Speech by FATF President Vladimir Nechaev at the Caribbean Financial Action Task Force regional conference

Caribbean Financial Action Task Force regional conference

3 April 2014, Nassau, the Bahamas

From left to right: Mr. Calvin Wilson, Executive Director, CFATF; Mr. Shadrach Haruna, Legal Adviser, Commonwealth Secretariat; Mr. Vladimir Nechaev, President of the FATF; CFATF Deputy Chair, the Honourable Luis Antonio Martinez Gonzalez, Attorney General, El Salvador; CFATF Chair Sen. the Hon. Z.C. Allyson Maynard Gibson, Attorney General, Minister of Legal Affairs,The Bahamas; the Rt. Hon. Perry Gladstone Christie, Prime Minister & Minister of Finance, The Bahamas; the Hon. Philip E. Brave Davis, Deputy Prime Minister & Minister of Works and Urban Development, The Bahamas; the Hon. Leo Ryan Pinder, Minister of Financial Services, The Bahamas; the Hon. Rhondalee Braithwaite-Knowles, Attorney General, Turks and Caicos Islands; and the Hon. The Hon. Damien Gomez, Minister of State in the Ministry of Legal Affairs, The Bahamas

Introduction

Right Honourable Perry Christie, Prime Minister of the Bahamas,

Sir Michael Barnett, Chief Justice of the Bahamas,

Honourable Philip Davis, Deputy Prime-Minister of the Bahamas,

Honourable Allyson Maynard-Gibson, Attorney General of the Bahamas and Chairperson of the Caribbean Financial Action Task Force,

Ministers and Attorneys-General from Caribbean nations,

Distinguished delegates and colleagues,

If you were present at yesterday’s Conference where I already spoke about FATF and CFATF, you may think that you will hear the same speech again. I can assure you that this is not the case. There are so many topics that I have to make a choice, and even with two speeches in two days I do not cover everything that I could cover.

At yesterday’s Conference, I spoke about the FATF, its mandate and membership, and its cooperation within the global network of FATF-style regional bodies. I shared my ideas on how the Caribbean could optimise its input to FATF, and I concluded with an overview of why compliance with the FATF Recommendations is so important for the success of the international financial services sector in this region. My speech was followed by a presentation by the FATF Secretariat with an overview of the expectations that we have from the public and private sector for the 4th round of mutual evaluations, and by a ministerial panel discussion.

Third round of assessments

It has been often said that the third round of FATF and CFATF assessments placed a heavy burden on all of us. There was overlap between the Recommendations and Special Recommendations, and assessors and assessment bodies found the application of the Methodology challenging. In addition, the assessments focused mainly on assessing technical compliance, and effectiveness was often only taken into account as an additional factor. Risk was rarely taken into account.

For the fourth round of mutual evaluations we have made some changes to the 40 Recommendations, the Assessment Methodology and the procedures to avoid the challenges that we faced, without losing sight of the many good features of the third round. In the remaining part of my speech, I will cover the risk based approach, technical and effectiveness compliance, quality of reports, and resources.

Risk Based Approach

From yesterday’s discussions, let me reiterate that the introduction of the risk based approach is probably the most important change to the revised FATF Recommendations. The term risk based approach, or RBA, is used in different contexts in relation to the FATF Recommendations. The main change; however, relates to the need for each country to understand the risks that it is facing. In addition, countries are required to implement the FATF Recommendations on the basis of their understanding of the risks, and to apply their resources accordingly.

This is an additional requirement to the FATF Recommendations. Many countries felt that in the third round risk was insufficiently taken into account and that all countries had to implement the same set of Recommendations in exactly the same manner. The RBA will allow countries to be more flexible, use their resources where necessary, and match the type of rules and enforcement with the risks that are present. However, a country can only successfully implement the RBA after it has assessed its risks.

This work needs to start today in your countries. It takes a long time to undertake a risk assessment and even more time to implement the results. It requires sufficient resources, expertise and coordination between Ministries and agencies to conduct it and to keep it up-to-date. And for compliance with the next round of assessments, it is essential that the risk assessment is undertaken in time.

Technical compliance

One of the criticisms during the third round was that countries could simply translate the FATF Recommendations into their legislation and become compliant without achieving any results. This was considered to be unfair to those countries that had imperfect legal systems, but did achieve positive results. This is one reason why we are shifting our focus to include an assessment of effectiveness.

However, technical compliance will still be assessed and rated. This means that every country being assessed still needs to present its technical compliance information to the assessment body. Work on this questionnaire should start as early as possible, and ideally not later than a year before the start of the assessment. If not, countries deprive themselves of valuable time to prepare for the assessment.

As Ministers, you need to know that every agency that is involved should have a lead person for this work, and that there should be an overall lead person who works with you to oversee this work. Providing information to the assessment body requires resources, and it requires trained and knowledgeable staff. The onus to prove compliance and effectiveness is on the assessed country, and incorrect and unclear information will lead to lower ratings.

In addition, some of you may have learned already, the technical assessment will be mainly undertaken by the FATF and FSRB Secretariats – in consultation with the assessors. This should lead to efficiency gains for each assessor – and therefore for the countries that they represent.

Effectiveness compliance

As indicated, the focus will be on effectiveness in the next round of assessments. FATF has just commenced its new round of assessments with the first on-site being undertaken this week, and it is too early to share practical experiences. At this stage, I would like to highlight the fact that in addition to the ratings for the 40 Recommendations, countries will receive a rating for each of the 11 so called “Immediate Outcomes”.

I would also like to point out that the effectiveness assessment and the on-site visit will be undertaken on the basis of a risk scoping exercise. This may, for example, mean that the focus of the on-site and the assessment report may shift from the banking industry to other financial industries if they are more relevant to a country.

I should stress that measuring effectiveness is not about statistics, but about measuring whether the system is achieving the results it should achieve. That is an important difference, which should guide countries in every step of the preparations for the fourth round.

The first FATF reports will be discussed in October this year, and shared with all delegations, including CFATF delegations, for comments in September. I would like to urge CFATF members, especially those that are assessed first, to take note of these first FATF assessments, and if possible to attend a discussion of a mutual evaluation in FATF before their assessment starts.

Quality of reports

Some words on quality and consistency of mutual evaluation reports. FATF and FSRBs all work on the basis of peer pressure, which in my view is one of the strengths of the Global Network. However, we have noted during the third round that in some cases, peer pressure was not consistently applied and some reports were adopted that did not correctly apply the FATF Recommendations. This was the case in CFATF, but also in other FSRBs. This negatively impacted the credibility of the Global Network.

For the new round we have taken measures to prevent inconsistent reports from being adopted. First of all, we have created a new working group in FATF, dedicated to the quality and consistency of all mutual evaluations. This group is called the Evaluations and Compliance Group and is tasked to review reports from all assessor bodies, and the FATF may publicly identify reports that do not meet the standard.

In addition, we have tasked the existing Global Network Coordination Group – which is co-chaired by your CFATFs deputy Executive Director Ms Dawne Spicer – to assist FSRBs to produce quality evaluation reports.

Additionally, we have updated our training material and programmes for this round of assessments. In the third round, assessor training consisted of 3 days power points on the FATF Recommendations and 2 days report writing. Hardly an exciting preparation for such a demanding task. For this next round we do things differently. We expect assessors to be familiar with the FATF Recommendations, although training on the Recommendation is still available to countries. Knowledgeable experts who are selected to become an assessor are required to undergo a one week assessor training course, with a focus on how to assess effectiveness. In addition, we have also developed training for assessed countries to help them prepare for an assessment. All of this material is available to CFATF and its members.

Resources

We believe that the focus on quality and consistency, on the risk based approach and on assessing effectiveness will improve the usefulness of our reports, for the private and for the public sector.

The downside is that more resources may be needed. At yesterday’s conference I highlighted the need for CFATF and its members to make even better use of the framework that CFATF offers to pool resources and exploit commonalities. I believe that for an organisation with so many small members this is an absolute necessity.

I should also stress that technical assistance coordination remains important, within the region and from outside. Two other FSRBs, the Asia Pacific Group and the Middle East and North Africa FATF, will soon present a best practices paper on technical assistance coordination that may be useful for the region.

It is important that relevant expertise remains available in the region. CFATF benefits from having many experienced and knowledgeable experts participating at its meetings. Governments all over the world face challenges to keep experienced staff. I need to stress that the solution to a lack of resources is to cooperate within the region, rather than to outsource specific tasks, such as the drafting of legislation or the undertaking of risk assessments, to commercial parties – who may produce output that is not in line with the FATF Recommendations.

Conclusions

Madam Chair, I realise that my message today is one of more work and more resources. However, I hope that you understand that the additional tasks and requirements aim to improve our common output, to enhance the usefulness of our assessments, also for technical assistance purposes, and ultimately to better fight illicit finance crimes and to protect the integrity of our financial systems.

Finally, Madam Chair, you will discuss today issues such as the funding of the next round of assessments, the long term financial stability and the Nassau Declaration. The FATF will engage in these discussions in line with the views that I have expressed today and yesterday.

Thank you.