Bank.

D. Upgrading ADB’s Staff Capacity 26. ADB has continued to keep abreast of current AML/CFT developments. Information from participation in plenary and working group meetings of the FATF, APG, and EAG are routinely shared with concerned departments and offices. Staff also share information on AML/CFT matters at the financial sector development community of practice (CoP) and the governance CoP, which facilitate coordination between these sector and thematic groups. These efforts also enable more systematic dissemination and exchange of AML/CFT-related information within ADB. 27. From April 2008 to September 2012, staff delivered internal presentations on (i) integrity due diligence in project processing for private sector, nonsovereign, and public sector operations, as part of training organized by OAI; 26

25 Memorandum on Proposed Arrangements for a Designated Advisory Function for Integrity Due Diligence and

Money Laundering/Financing of Terrorism Risks, dated 2 November 2011 and approved by Management on 7 November 2011.

(ii) integrity due diligence for financial intermediation loans, as part of a workshop organized by the financial sector development CoP; (iii) ADB’s Policy on Combating Money Laundering and the Financing of Terrorism and related activities, for the DMC officials orientation program, as well as for staff from COSO, the

26 For instance, OAI conducted 8 training sessions attended by 195 staff from the operations departments in 2011.

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Controller’s Department, OGC, and the Treasury Department; and (iv) the Revised FATF Recommendations and DMCs that are listed in the FATF public statements. 28. Staff also delivered presentations on (i) regional vulnerabilities in connection with capital markets at an APG plenary and working group meeting; (ii) FIU governance and independence at a World Bank–UNODC workshop for officials from Uzbekistan; (iii) access to and use of information in the supervision of financial groups at the 27th International Symposium on Economic Crime; (iv) integrity due diligence using a case study at the 3rd Multilateral Development Banks Private Sector Integrity Conference; and (v) the implementation of the AML/CFT international standards from the DMC perspective at an EAG plenary and working group meeting. 29. As part of OGC’s law, justice, and development activities, staff published (i) three chapters on international law and standards for AML/CFT in a publication in the United Kingdom;27 and (ii) a paper based on the review of the level of compliance of DMCs using published mutual evaluation or assessment reports for 24 DMCs. 28

Work is ongoing to assimilate OGC’s AML/CFT website as part of the new law, justice, and development website.

IV. FURTHER IMPLEMENTATION OF THE POLICY

30. ADB’s AML/CFT activities during the review period have built upon previous activities under the Policy on Combating Money Laundering and the Financing of Terrorism. Staff will continue to take into account the priorities under Strategy 202029

, ADB’s financial sector and governance activities, and efforts across ADB to strengthen knowledge management. Implementation of the policy should also take into account international and regional developments, and the activities of other international organizations and aid agencies.

A. Assisting Developing Member Countries in Establishing and Implementing Legal and Institutional Systems to Combat Money Laundering and the Financing of Terrorism

31. The policy dialogue between ADB and its DMCs should continue to be an essential aspect of future AML/CFT activities. This should take into account the experiences and lessons learned in DMCs where ADB has been successful or less successful in mainstreaming AML/CFT components into programs and TA, particularly in the areas of financial sector and governance. The TA activities of other international organizations and aid agencies are also an important factor to ensure the optimal use of resources, and staff should continue to prioritize development partner coordination. 32. ADB’s approach should continue to be demand-driven, and consistent with ADB’s country partnership strategies, and its financial sector and governance work in the DMCs. There might be increasing demands for ADB support given the additional requirements of the Revised FATF Recommendations and continuing scrutiny of DMCs listed in the FATF public statements. 27 C. Png. 2008. "International Legal Sources I – the United Nations Conventions", "International Legal Sources II –

the UN Security Council Resolutions" and "International Legal Sources III – the FATF Recommendations". In W. Blair, and R. Brent, eds. Banks and Financial Crime – The International Law of Tainted Money. Oxford: Oxford University Press.

28 N. Jensen and C. Png. 2011. Implementation of the FATF 40+9 Recommendations: A Perspective from Developing Countries. Journal of Money Laundering Control. (14) 2, pp. 110–120. The paper has been recognized as one of three highly commended papers in the Journal of Money Laundering Control in 2011 under the 2012 Awards for Excellence of the publisher.

29 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008-2020. Manila.

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At the same time, a few of the DMCs have received substantial AML/CFT assistance from ADB, and this should be considered when further assistance is contemplated. In this respect, there should be a balance between providing assistance to DMCs which ADB has had deeper engagements in AML/CFT, financial sector or governance related developments (which is more optimal than say “one-off” interventions) and to DMCs where there have been less AML/CFT developments. B. Increasing Collaboration with Other International Organizations 33. It is important for ADB to continue to stay abreast of current developments at the international and regional levels. The Revised FATF Recommendations and the ensuing mutual evaluations or assessments are significant challenges for the DMCs. The ICRG review of jurisdictions with strategic deficiencies in their AML/CFT regimes and the FATF public statements should also be taken seriously—both in (i) prioritizing resources to support DMCs in strengthening their AML/CFT regimes; and (ii) avoiding reputational risks to ADB where its operations are subject to money laundering and terrorism financing risks. Project teams should pay special attention to transactions involving these jurisdictions, including in the integrity due diligence carried out during project processing. Awareness of current AML/CFT developments will also enable staff to engage with DMCs in a more substantive manner and help address their concerns. 34. It is also important for ADB to continue to coordinate with other development partners on TA, including through regional forums. Information from these activities should continue to be systematically disseminated to and exchanged with concerned departments and offices. Where applicable, staff should contribute to broader AML/CFT developments from the perspective of the DMCs. C. Strengthen Internal Control to Safeguard ADB Funds

35. A working group comprising representatives of concerned departments and offices within ADB will be formed by OAI and OGC to coordinate efforts across departments in the strengthening of ADB’s internal controls on integrity, money laundering, and terrorism financing risks, as well as increase awareness of such risks and controls. Outcomes of the working group will also inform ADB’s internal training on integrity and AML/CFT. 36. Building on the establishment of the OAI advisory function in November 2011, OAI and OGC will prepare a proposal to broaden the function's role in relation to integrity, including AML/CFT issues. 30

This will take into account consultations with the new working group (para. 35) on formulating, strengthening, and monitoring appropriate controls. Staffing implications of this broader remit, and in relation to the growth in sovereign and nonsovereign projects, will also be assessed.

D. Upgrade ADB’s Staff’s Capacity 37. In addition to staying abreast of current international and regional developments, staff need to continue to disseminate and exchange information systematically with concerned

30 Memorandum on Proposed Arrangements for a Designated Advisory Function for Integrity Due Diligence and

Money Laundering/Financing of Terrorism Risks, dated 2 November 2011 and approved by Management on 7 November 2011, para. 10.

11


departments and offices. This will improve awareness of these developments and issues. Relevant information should be made available on the AML/CFT website. 38. Staff should continue to focus on AML/CFT knowledge management and knowledge products, consistent with the efforts across ADB to strengthen knowledge management. 39. ADB should periodically review its work under the Policy on Combating Money Laundering and the Financing of Terrorism, taking into account international developments as well as demand from its DMCs.

12 Appendix 1

KEY REQUIREMENTS OF THE FINANCIAL ACTION TASK FORCE 40 RECOMMENDATIONS ON MONEY LAUNDERING AND SPECIAL RECOMMENDATIONS ON TERRORIST

FINANCING31

Countries are expected to have adequate legal frameworks and institutional regimes for combating money laundering and the financing of terrorism. They are required to carry out the following: 1. Recognize money laundering and financing of terrorism as criminal offenses. Countries are required to criminalize the laundering of proceeds of criminal activities and activities relating to financing of terrorism based on applicable United Nations (UN) conventions: the Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988), the International Convention for the Suppression of Financing of Terrorism (1999), the Convention against Transnational Organized Crime (2000), and the Convention against Corruption (2003). 2. Apply the money laundering offense to a wide range of predicate offenses. This includes corruption-related offenses, such as obstruction of justice, bribery of public officials, embezzlement, misappropriation of property, and abuse of functions. 3. Institute a comprehensive regulatory and supervisory regime for banks, nonbank financial institutions, and certain designated non-financial businesses and professions. Such a regime should have requirements for customer due diligence, record keeping, and reporting of suspicious transactions, as well as adequate regulatory and supervisory capabilities to ensure compliance with the requirements. 4. Ensure that national authorities tasked with combating money laundering and the financing of terrorism can cooperate and exchange information nationally and internationally. This should include the establishment of national financial intelligence units for the collection, analysis, and dissemination of information on combating money laundering and the financing of terrorism. 5. Enable the freezing, seizing, and confiscation of proceeds and instruments of crime and terrorism-related assets. This includes implementation of the financial sanctions of the UN Security Council on freezing without delay funds and other financial assets of persons and entities associated with terrorism, pursuant to Chapter VII of the UN Charter (c.f. Security Council Resolution 1279/1999 and related resolutions, and Security Council Resolution 1373/2001). 6. Require the monitoring of cross-border movements of cash and negotiable instruments. This is to help detect physical transportation of cash and negotiable instruments. 7. Ensure that countries afford one another the widest forms of cooperation in mutual legal assistance and extradition. This is to enhance international cooperation in the investigation and prosecution of offenses related to money laundering and the financing of terrorism, as well as the freezing, seizing, and confiscation of proceeds of crime and terrorism-related assets.

31 Asian Development Bank. 2008. Review of Enhancing the Asian Development Bank’s Role in Combating Money

Laundering and the Financing of Terrorism. Manila (Box 1).

Appendix 2 13

OVERVIEW OF THE OUTCOME OF MUTUAL EVALUATIONS AND ASSESSMENTS FOR ADB DEVELOPING MEMBER COUNTRIES AND FATF MEMBERS

1. These developing member countries (DMCs) demonstrated positive developments in addressing anti-money-laundering and combating the financing of terrorism (AML/CFT) requirements, and in having their level of compliance evaluated through a rigorous process under public scrutiny. More than 50% of DMCs made progress in the following:

(i) preventing secrecy laws for financial institutions that inhibit the implementation of AML/CFT requirements;

(ii) providing legal protection for financial institutions and their management and staff for making disclosures on suspicious transactions to national authorities, particularly the national financial intelligence units (FIUs);

(iii) considering the feasibility and utility of requiring financial institutions to report currency transactions above a certain value to the FIU;

(iv) applying AML/CFT requirements to businesses and entities that present money laundering and/or terrorism financing risks, but are not covered under the international standard;

(v) ensuring that law enforcement agencies have adequate powers to obtain information when conducting investigations into money laundering and financing of terrorism;

(vi) supporting international cooperation by providing mutual legal assistance to the greatest extent possible, notwithstanding the absence of “dual criminality”; and

(vii) supporting international cooperation by having appropriate laws and procedures to provide effective and timely responses to requests for mutual legal assistance in relation to money laundering and financing of terrorism.32

2. This is no mean feat given the complexities of the requirements under the Financial Action Task Force 40 Recommendations on Money Laundering and Special Recommendations on Terrorist Financing (FATF 40+9 Recommendations). It is also important to recognize that AML/CFT reforms cut across a broad range of areas, from criminal justice, and financial sector regulation and supervision, to selected aspects of the non-financial sector and international cooperation. That said, the general level of compliance of these DMCs is not high based on a strict reading of the compliance ratings. 33

For instance, at least 75% of DMCs were rated partially compliant or non-compliant for 19 of the FATF 40 Recommendations and 7 of the 9 Special Recommendations (Appendix 2, Table A2.1). By comparison, the general level of compliance among FATF members is substantially higher: at least 50% of these countries have attained compliant or largely compliant ratings for 22 of the FATF 40 Recommendations and 3 of the 9 Special Recommendations (Appendix 2, Table A2.2).

32 This is based on the seven FATF Recommendations where DMCs have achieved a compliant or largely compliant

rating. Compliance ratings for each FATF Recommendation are compliant, largely compliant, partially compliant, and non-compliant. Countries rated compliant or largely compliant on a FATF Recommendation are considered to have attained an acceptable level of implementation for that recommendation. Those rated partially compliant or non-compliant are required to improve their level of implementation.

33 The information in Table A2.1 in Appendix 2 is static and provides a benchmark based on the compliance level of each DMC at the time of the completion of its mutual evaluation or assessment. It does not take into account developments in individual DMCs following the publication of the results of their mutual evaluation or assessment, and some of the DMCs have made progress on the weaknesses identified in their mutual evaluation or assessment.

14 Appendix 2

Table A2.1: Analysis of the Ratings from the Mutual Evaluations or Assessments of 40 Developing Member Countries

Recommendations 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Country 1 LC C LC C LC LC C C C C C PC LC C C PC Country 2 LC C LC C LC LC C C C LC LC PC LC C LC PC Country 3 LC LC LC C PC LC C C C LC LC PC LC C LC PC Country 4 LC LC LC C PC LC LC LC LC LC LC PC LC C LC PC Country 5 LC LC LC C PC LC LC LC LC LC LC PC LC C LC PC Country 6 LC LC LC C PC PC LC LC LC LC LC PC LC C LC PC Country 7 LC LC LC C PC PC LC LC LC LC LC PC LC C LC PC Country 8 LC LC LC C PC PC LC LC PC LC LC PC LC C LC PC Country 9 PC LC LC C PC PC LC LC PC LC PC NC PC C PC PC Country 10 PC LC LC C PC PC LC LC PC LC PC NC PC C PC PC Country 11 PC LC LC C PC PC LC LC PC LC PC NC PC C PC PC Country 12 PC LC LC C PC PC PC LC PC LC PC NC PC C PC NC Country 13 PC LC PC C PC PC PC PC PC LC PC NC PC C PC NC Country 14 PC LC PC C PC PC PC PC PC LC PC NC PC C PC NC Country 15 PC LC PC LC PC PC PC PC PC LC PC NC PC LC PC NC Country 16 PC LC PC LC PC NC PC PC PC LC PC NC PC LC PC NC Country 17 PC LC PC LC PC NC PC PC NC PC PC NC PC LC PC NC Country 18 PC PC PC LC PC NC PC PC NC PC PC NC PC LC PC NC Country 19 PC PC PC LC PC NC PC PC NC PC PC NC PC LC PC NC Country 20 PC PC PC LC PC NC PC PC NC PC PC NC PC LC PC NC Country 21 PC PC PC LC PC NC PC PC NC PC PC NC PC LC PC NC Country 22 PC PC PC LC PC NC NC NC NC PC PC NC PC LC PC NC Country 23 PC PC PC LC NC NC NC NC NC PC PC NC PC LC PC NC Country 24 PC PC PC LC NC NC NC NC NC PC PC NC PC LC PC NC Country 25 PC PC PC LC NC NC NC NC NC PC PC NC PC PC PC NC Country 26 PC PC PC LC NC NC NC NC NC PC NC NC PC PC PC NC Country 27 PC PC PC LC NC NC NC NC NC PC NC NC PC PC PC NC Country 28 PC PC PC LC NC NC NC NC NA PC NC NC PC PC PC NC Country 29 PC PC PC LC NC NC NC NC NA PC NC NC PC PC PC NC Country 30 PC PC PC LC NC NC NC NC NA PC NC NC PC PC PC NC Country 31 PC PC PC LC NC NC NC NC NA PC NC NC PC PC PC NC Country 32 PC PC PC PC NC NC NC NC NA PC NC NC NC PC PC NC Country 33 PC PC PC PC NC NC NC NC NA PC NC NC NC PC NC NC Country 34 PC PC PC PC NC NC NC NC NA PC NC NC NC PC NC NC Country 35 PC PC NC PC NC NC NC NC NA PC NC NC NC PC NC NC Country 36 PC PC NC PC NC NC NC NC NA PC NC NC NC PC NC NC Country 37 NC PC NC PC NC NC NC NC NA NC NC NC NC NC NC NC Country 38 NC PC NC PC NC NC NC NC NA NC NC NC NC NC NC NC Country 39 NC NC NC PC NC NC NC NC NA NC NC NC NC NC NC NC Country 40 NC NC NC PC NC NC NA NC NA NC NC NC NC NC NC NC Compliant - 2 - 14 - - 3 3 3 15 1 - - 14 1 - Largely Compliant 8 15 12 17 2 5 8 9 4 1 7 - 8 10 7 - Percentages 20 42 30 77 5 12 30 30 18 40 20 0 20 60 20 0 Partially Compliant 28 21 22 9 20 10 10 9 9 20 17 8 23 12 24 11 Non-Complaint 4 2 6 - 18 25 18 19 11 4 15 32 9 4 8 29 Percentages 80 58 70 23 95 88 70 70 50 60 80 100 80 40 80 100 Not applicable - - - - - - 1 - 13 - - - - - - -

Appendix 2 15


Table A2.1 (Continued) Recommendations 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Country 1 C C C C LC C LC PC C C C C LC C C LC Country 2 LC C C C LC C LC PC LC C C C LC LC C LC Country 3 LC C C C LC C LC PC LC C LC C LC LC C LC Country 4 LC C C C LC C LC PC LC LC LC C LC LC LC LC Country 5 LC C C C LC C LC PC LC LC LC C LC LC LC LC Country 6 LC C C C LC LC LC PC LC LC LC C LC LC LC LC Country 7 PC C C C PC LC LC PC LC LC LC C LC PC LC LC Country 8 PC C C C PC LC LC PC LC LC LC C LC PC LC LC Country 9 PC LC C C PC LC PC NC PC LC LC C LC PC LC LC Country 10 PC LC C C PC LC PC NC PC LC LC C LC PC LC PC Country 11 PC LC C C PC LC PC NC PC LC LC C LC PC LC PC Country 12 PC LC C LC PC PC PC NC PC LC LC C PC PC LC PC Country 13 PC LC C LC PC PC PC NC PC LC LC C PC PC LC PC Country 14 PC LC C LC PC PC PC NC PC LC LC C PC PC LC PC Country 15 PC LC C LC PC NC PC NC PC PC PC LC PC PC LC PC Country 16 PC LC C LC PC NC PC NC PC PC PC LC PC PC LC PC Country 17 PC LC C LC PC NC PC NC PC PC PC LC PC PC PC PC Country 18 PC PC C LC PC NC PC NC PC PC PC LC PC PC PC PC Country 19 PC PC C LC PC NC PC NC PC PC PC LC PC PC PC PC Country 20 PC PC C LC PC NC PC NC PC PC PC LC PC PC PC PC Country 21 PC PC C LC NC NC PC NC PC PC PC LC PC PC PC PC Country 22 PC PC C LC NC NC PC NC PC PC PC LC PC PC PC PC Country 23 PC PC C LC NC NC PC NC PC PC PC LC PC PC PC PC Country 24 PC PC C LC NC NC PC NC PC PC PC LC PC PC PC PC Country 25 PC PC C LC NC NC PC NC NC PC PC LC PC PC PC PC Country 26 PC PC C PC NC NC PC NC NC PC PC LC PC PC PC PC Country 27 PC PC C PC NC NC PC NC NC PC PC LC PC PC PC NC Country 28 PC PC C PC NC NC PC NC NC PC PC LC PC PC PC NC Country 29 PC PC C PC NC NA PC NC NC PC PC LC PC PC PC NC Country 30 PC PC C PC NC NA PC NC NC PC PC LC PC PC PC NC Country 31 NC PC C PC NC NA PC NC NC PC PC PC PC PC PC NC Country 32 NC PC C PC NC NA NC NC NC NC PC PC PC PC PC NC Country 33 NC PC C PC NC NA NC NC NC NC PC PC PC NC PC NC Country 34 NC PC C PC NC NA NC NC NC NC PC PC PC NC PC NC Country 35 NC PC C NC NC NA NC NC NC NC PC PC NC NC PC NC Country 36 NC PC LC NC NC NA NC NC NC NC PC PC NC NC NC NC Country 37 NC NC LC NC NC NA NC NC NC NC PC PC NC NC NC NC Country 38 NC NC PC NC NC NA NC NC NC NC NC PC NC NC NC NC Country 39 NC NC NC NC NC NA NC NC NC NC NC PC NC NC NC NC Country 40 NC NC NC NC NC NA NC NC NC NC NC PC NC NC NC NC Compliant 1 8 35 11 - 5 - - 1 3 2 14 - 1 3 - Largely Compliant 5 9 2 14 6 6 8 - 7 11 12 16 11 5 13 9 Percentages 15 42 92 62 15 27 20 0 20 35 35 75 27 15 40 22 Partially Compliant 24 19 1 9 14 3 23 8 16 17 23 10 23 26 19 17 Non-Complaint 10 4 2 6 20 14 9 32 16 9 3 6 8 5 14 Percentages 85 58 8 38 85 43 80 100 80 65 65 25 73 85 60 78 Not applicable - - - - - 12 - - - - - - - - - -

16 Appendix 2

Table A2.1 (Continued) Recommendations 33 34 35 36 37 38 39 40 SR

I SR II

SR III

SR IV

SR V

SR VI

SR VII

SR VIII

SR IX

Country 1 LC LC LC C C LC C C LC LC LC C LC LC LC LC LC Country 2 PC PC LC LC C LC C C LC LC LC C LC LC LC LC LC Country 3 PC PC LC LC C LC C C LC LC LC LC LC LC LC LC LC Country 4 PC PC LC LC C LC C C LC LC LC LC LC LC LC LC PC Country 5 PC PC LC LC C LC C LC PC LC PC LC LC LC LC PC PC Country 6 PC PC LC LC C LC C LC PC LC PC LC LC PC LC PC PC Country 7 PC PC LC LC C LC C LC PC LC PC LC LC PC LC PC PC Country 8 PC PC LC LC C LC LC LC PC LC PC LC LC PC LC PC PC Country 9 PC PC PC LC C LC LC LC PC LC PC LC LC PC LC PC PC Country 10 PC PC PC LC C LC LC LC PC PC PC LC LC PC PC PC PC Country 11 PC PC PC LC LC LC LC LC PC PC PC PC PC PC PC PC PC Country 12 PC PC PC LC LC LC LC LC PC PC PC PC PC PC PC PC PC Country 13 PC PC PC LC LC LC LC LC PC PC PC PC PC PC PC PC PC Country 14 PC PC PC LC LC LC LC LC PC PC PC PC PC PC PC PC PC Country 15 PC PC PC LC LC LC LC LC PC PC PC PC PC PC PC PC PC Country 16 PC NC PC LC LC LC LC LC PC PC PC PC PC PC PC PC PC Country 17 PC NC PC LC LC LC LC LC PC PC PC PC PC PC PC PC PC Country 18 PC NC PC LC LC PC LC PC PC PC PC PC PC PC PC PC PC Country 19 PC NC PC LC LC PC LC PC PC PC NC PC PC PC PC PC PC Country 20 PC NC PC PC LC PC LC PC PC PC NC PC PC PC PC PC PC Country 21 PC NC PC PC LC PC LC PC PC PC NC PC PC PC PC PC PC Country 22 PC NC PC PC LC PC PC PC PC PC NC PC PC PC PC PC PC Country 23 PC NC PC PC LC PC PC PC PC PC NC NC PC PC PC PC PC Country 24 PC NC PC PC LC PC PC PC NC PC NC NC PC PC PC NC PC Country 25 PC NC PC PC LC PC PC PC NC PC NC NC PC NC NC NC NC Country 26 PC NA PC PC LC PC PC PC NC PC NC NC PC NC NC NC NC Country 27 NC NA PC PC LC PC PC PC NC PC NC NC PC NC NC NC NC Country 28 NC NA PC PC LC PC PC PC NC NC NC NC PC NC NC NC NC Country 29 NC NA PC PC LC PC PC PC NC NC NC NC PC NC NC NC NC Country 30 NC NA PC PC LC PC PC PC NC NC NC NC PC NC NC NC NC Country 31 NC NA PC PC LC PC NC PC NC NC NC NC NC NC NC NC NC Country 32 NC NA PC PC PC PC NC PC NC NC NC NC NC NC NC NC NC Country 33 NC NA PC PC PC NC NC PC NC NC NC NC NC NC NC NC NC Country 34 NC NA PC PC PC NC NC PC NC NC NC NC NC NC NC NC NC Country 35 NC NA PC NC PC NC NC PC NC NC NC NC NC NC NC NC NC Country 36 NC NA NC NC PC NC NC NC NC NC NC NC NC NC NC NC NC Country 37 NC NA NC NC PC NC NC NC NC NC NC NC NC NC NC NC NC Country 38 NC NA NC NC PC NC NC NC NC NC NC NC NC NC NC NC NC Country 39 NC NA NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC Country 40 NC NA NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC Compliant - - - 1 10 - 7 4 - - - 2 - - - - - Largely Compliant 1 1 8 18 21 17 14 13 4 9 4 8 10 5 9 4 3 Percentages 2 2 20 47 77 42 52 42 10 22 10 25 25 12 22 10 7 Partially Compliant 25 14 27 15 7 15 9 18 19 18 14 12 20 19 15 19 21 Non-Complaint 14 10 5 6 2 8 10 5 17 13 22 18 10 16 16 17 16 Percentages 98 60 80 53 23 58 48 58 90 78 90 75 75 88 78 90 93 Not applicable - 15 - - - - - - - - - - - - - - - C = compliant; LC = largely compliant; NA = not applicable; NC = non-compliant; PC = partially compliant. Source: Asian Development Bank.

Appendix 2 17

Table A2.2: Analysis of the Ratings from the Mutual Evaluations or Assessments of 34 FATF

Members Recommendations 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Member 1 C C C C LC LC C C C C C PC C C LC LC Member 2 C C C C LC LC C C LC C C PC C C LC LC Member 3 C C C C LC LC C C LC C C PC LC C LC LC Member 4 LC C C C LC LC LC C LC C C PC LC C LC PC Member 5 LC C C C PC LC LC C LC C LC PC LC C LC PC Member 6 LC C C C PC LC LC C LC C LC PC LC C LC PC Member 7 LC LC C C PC LC LC LC PC C LC PC LC C LC PC Member 8 LC LC LC C PC PC LC LC PC C LC PC LC C LC PC Member 9 LC LC LC C PC PC LC LC PC C LC PC LC C LC PC Member 10 LC LC LC C PC PC LC LC PC C LC PC LC C LC PC Member 11 LC LC LC C PC PC PC LC PC C LC PC LC C LC PC Member 12 LC LC LC C PC PC PC LC PC C LC PC LC C LC PC Member 13 LC LC LC C PC PC PC LC PC C LC PC LC C LC PC Member 14 LC LC LC C PC PC PC LC PC C LC NC LC C LC PC Member 15 LC LC LC C PC PC PC LC PC LC LC NC LC C LC PC Member 16 LC LC LC C PC NC PC LC NC LC PC NC LC C LC PC Member 17 LC LC LC C PC NC PC LC NC LC PC NC LC C LC PC Member 18 LC LC LC C PC NC NC LC NC LC PC NC LC C LC PC Member 19 LC LC LC C PC NC NC PC NC LC PC NC LC C PC NC Member 20 LC LC LC C PC NC NC PC NC LC PC NC PC C PC NC Member 21 LC LC LC C PC NC NC PC NC LC PC NC PC C PC NC Member 22 LC LC LC C PC NC NC PC NC LC PC NC PC LC PC NC Member 23 LC LC LC C PC NC NC PC NC LC PC NC PC LC PC NC Member 24 PC LC LC C PC NC NC PC NC LC PC NC PC LC PC NC Member 25 PC LC LC C PC NC NC PC NC LC PC NC PC LC PC NC Member 26 PC LC PC LC PC NC NC PC NC LC PC NC PC LC PC NC Member 27 PC PC PC LC PC NC NC PC NA LC PC NC PC LC PC NC Member 28 PC PC PC LC PC NC NC PC NA LC PC NC PC LC PC NC Member 29 PC PC PC LC NC NC NC PC NA LC PC NC PC LC PC NC Member 30 PC PC PC LC NC NC NC PC NA LC PC NC PC PC PC NC Member 31 PC PC PC PC NC NC NC NC NA PC NC NC PC PC PC NC Member 32 PC PC PC PC NC NC NC NC NA PC NC NC PC PC NC NC Member 33 PC PC PC PC NC NC NC NC NA PC NC NC PC PC NC NC Member 34 PC PC PC PC NC NC NC NC NA PC NC NC NC PC NC NC Compliant 3 6 7 25 - - 3 6 1 14 4 - 2 21 - - Largely Compliant 20 20 18 5 4 7 7 12 5 16 11 - 17 8 18 3 Percentages 68 76 74 88 12 21 21 53 18 88 44 0 56 85 53 9 Partially Compliant 11 8 9 4 24 8 8 12 9 4 15 13 14 5 13 15 Non-Complaint - - - - 6 19 19 4 11 - 4 21 1 - 3 16 Percentages 32 24 26 12 88 79 79 47 59 12 56 100 44 15 47 91 Not applicable - - - - - - - - 8 - - - - - - -

18 Appendix 2

Table A2.2 (Continued) Recommendations 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Member 1 LC C C C C C LC LC C C C C C C C LC Member 2 LC C C C C C LC LC C C C C C LC C LC Member 3 LC C C C C LC LC PC C C C C LC LC C LC Member 4 LC C C C LC LC LC PC C C C C LC LC C LC Member 5 LC C C C LC LC LC PC LC LC C C LC LC C LC Member 6 LC C C C LC LC LC PC LC LC C C LC LC C LC Member 7 LC C C C LC LC LC PC LC LC C C LC LC LC LC Member 8 LC C C C LC LC LC PC LC LC C C LC LC LC LC Member 9 LC C C C LC LC LC PC LC LC C C LC LC LC LC Member 10 LC LC C C LC LC LC PC LC LC C C LC LC LC LC Member 11 LC LC C C LC LC LC PC LC LC C C LC LC LC LC Member 12 LC LC C C LC LC LC PC LC LC C C LC LC LC LC Member 13 PC LC C C PC LC PC NC LC LC LC C LC LC LC LC Member 14 PC LC C C PC LC PC NC LC LC LC C LC LC LC LC Member 15 PC LC C C PC PC PC NC LC LC LC C LC LC LC LC Member 16 PC LC C C PC PC PC NC PC LC LC C LC LC LC LC Member 17 PC LC C C PC PC PC NC PC LC LC C LC PC LC PC Member 18 PC PC C C PC PC PC NC PC LC LC C LC PC LC PC Member 19 PC PC C C PC PC PC NC PC LC LC C LC PC LC PC Member 20 PC PC C C PC PC PC NC PC LC LC C LC PC LC PC Member 21 PC PC C C PC PC PC NC PC LC LC C LC PC LC PC Member 22 PC PC C C PC PC PC NC PC LC LC C PC PC LC PC Member 23 PC PC C C PC PC PC NC PC LC LC C PC PC LC PC Member 24 PC PC C LC PC PC PC NC PC LC LC C PC PC LC PC Member 25 PC PC C LC PC NC PC NC PC LC LC LC PC PC LC PC Member 26 PC PC C LC NC NC PC NC PC LC LC LC PC PC LC PC Member 27 PC PC C LC NC NC PC NC PC LC LC LC PC PC LC PC Member 28 PC PC C LC NC NC PC NC PC PC LC LC PC PC LC PC Member 29 PC PC C LC NC NC PC NC PC PC LC LC PC PC LC PC Member 30 PC PC C LC NC NC PC NC PC PC LC LC PC PC LC PC Member 31 PC PC LC LC NC NC PC NC PC PC PC LC PC PC LC PC Member 32 PC PC PC PC NC NC PC NC NC PC PC LC PC PC PC NC Member 33 NC PC PC PC NC NC PC NC NC PC PC LC NC NC PC NC Member 34 NC NC NC NC NC NC NC NC NC NC PC LC NC NC PC NC Compliant - 9 30 23 3 2 - - 4 4 12 24 2 1 6 - Largely Compliant 12 8 1 8 9 12 12 2 11 23 18 10 19 15 25 16 Percentages 35 50 91 91 35 41 35 6 44 79 88 100 62 47 91 47 Partially Compliant 20 16 2 2 13 10 21 10 16 6 4 - 11 16 3 15 Non-Complaint 2 1 1 1 9 10 1 22 3 1 - - 2 2 - 3 Percentages 65 50 9 9 65 59 65 94 56 21 12 0 38 53 9 53 Not applicable - - - - - - - - - - - - - - - -

Appendix 2 19


Table A2.2 (Continued) Recommendations 33 34 35 36 37 38 39 40 SR

I SR II

SR III

SR IV

SR V

SR VI

SR VII

SR VIII

SR IX

Member 1 C LC C C C C C C C C C C C C C C C Member 2 LC LC C C C C C C LC C LC C C C C C C Member 3 LC PC LC C C C C C LC C LC C C LC C C C Member 4 LC PC LC C C C C C LC C LC C LC LC C LC LC Member 5 PC PC LC C C C C C LC C LC LC LC LC LC LC LC Member 6 PC PC LC C C C C C LC LC LC LC LC LC LC LC LC Member 7 PC PC LC C C C C C LC LC LC LC LC LC LC LC LC Member 8 PC PC LC LC C C C C LC LC LC LC LC LC LC LC LC Member 9 PC PC LC LC C LC C C LC LC LC LC LC LC LC LC LC Member 10 PC PC LC LC C LC LC C LC LC PC LC LC LC LC LC LC Member 11 PC PC LC LC C LC LC C LC LC PC LC LC LC LC LC LC Member 12 PC PC LC LC C LC LC C LC LC PC LC LC LC LC LC LC Member 13 PC PC LC LC C LC LC C PC LC PC LC LC LC PC LC PC Member 14 PC PC LC LC C LC LC C PC LC PC LC LC LC PC LC PC Member 15 PC PC LC LC C LC LC C PC LC PC LC LC LC PC LC PC Member 16 PC PC LC LC C LC LC LC PC LC PC LC LC LC PC PC PC Member 17 PC NC LC LC C LC LC LC PC LC PC LC LC PC PC PC PC Member 18 PC NC LC LC C LC LC LC PC LC PC LC LC PC PC PC PC Member 19 PC NC LC LC C LC LC LC PC LC PC LC LC PC PC PC PC Member 20 PC NC PC LC C LC LC LC PC LC PC LC LC PC PC PC PC Member 21 PC NC PC LC C LC LC LC PC PC PC LC LC PC PC PC PC Member 22 PC NC PC LC C LC LC LC PC PC PC LC LC PC PC PC PC Member 23 PC NC PC LC LC LC LC LC PC PC PC PC LC PC PC PC PC Member 24 NC NA PC LC LC LC LC LC PC PC PC PC LC PC PC PC PC Member 25 NC NA PC LC LC LC LC LC PC PC PC PC LC PC NC PC PC Member 26 NC NA PC LC LC LC LC LC PC PC PC PC LC PC NC PC PC Member 27 NC NA PC LC LC LC LC LC PC PC PC PC PC PC NC PC NC Member 28 NC NA PC LC LC LC LC LC PC PC PC PC PC PC NC PC NC Member 29 NC NA PC LC LC PC LC LC PC PC PC PC PC PC NC NC NC Member 30 NC NA PC LC LC PC LC LC PC PC NC PC PC NC NC NC NC Member 31 NC NA PC PC LC PC LC LC PC PC NC NC PC NC NC NC NC Member 32 NC NA PC PC LC PC PC LC PC PC NC NC PC NC NC NC NC Member 33 NC NA PC PC PC PC PC PC PC PC NC NC PC NC NC NC NC Member 34 NC NA PC PC PC PC PC NC NC NC NC NC PC NC NC NC NC Compliant 1 - 2 7 22 8 9 15 1 5 1 4 3 2 4 3 3 Largely Compliant 3 2 17 23 10 20 22 17 11 15 8 18 23 14 8 12 9 Percentages 12 6 56 88 94 82 91 94 35 59 26 65 76 47 35 44 35 Partially Compliant 19 14 15 4 2 6 3 1 21 13 20 8 8 13 12 13 14 Non-Complaint 11 7 - - - - - 1 1 1 5 4 - 5 10 6 8 Percentages 88 62 44 12 6 18 9 6 65 41 74 35 24 53 65 56 65 Not applicable - 11 - - - - - - - - - - - - - - - C = compliant; LC = largely compliant; NA = not applicable; NC = non-compliant; PC = partially compliant. Source: Asian Development Bank.

20 Appendix 3

ADB PROJECTS AND TECHNICAL ASSISTANCE WITH AML/CFT COMPONENTS APPROVED OR IMPLEMENTED FROM APRIL 2008 TO SEPTEMBER 2012

A. Projects and Related Technical Assistance

DMC Project and Related TA Description of AML/CFT Component Status

1. Bhutan Financial Sector Development Program (Loans 2279/2280-BHU). Approved on 7 December 2006.

This is a sector development program (“SDP”) that supports financial sector developments. The program component of the SDP is aimed at addressing the main constraints that impede financial sector developments and financial intermediation. This includes a subcomponent that supports (i) the development of the AML/CFT legal framework, including the establishment of the Royal Monetary Authority as the AML/CFT regulator and supervisor for all financial institutions, (ii) the drafting of regulations to require financial institutions to establish AML/CFT procedures, and (iii) the establishment of the FIU in the Royal Monetary Authority. The project component of the SDP has a subcomponent that supports training for the financial regulator and other institutions, and development of AML/CFT regulation.

Implementation is ongoing.

2.

Cambodia

Second Financial Sector Program, Subprogram 1 (Loan 2378-CAM) was approved in conjunction with the program cluster on 6 December 2007. Subprogram 2 (Loan 2479-CAM) was approved on 5 December 2008. Subprogram 3 (Loan 2585-CAM) was approved on 26 November 2009. Subprogram 4 (Loan 2706-CAM) was approved on 2 December 2010.

This is a program cluster comprising four subprograms. A subcomponent of the program cluster supported the government’s AML/CFT efforts, notably the adoption of the AML/CFT law and the establishment and operationalisation of the FIU. It was supported by three TAs, one of which had a subcomponent that provided assistance in the establishment of the FIU and preparation of related regulation. The TA also facilitated assistance from the Australian Transaction Reports and Analysis Centre, the Bank Negara Malaysia, and the World

The program cluster was completed in June 2011 and a PCR (IN.158-11) was issued on 12 August 2011. The program cluster was rated highly successful. It was highly relevant, highly effective in achieving its outcome, highly efficient in achieving its outcome and output, likely to be sustainable, and suitable institutional frameworks are in place. The TA was completed in August 2010 and a TCR (IN.61-11) was issued on 3 May 2011. The TA was rated highly

Appendix 3 21


An associated TA (TA 4999-CAM) with an AML/CFT subcomponent was approved on 6 December 2007 ($1,700,000 financed by the Republic of Korea e-Asia and Knowledge Partnership Fund, the Financial Sector Development Partnership Fund, and TASF).

Bank.

successful. All outputs were completed on time and within budget, and contributed to the achievement of the overall outcome.

3. Cambodia

Third Financial Sector Program, Subprogram 1 (Loan 2815-CAM) was approved in conjunction with the programmatic approach on 29 November 2011. Subprogram 2 was approved on 29 November 2011. An associated TA (TA 7934-CAM) with a AML/CFT subcomponent was approved on 29 November 2011 (financed by the Cooperation Fund for Regional Trade and Financial Security Initiative and TASF).

Pursuant to successful completion of the Second Financial Sector Program, the Third Financial Sector Program was approved in November 2011. It is a programmatic approach (previously entitled program cluster) comprising 3 subprograms. A subcomponent supports the government’s efforts in strengthening international cooperation for the FIU and developing a risk-based approach to nonbank financial institutions and other businesses (including the preparation of a national risk assessment and implementation plan). It is supported by a TA, which includes a subcomponent to assist in the application of the risk-based approach to nonbank financial institutions and other businesses.


4. Indonesia Capital Market Development Program Cluster, Subprogram 1 (Loan 2379-INO) was approved in conjunction with the program cluster on 10 December 2007.

This is a program cluster comprising two subprograms. A subcomponent of the program cluster supports the government’s AML/CFT efforts through (i) developing requirements for nonbank financial institutions; (ii) providing systematic capacity development for these institutions; and (iii) strengthening the AML/CFT supervisory capacity of the financial regulator.


22 Appendix 3


5. Mongolia Financial Regulation and Governance Program (Loan 2218-MON). Approved on 15 December 2005. An associated TA (TA 4737-MON) was approved on 15 December 2005 ($900,000 financed by JSF).

The program has a component that supported the government’s AML/CFT efforts through (i) the adoption of an AML/CFT law and related regulations; and (ii) the establishment of an FIU. It was supported by a TA, which included a component that assisted in the establishment of and capacity development for the FIU.

The program was completed in June 2010 and a PCR (IN.14-12) was issued on 13 January 2012. The program was rated partly successful. It was relevant, less effective in achieving its outcome, less efficient in achieving its outcome and output, and sustainable. Based on the PCR, the TA was rated partly successful. It was well-formulated and implemented on time, but under-resourced compared with the wide scope of the program.

6. Pakistan Accelerating Economic Transformation Program, Subprogram 1 (Loan 2446-PAK) was approved in conjunction with the program cluster on 30 September 2008. Subprogram 2 (Loan 2524-PAK) was approved on 25 June 2009.

This is a program cluster comprising four subprograms. A subcomponent of the program cluster supports the government’s AML/CFT efforts through (i) legislative amendments to strengthen the governance framework and operational autonomy of the FIU, which includes providing transparent criteria for the appointment and dismissal of the head of the FIU, and (ii) the adoption of a national training program for financial regulators, financial institutions, the FIU, and law enforcement agencies.


7. Philippines Financial Market Regulation and Intermediation Program, Subprogram 1 (Loan 2278-PHI) was approved in conjunction with the program cluster on 6 December 2006.

This is a program cluster comprising two subprograms. A subcomponent of the program cluster supports the government’s AML/CFT efforts through strengthening the requirements and oversight of nonbank financial institutions.


8. Sri Lanka Financial Markets Program for Private Sector Development (Loans 2138/2139-SRI). Approved on 15 December 2004.

The program had a subcomponent that supported the government’s AML/CFT efforts through the enactment of AML/CFT laws.

The program was completed in December 2010 and a PCR (IN.266-11) was issued on 28 October 2011. The program was rated successful. It was relevant, effective in achieving the

Appendix 3 23


outcomes, less efficient in achieving outcomes and outputs, likely to be sustainable, and the impact is likely to be achieved and be sustainable.

9. Viet Nam Third Financial Sector Program, Subprogram 1 (Loan 2377-VIE) was approved in conjunction with the program cluster on 6 December 2007. Subprogram 2 was approved on 26 November 2010.

This is a program cluster comprising two subprograms. A subcomponent of the program cluster supports the government’s AML/CFT efforts through (i) establishment of the IT system for the FIU; (ii) strengthening the AML/CFT regulatory requirements; and (iii) awareness raising for AML/CFT activities.


AML/CFT = anti-money laundering and combating the financing of terrorism; BHU = Bhutan; CAM = Cambodia; FIU = financial intelligence unit; INO = Indonesia; MON = Mongolia; PAK = Pakistan; PCR = project completion report; PHI = the Philippines; SRI = Sri Lanka; TA = technical assistance; TASF = Technical Assistance Special Fund; VIE = Viet Nam Source: Asian Development Bank.

24 Appendix 3

B. Standalone Technical Assistance

DMC Stand-Alone TA Description of AML/CFT Component Status

1. Lao PDR Enhancing Financial Sector Supervision (TA 7500-LAO). Approved on 5 February 2010 ($750,000, financed by the Cooperation Fund for Regional Trade and Financial Security Initiative and TASF).

The TA has a component for supporting the government’s AML/CFT efforts through (i) preparation of guidelines to implement the AML/CFT decree; (ii) on-the-job training for staff of the FIU; (iii) communications and media training; (iv) training for staff in government agencies and financial institutions; (v) design and development of an IT system for receiving, storing, and analyzing transaction reports; (vi) preparation for the mutual evaluation to be carried out by the APG; and (vii) advice on upgrading the AML/CFT decree to a law over the longer term.

The TA was completed in August 2012 and a TCR (IN.251-12) was issued on 9 October 2012. The TA was rated partly successful. Based on the TCR, the guidelines for the AML/CFT decree were not implemented and no IT system was established for the FIU.

2. Pakistan Support to Governance Reforms in Pakistan (TA 4922-PAK). Approved on 7 March 2007 ($11.5 million, financed by the Government of the United Kingdom).

This TA cluster had five sub-clusters. The fourth sub-cluster provided capacity development for accountability, transparency, and anticorruption. This sub-cluster had a subproject on Strengthening the Anti-Money Laundering Regime in Pakistan, which included support for timely implementation of the AML law.

The TA was completed in March 2010 and a TCR (IN.92-11) was issued on 22 June 2011. This sub-cluster was rated partly successful. Based on the TCR, the AML subproject was not fully implemented as government ownership of AML reforms was unclear and delays in staffing of the FIU undermined the related training. While the consultants produced high-quality materials, the FIU disagreed with a number of findings and recommendations in the final report.

3. People’s Republic of China

Strengthening the Legal and Implementation Framework for Anti-Money Laundering (TA 4824-PRC). Approved on 7 August 2006 ($400,000, financed by TASF).

The TA initially assisted in the development and enactment of the PRC’s AML law by facilitating stakeholder consultations through an international symposium. Following enactment of the law and the mutual evaluation of the PRC carried out by the FATF in 2006–2007, the TA provided support for (i) strengthening the criminal law aspects of the AML legal framework; (ii) strengthening regulations, including the reporting of suspicious activities, for the financial sector; (iii) extending the application of the law to relevant parts of the

The TA was completed in June 2009 and a TCR (IN.328-09) was issued on 16 November 2009. The TA was rated successful. The TCR indicated that the government placed high emphasis on the TA, which is demonstrated by the use of the TA outputs in their reform proposals and the active participation of high-level officials in the international symposium and workshops under the TA.

Appendix 3 25

DMC Stand-Alone TA Description of AML/CFT Component Status

non-financial sector. These areas also corresponded to some of the main deficiencies identified in the FATF mutual evaluation report.

4. People’s Republic of China

Strengthening the Legal Framework for Anti-Money Laundering and Combating the Financing of Terrorism (TA 7454-PRC). Approved on 16 December 2009 ($200,000, financed by TASF).

The TA supported the government’s efforts to improve the AML/CFT legal framework. The first component helped to clarify the FATF’s treatment of the requirement on prosecuting “self-laundering” in its mutual evaluations and considerations of fundamental legal principles under PRC law. This assisted the government in explaining why it would be inappropriate for the PRC to adopt legislative changes in this respect. The second component helped to establish the legal basis for implementing the United Nations Security Council resolutions.

The TA was completed in January 2012 and a TCR (IN.188-12) was issued on 22 August 2012. The TA was rated successful. The TCR indicated that the TA contributed to the improvement of the AML/CFT legal framework.

5. Viet Nam Support for Developing Capital Markets and Building Capacity in the Financial Sector (TA 7087-VIE). Approved on 5 June 2008 ($1,000,000, financed by TASF)

The TA had a component for supporting the government’s AML/CFT efforts by establishing a database for these purposes.

The TA was completed in June 2011 and a TCR (IN.98-12) was issued on 3 May 2012. The TA was rated partly successful. The TCR indicated that a number of the components were not addressed, including the establishment of the AML/CFT database.

AML/CFT = anti-money laundering and combating the financing of terrorism; FATF = Financial Action Task Force; FIU = financial intelligence unit; LAO = Lao People’s Democratic Republic; PAK = Pakistan; PRC = People’s Republic of China; TA = technical assistance; TASF = Technical Assistance Special Fund; TCR = technical assistance completion report; VIE = Viet Nam. Source: Asian Development Bank.

Documents

Second Review of Enhancing the Asian Development Bank’s