Inspections by global financial authorities from the Financial Action Task Force will start in May next year, evaluating the self-assessments of worldwide jurisdictions seeking compliance with new, wide-ranging demands by the Paris-based group.
Territories judged as non-compliant by FATF will be placed on a “black list”, comparable to the OECD’s 2008 and 2009 roster of nations with insufficient tax-exchange agreements.
Fresh regulations, agreed by the group in February last year, demand every jurisdiction rate itself against standards for corruption, money laundering, counter-terrorism finance, weapons of mass destruction, tax crimes, smuggling and the confiscation of proceeds of criminal activity.
“This is going to be complex and time-consuming,” warned Professor William Gilmore, emeritus professor of international criminal law at the University of Edinburgh and a board member of the Cayman Islands Monetary Authority since 2006.
Speaking on Tuesday at the third annual Grand Court lecture series, Mr. Gilmore said the FATF standards – and country visits – were likely to prove “a deep and intrusive process” that would place “a heavy burden” on assessing and evaluated countries.
“The onus,” he said, “is on each country to demonstrate the effectiveness of its anti-money-laundering system”.
If compliance is not evident, the assessors will conclude the system is not effective, Mr. Gilmore told a courtroom packed with legal professionals, bank officers and monetary authority executives.
“This will impact the identification of high-risk jurisdictions, a kind of black-list process,” he said.
Mr. Gilmore said the new FATF standards had originally been proposed by the UK, Brazil and the Netherlands, supplementing the group’s traditional “40 + 9” standards, covering money laundering, developed in 1990, and combating terrorist financing, post 11 September, 2001.
While retaining the 49 traditional standards, he said, new regulations encompass proliferation of weapons of mass destruction; expansion of money-laundering regulations to include “tax crimes, placing a tax dimension on smuggling”; an anti-money-laundering regime relating to corruption and the exposure of government officials, politicians and certain domestic politicians”, extending even to unelected figures.
Many of the changes, he said, accorded with United Nations sanctions against corruption.
Efforts would also enlist local law enforcement and intelligence operations.
“The most significant changes, though, relate to a risk-based assessment approach to money-laundering,” Mr. Gilmore told the audience, detailing self-assessments of a jurisdiction’s compliance.
FATF teams would perform two “interlinked evaluations”. The first would determine the degree of technical compliance with agency standards, yielding ratings from “good to major shortcomings”.
A second survey would comprise a “major evaluation”, an “effectiveness assessment”, Mr. Gilmore said, not necessarily based on specific requirements, but rather “requiring a judgement [by the team] of whether key objectives are met in practice”.
Offering greater detail about the survey, Mr. Gilmore cited “the type and source of information” about money laundering and other criminal activities; “the extent of confiscation of criminal proceeds; how good the authorities are at confiscations, both domestic and in foreign countries; and how those confiscations reflect the national risk assessment.
“We will ask detailed information about confiscations, criminal offences, types of cases, the value of the proceeds of crime, broken down by foreign and domestic, criminal and civil, and to what proportion orders for confiscations are processed,” he said.
Challenges were likely to vary widely: “Some countries will have weapons of mass destruction problems, some will have money-laundering problems,” he said, pointing out that FATF inspectors were not obliged to accept the self-assessment of any jurisdiction, but were “entitled to question the adequacy and conclusions” of the information, and could “look to authoritative sources outside the jurisdiction if they draw conclusions opposite to the national risk-assessment”.
Further refinements to the inquiry processes would come at FATF’s October meeting, while risk assessments were expected to begin “in the coming weeks and months”, he said, naming Spain, Norway and Belgium for initial site visits in May 2014.
He predicted adoption of a new round of FATF proposals later this year, citing an “EU directive that will apply to all gambling, not just casinos”, that will “bring in all persons involved with cash payments of €700,000 or more”, but also said the organisation would abandon regulations on wire transfers.
“Given the intrusiveness of this,” he said of the inspections, “it will give rise to controversies, that will need resolving in the courts.
“We urge all countries to treat national risk-assessments as a priority. It’s an important time for all sectors, private and public, to make the appropriate changes to their procedures. They must identify areas of weakness and make changes to create improvements.”
Professor Gilmore, who was dean of the Edinburgh Law School from 2004 and 2007, is the author of 2011’s “Dirty Money: The Evolution of International Measures to Counter Money Laundering and the Financing of Terrorism” and also 1991’s “Combating International Drug Trafficking”.
The FATF comprises 34 member jurisdictions and two regional organisations, representing most major financial centres around world.
Its objectives are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.