Keynote Speech by FATF Vice-President Je-Yoon SHIN
Thomson Reuters – 2nd Annual Japanese Regulatory Summit
Tokyo, 10 March 2015
Thank you for inviting me here this afternoon. I am heartened to see the number of experienced professionals and experts gathered today in Tokyo to share perspectives on financial market regulations.
I have just returned from Paris after a week-long plenary meeting of the FATF and I want to bring you up to date in relation to the current agenda and priorities of this international policy-making body whose purpose is to protect the global financial system from money laundering and terrorist financing.
In addressing this summit today, I will focus on the following key areas:
- The Global Regulatory Arena
- The risk-based approach
- De-risking
- The FATF’s Mutual Evaluation Process
- The FATF Action on Terrorist Finance
The Global Regulatory Arena
During the past decade, the global AML (anti-money laundering) /CFT (countering the financing of terrorism) landscape has changed tremendously. While financial institutions have ridden the highs and plunged to the lows of the economic cycles, AML as a regulatory focus has steadily increased in its importance.
As a result, and as you all know very well, “AML”, “CFT” and “KYC” (know your customer) are now the buzzwords in financial institutions’ daily operations. Strong AML/CFT controls are at the heart of many financial institutions.
However, recent cases have shown that contraventions of these controls can result in fines and deferred prosecution agreements running into billions of dollars, or sanctions becoming license threatening.
To this end, major financial centres look ultimately to this Task Force for guidance on a set of international standards to combat money laundering and terrorist financing risks, as part of the coordinated efforts to ensure market integrity.
Since its establishment in 1989, the FATF carries a recognised standard-setting function to establish robust “Recommendations”, and have them revised periodically, to address the evolving threats posed by money launderers and terrorist financiers. The latest version of 40 Recommendations was adopted by the FATF in 2012, covering comprehensively a wide range of preventive measures, institutional requirements, enforcement and prosecution issues, sectorial controls, and obligations to achieve mutual legal assistance and international cooperation to freeze and confiscate criminal proceeds.
The Risk-Based Approach
It is important to highlight that the most recent update of the FATF Recommendations emphasises the “risk-based approach” much more than previous versions of the standards. The risk-based approach is central to the effective implementation of the FATF Recommendations. A risk-based approach means that countries, competent authorities, and banks identify, assess, and understand the money laundering and terrorist financing risk to which they are exposed, and take the appropriate mitigation measures in accordance with the level of risk.
This flexibility allows for a more efficient use of resources, as banks, countries and competent authorities can decide on the most effective way to mitigate the money laundering / terrorist financing risks they have identified.
It enables them to focus their resources and take enhanced measures in situations where the risks are higher, apply simplified measures where the risks are lower and exempt low risk activities. The implementation of the risk-based approach will avoid the consequences of inappropriate de-risking behaviour.
Recently, the FATF issued a guidance document for a Risk-Based Approach for the Banking Sector. This document provides operational suggestions to assist banking regulators in integrating this “risk-based” philosophy into day-to-day supervision. It should also help banks strengthen their internal risk assessments, as well as their due diligence process and risk mitigation controls. It will help develop a common understanding of the risk-based approach between supervisory authorities and banks. The practical examples in this guidance hopefully assist in understanding the various elements of this approach. I urge you to look into this piece of guidance which is available on the FATF’s website.
De-risking
I have emphasised “risk” several times, but there is now also another fashionable word associated with that: “de-risking”. It basically means a situation when financial institutions terminate, or restrict, business relationships with clients, or categories of clients, to avoid, rather than manage, risk in line with the FATF’s risk-based approach.
The issues surrounding de-risking are somewhat complex. De-risking can be the result of various drivers, such as concerns about profitability, prudential requirements, anxiety after the global financial crisis, and reputational risk. It is a misconception though to characterise de-risking exclusively as an anti-money laundering issue.
This issue of de-risking is of crucial importance to the FATF. De-risking can itself introduce risk and opacity into the global financial system, as the termination of account relationships has the potential to force entities and persons into less regulated or unregulated channels. Moving funds through regulated, traceable channels facilitates the implementation of AML/CFT measures.
“De-risking” should never be an excuse for a bank to avoid implementing a risk-based approach, in line with the FATF standards. The FATF Recommendations only require financial institutions to terminate customer relationships, on a case-by-case basis, where the money laundering and terrorist financing risks cannot be mitigated. This is fully in line with AML/CFT objectives. What is not in line with the FATF standards is the wholesale cutting loose of entire classes of customer, without taking into account, seriously and comprehensively, their level of risk or risk mitigation measures for individual customers within a particular sector.
Therefore, the risk-based approach should be the cornerstone of an effective AML/CFT system, and is essential to properly managing risks. The FATF expects financial institutions to identify, assess and understand their money laundering and terrorist financing risks and take commensurate measures in order to mitigate them. This does not imply a “zero failure” approach.
The Mutual Evaluation Process
It goes without saying that all 36 members of the FATF are concerned about compliance with the FATF Recommendations. You know well that FATF member countries – not just competent government agencies and institutions but also the private sector – are subject to a very vigorous mutual evaluation process regularly conducted to assess how effective they are in implementing the jurisdiction-wide AML/CFT measures. The same health-check process applies consistently to non-FATF members belonging to the FATF-style regional bodies, such as the Asia/Pacific Group on Money Laundering in this region.
Last week, I was witness of the consideration and deliberation of the mutual evaluation reports of Belgium and Australia, which are among the first members to have their AML/CFT regime, including financial sector regulation, carefully scrutinised by a group of expert assessors. The assessments of Norway and Spain were already adopted by the FATF in October last year and their reports are publicly available on the FATF website. The reports of Belgium and Australia will also be made public soon.
I must say I am deeply impressed by the assessments. This new round of evaluations is by no means easy. Indeed, the FATF has now strengthened significantly the assessment of effectiveness over and above the previous technical compliance assessment. Put it simply, it is not enough to pass laws and set up agencies and institutions – they also need to work effectively to get right results on the ground. A “real” reality check indeed.
FATF Action on Terrorist Finance
There is one other fundamental area of FATF work which I would like to describe today.
Terrorism is an increasingly global problem that requires concerted global action by a united international community. The ISIL phenomenon shows a new type of terrorist organisation with unique funding streams that are crucial to its activities. Therefore, cutting off this financing is critically important. Given its mandate, the FATF has a particular responsibility to develop a coordinated and decisive response to fight not just terrorist financing, but ultimately, terrorism.
During its meetings last week, the FATF adopted and published a report on the Financing of the Terrorist Organisation Islamic State in Iraq and the Levant. This significant report will contribute to the international discussion to update global efforts to counter terrorist financing. Using the findings of this report on the sources and methods of financing of ISIL, the FATF and the FATF-Style Regional Bodies will work together with international organisations to develop proposals to strengthen all counter-terrorism financing tools and report back to the G20 in October this year.
Although this has been a priority area for many years, the FATF will put an enhanced focus on the freezing of terrorist assets without delay and the implementation of ongoing prohibitions; an area of work in which financial institutions are heavily involved. The United Nations has recently created a consolidated sanctions list with the designated persons and entities from all the sanctions committees. This list is now published on the UN website.
Feedback from the private sector would be helpful in order to ensure the list is more useable by the private sector. The FATF will facilitate this feedback process, as this consolidated sanctions list is important for effective implementation of freezing of terrorist assets requirements. Therefore, during the third meeting of the FATF Private Sector Consultative Forum – the annual meeting of FATF and the private sector which will take place in Brussels at the end of this month – there will be an extensive discussion on the usefulness of the new consolidated sanctions list and how it can be further improved to assist the financial and other relevant sectors.
Concluding Remarks
Ladies and gentlemen, I covered quite a bit of ground today, and I hope you may find my updates helpful in understanding the determination of the FATF to address these pertinent AML/CFT issues. It is important that we build a strong AML/CFT compliance culture to safeguard the integrity of our financial system. There is still much work to be done, and there will always be new threats to mitigate. On this note, I would like to thank you for your attention and for the opportunity to speak to you today.
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