Assessment of Member States compliance with FATF recommendations and strategy on combatting terrorist financing

 

Watch the recorded speech on the European Parliament website

Speech by David Lewis

FATF Executive Secretary 

at the European Parliament Special Committee on Terrorism Public Hearing ‘How to Improve Counter Terrorist Financing within the EU’

Brussels, 17 May 2018 

Assessment of Member States compliance with FATF recommendations and strategy on combatting terrorist financing

Dear Committee members,

Thank you for inviting me to speak to you today. EU Member States account for nearly half of the members of the FATF1. The European Commission is also a member of the FATF, and an increasingly active and valuable contributor to the task force. Those EU Member States that are not members of the FATF are members of the FATF-Style Regional Body for the Council of Europe, MONEYVAL.

Let me begin by briefly introducing the FATF and what we do. Created by the G7 in Paris in 1989 to tackle the proceeds of drug trafficking from the cartels, the FATF today leads global action against money laundering, terrorist financing, and the financing of the proliferation of weapons of mass destruction.

The success of the FATF comes from being a technical taskforce of its members, rather than a separate institution. The Secretariat, which I lead, facilitates the activity of members and oversees the activity of the 204 jurisdictions that are members of the FATF and FATF-Style Regional Bodies. In only 17 years since 9/11 the FATF has been successful in developing global standards against terrorist financing, which virtually every country in the world has agreed to implement, and to be assessed against. Not only this, but most countries have put in place the basic building blocks necessary – from criminalising terrorist financing to being able to implement targeted financial sanctions, and collect and share intelligence through financial intelligence units.

The FATF does three things – it brings together the operational experience of its members to share information on how criminals launder money and terrorists raise and access funds; it develops policy based on this evidence to respond to these risks through the provision of global standards, best practice and guidance; and it assesses and holds countries to account for effective implementation of these standards.

As a result of the global consensus that FATF has rapidly built on how to counter terrorist financing, most countries now have the legal, operational, regulatory and institutional framework in place to be able to tackle this threat. We call this ‘technical compliance’. Since 2013 FATF has focussed increasingly on assessing the practical impact of this, that is, how effective countries are at preventing, detecting and disrupting terrorist financing. Today I will share with you some of the findings of FATF’s assessments, the conclusions of which are not unique to EU Member States.

Targeted financial sanctions are an important cornerstone of an effective CFT system. In recent years, the European Commission has improved implementation by significantly reducing the time taken to give them legal effect under European law. Average transposition times have been reduced from one month to 2 to 3 working days. However, this assumes that criminals and terrorists also don’t work on weekends and is still longer than ‘within hours’ specified by the FATF Standards. In a world where money can be transferred across borders in numerous ways in seconds, taking days to implement sanctions on individuals and entities that have already been publicly identified by the UN, is clearly sub optimal. It means that to comply with the FATF standards and implement targeted financial sanctions ‘without delay’ EU Member States are reliant on national measures to complement action at EU level.

And while we have seen a welcome focus on improving the use and implementation of targeted financial sanctions, our assessments have shown a relatively low number of investigations and prosecutions of terrorist financing within Europe. It is important to build capacity in EU Member States in this area.

Under the Argentine Presidency of the FATF this year, we have focussed on strengthening the engagement of the judiciary around the world. Through several workshops in different regions, the FATF brought together 450 judges and prosecutors from 150 jurisdictions to share experiences and best practices. The conclusions of these workshops are consistent with the findings of our evaluations generally and also our engagement with the private sector, in particular with financial institutions.

There is a need for more specialised training for investigators and prosecutors. There is also the need to involve prosecutors at the early stages of investigations. Greater use can be made of multi-agency task forces to discuss specific cases and joint investigations, including financial intelligence units and also other authorities such as tax and customs agencies

There is a clear need to improve information sharing and international cooperation. Cutting off the finances of terrorist organisations and the effective use of financial intelligence is a critical part of any counter- terrorism strategy. It requires full and timely co-operation between FIUs, law enforcement, intelligence agencies and the judiciary. As well as, critically, the private sector.

Domestically and across borders, more information needs to be shared, and more rapidly. Banks have invested substantially in people and technology - and they want to work in partnership with the authorities to improve the quality and use of the information they provide. Government support for information sharing with the private sector, and to allow banks and others to share information between themselves is critical.

Effective information sharing is integral to the FATF Standards. Working with the financial sector, the FATF has recently published new guidance on information sharing. Countries should use this to enhance their response.

This is an area which, under the leadership of Rob Wainwright, Europol have recently shown interest and where perhaps they can play a greater role, in liaison with the authorities of EU Member States and global financial institutions. It is also an area where there is increasing value to be realised from leveraging efforts against cyber crime with AML/CFT measures. As Bill Winters, the CEO of Standard Chartered wrote in the Financial Times this week “The shift to online banking and payments is giving organised criminal groups access to a vast and growing treasure trove of ways to exploit the system and reduce their own risk.” The same is true for terrorists and those that finance them.

FATF’s engagement with the judiciary this year has also highlighted the use and value of European Investigation Orders. And informal cooperation between FIUs (such as through the Egmont Group) is often faster and more effective than using formal mutual legal assistance channels. This is particularly the case where the speed of international cooperation is vital following the detention of suspects in terrorist and terrorist financing cases.

FATF assessments and follow up reports have shown that EU Member States are taking positive action to keep pace with the FATF standards. This will help with the investigation and prosecution of terrorist financing. In particular we have seen action to criminalise the financing of travel to a foreign state for the purpose of perpetration, planning, or preparation of, or participation in, terrorist acts or the providing or receiving of terrorist training.

Counter terrorist financing measures are at their most effective when they form part of a coherent counter terrorism strategy. Within Europe more could be done to ensure a common understanding of the role CFT can play in national and supranational counter terrorism strategies.

Combating terrorist financing is not just another investigative tool to be used after an attack occurs, or a planned attack is uncovered, and it is not just another offence to prosecute facilitators. Instead, CFT measures should be used proactively, in conjunction with other intelligence, and should focus on identifying and disrupting terrorist and facilitation networks - with intelligence, criminal justice measures, and sanctions used in an integrated way. This can enable authorities to identify and disrupt planned attacks, but can also reduce terrorist groups' capabilities, diminish trust and cooperation within terrorist groups, and place their networks under financial stress. Several European countries are using this approach with some success.

Terrorist financing disruption strategies are an area of current focus for the FATF, learning the lessons from FATF evaluations. There is clearly scope for better exchange of information and good practices between EU Member States.

Technological innovation in financial services and in the ability to share and analyse large volumes of complex data, provides unique opportunities. Criminals and terrorists alike are using FinTech. Governments and Fintech providers need to understand and take action to mitigate those risks. The FATF is bringing them together to do just that. Furthermore FinTech, and its underlying technology, also offers opportunities for following the money behind crime and terrorism, and increasing financial inclusion.

FATF is committed to strongly supporting financial innovation that is in line with effective AML/CFT preventive measures.

The FATF standards can already be applied to virtual currencies, or crypto-assets, and the FATF has issued guidance to countries on how to do this. However, we have found little consistency in the approach countries are taking to mitigate the risks associated with crypto-assets. This patchwork response by countries can be exploited by criminals and terrorists. The FATF is reviewing its guidance and will consider if changes to the standards are necessary in order to promote a more consistent approach to regulation in particular. We will be reporting to G20 Finance Ministers and Central Bank Governors on this later in the year.

To that end, the focus of the EU in this area in recent Directives, is welcome and should help mitigate the increasing use of new payment methods from pre-paid card to cryto-assets by criminals and terrrorists alike.

Terrorism and terrorist organisations are predominantly financed through the use of cash, formal and informal remittance systems, and the abuse of non-profit organisations. Extortion, kipnap for ransom, the illegal sale of cultural property, human trafficking and fraud have been and continue to be important sources of terrorist financing. Unlike tax evasion, terrorist financing is less likely to be facilitated through the formal financial system or through complex corporate ownership structures, although there are examples of this. That said, recent EU efforts to improve transparency, including of beneficial ownership, are welcome.

The results of the assessments to date, show that EU Members States could do more to implement the revised FATF standard on non-profit organisations. Working in close partnership with this sector, the FATF revised its standard to promote a more nuanced and risk-based approach to identifying and mitigating the risks associated with this activity. It is vital to successful counter terrorism efforts, that countries better understand the risks in this area and take targeted action to address these risks.

More generally understanding and assessing risk, then coordinating action based on this, is an area where Member States should continue to focus. The EU initiative to do this at supranational level is important and the Commission should be encouraged – and given the resources – to work with Member States to develop their supranational risk assessment and build a more nuanced understanding of the risks.

The risk of not doing so, and categorising whole sectors as high risk, rather than focusing on specific activities by certain actors in higher risk countries, is that it could contribute to unintended consequences like de-risking. As banks de-risk it is likely that criminals will seek to use other methods to move illicit funds and that innocent individuals and businesses will be excluded from the financial system, thereby increasing the very risks we are trying to mitigate. This is especially the case for money remittance providers, but also others.

Finally, I’d like to recognise the vital work of MONEYVAL in this area, and urge you to ensure that they have the resources and support necessary for them to conduct timely and robust evaluations of their members, which include members of the Council of Europe, Gibraltar and the UK Crown Dependencies. These evaluations are likely to be important for the accession of countries to the EU.

MONEYVAL has proved effective in holding members to account when they do not implement the FATF standards and has not refrained from nominating members to the FATF listing process when necessary (e.g. Bosnia and Herzegovina in 2015 that led to further progress and subsequent delisting). Recent MONEYVAL evaluations include Ukraine, Andorra, and the follow-up report for Hungary, which all showed significant improvements.

MONEYVAL work has also recently undertaken the targeted monitoring of its members for FATF terrorist financing obligations. As of December 2017 only the Former Yugoslav Republic of Macedonia is still under scrutiny due to outstanding significant deficiencies in their CFT framework (6 others have addressed the deficiencies: Bosnia and Herzegovina, Cyprus, Lithuania, Moldova, Montenegro, and Poland.

Recognising the impact of de-risking and its potential to increase money laundering and terrorist financing risks, MONEYVAL has been holding a number of roundtable discussions in Europe and the US with relevant Governments, international organisations, and the private sector to ‘reconnect the de-risked’, raising awareness of the FATF requirements and to explain how MONEYVAL assessments can be used by global financial institutions to better inform their approach to risk management.

These efforts by MONEYVAL are hugely valuable and they would benefit from further support to prioritise this work within the Council of Europe.

President Macron recognised the importance of the work of the FATF and FATF-Style Regional Bodies such as MONEYVAL, in his closing remarks to the ‘No Money For Terror’ conference last month. As task forces of member countries, FATF and its regional bodies are highly effective models for international cooperation and coordinated action against terrorist financing. Your continued support is therefore critical.

I would like to finish by thanking the committee again for the opportunity to share the results of the work of the FATF, and for your continued support for prioritising and enabling a more joined up approach to tackling terrorist financing in Europe and beyond.

 

Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom