The Practical Impact of the FATF Mutual Evaluation on the US AML Professional Monday, April 3 1:30 PM Moderator: Rick McDonell, Executive Director, ACAMS, and Former Executive Secretary, Financial Action Task Force (FATF) Speakers: Nick Burbidge, Senior Advisor, AML/CFT Initiatives, Office of the Superintendent of Financial Institutions (OSFI) William J. Fox, Global Financial Crimes Compliance Executive, Bank of America Sarah Runge, Director, Office of Strategic Policy Terrorist Financing and Financial Crimes, US Department of the Treasury
Key Findings of the Evaluation The AML / CFT framework in the United States is well developed and robust. Domestic coordination and cooperation in AML / CTF issues is sophisticated. Understanding of money laundering and terrorist financing risks is well supported by risk assessment processes. The financial sector bears most of the burden related to required measures under the Bank Secrecy Act. Financial institutions have an evolved understanding of ML / TF risks and obligations, and have systems and processes for implementing preventative measures. The U.S. regulatory framework has some significant gaps, including minimal coverage of certain institutions and businesses (e.g., investment advisors; lawyers; accountants; real estate agents; trust and corporate service providers. Minimal measures are imposed on designated non-financial businesses and professions (DNFBPs), other than casinos and dealers in precious metals and stones. Lack of timely access to adequate, accurate and current beneficial ownership information remains one of the fundamental gaps in the U.S. AML / CTF regime. AML / CFT supervision of banking and securities sectors appears to be robust as a whole, and is evolving for money service businesses. The U.S. has a range of sanctions it can and does impose, which seem to have desired effect. 2
Key Findings of the Evaluation (continued) Law enforcement in the U.S. rests on a well-established task force environment, which enables pooling of expertise from a wide range of agencies. Law enforcement has access to a wide range of financial intelligence. There is a strong focus on following the money in predicate offense investigations. The U.S. investigates and prosecutes terrorist finance networks aggressively and in line with its risk profile. International cooperation is generally effective. At the Federal level, the U.S. annually prosecutes on average 1,200 money laundering cases. Many are large, complex, white collar crimes cases in line with the country s risk profile. Federal authorities have the lead role in all large and/or international investigations. There is no uniform approach to State-level AML efforts and it is not clear that all States give money laundering due priority. The U.S. would benefit from ensuring that a range of tax crimes are predicate offenses for money laundering. Federal authorities aggressively pursue high-value asset seizures in large and complex cases. The authorities effectively resort to criminal, civil and administrative tools to forfeit assets. U.S. authorities effectively implement and administer targeted economic sanctions for terrorism and proliferation purposes. The U.S. economic sanctions lists are used by Financial Institutions across the U.S. and beyond, which gives the U.S. sanctions regime a global effect. 3
In terms of overall effectiveness, the evaluation found that The United States achieves high results in prevention, investigation, prosecution and sanctions for terrorist financing and proliferation finance; for prevention of the abuse of the NGO sector, and for asset seizure. The United States achieves substantial outcomes in understanding money laundering and terrorist financing threats; domestic and international cooperation; using financial intelligence and other information; and investigating and sanctioning money laundering offenses, such that only moderate improvement is needed. The United States needs to make fundamental improvements in order to protect legal entities, and to a lesser extent legal arrangements, from money laundering or terrorist financing abuse and ensure competent authorities have timely access to beneficial ownership information. Major improvements are needed to apply appropriate preventative measures to all financial institutions and designated nonfinancial businesses and providers; and, to undertake effective supervision of all sectors. The United States supervisory regime for financial institutions is very complex, with AML / CFT supervision being taken by multiple regulators a the Federal and State level. The designated non-financial business and providers sectors are not well covered. Measures taken to prevent abuse of legal entities are inadequate, and the U.S. legal framework has serious gaps that must be addressed, particularly related to beneficial ownership. 4
Relating to Financial Institutions, the evaluation found that The United States has an extremely large and diverse financial and designated nonfinancial business and provider sectors. The financial sector bears most of the burden of preventative measures and reporting, with the domestic banking sector playing a predominant role in the domestic and international financial sectors, along with the securities sector. Money Service Businesses are large in number, diverse and also and important part of the financial architecture. Financial Institutions generally demonstrate a fair understanding of money laundering and terrorist financing risks and obligations, though the quality of understanding varies across and within sectors. The level of highest understanding is the banking sector. Residential Mortgage Lenders and Originators do not seem to have a good understanding of money laundering vulnerabilities in their sector. There are certain exemptions and thresholds in the BSA regime, non-coverage of all Investment Advisors for example, which generally soften the deterrent value of preventative measures being applied by Financial Institutions. Among designated non-financial businesses and providers, the casino sector is large and been identified as vulnerable to money laundering. In practice, while not essential, lawyers, company formation agents and, to a lesser extent, accountants are often involved with related transactions. While there is evidence that casinos have developed a greater appreciation for money laundering and terrorist financing issues, there is no evidence that the rest of the sectors have a clear understanding of vulnerabilities relating to money laundering and terrorist financing. 5
The mutual evaluation prioritized six (6) actions for the United States: 1. Take steps to ensure that adequate, accurate and current beneficial ownership information of U.S. legal entities is available to competent authorities in a timely manner, by requiring that such information be obtained at the Federal level. 2. Implement beneficial ownership requirements under the BSA and apply these to the sectors discussed in number 3 below. 3. Apply appropriate AML / CTF obligations to: a. Investment Advisors; b. On the basis of a vulnerability analysis, to lawyers, accountants, trust and company service providers (other than trust companies that are already covered); and, c. After outcomes of the current GTO are analyzed, take appropriate action to address the money laundering risks associated with high-end real estate. 4. Issue guidance to clarify the scope of the immediate SAR reporting requirement, in order to make it clear that the requirement applies below the otherwise applicable thresholds; and, conduct a focused risk review of the existing SAR reporting thresholds and the 60/30 day reporting requirements. 5. Improve the visibility of AML and State level activities and statistics, including improved data collection and sharing, for a clearer nation-wide picture of the adequacy of AML efforts at all levels. 6. FinCEN should continue to expand the use of tools such as the GTO and 314(a) requests, and further its proactive dissemination of strategic and operational intelligence to law enforcement. 6
Key Takeaways 1. The results of FATF Mutual Evaluation Reports have a direct bearing on national regulation. 2. Deficiencies identified in FATF reports are expected to be rectified within a reasonable timeframe and regular follow-up reports are done to monitor progress. This will be done in the US case. 3. The US report identifies inadequacies in the beneficial ownership and the broader transparency requirements and this will continue to be a particular focus in the follow-up reports. 4. For financial sector supervision including DNFBPs the report indicated: "There is a need for more and ongoing guidance from supervisors to industry on their regulatory expectations." 7