GAFI (FAFT) and the forty recommendations
The Financial Action Task Force on Money Laundering (GAFI), also known as Groupe d’action financière (GAFI), is an intergovernmental organization, creaby the Countries of G7 in 1989 during Paris summit, with the aim to fight the money laundering phenomenon. Since 2001 this purpose was also extended to terrorism financing, after the event of the terroristic attack on the 11th of September .
Currently GAFI includes thirty-five members, plus the international organizations of EU and the Gulf Co-operation Council.
The tasks given to GAFI are studying money laundering trends, monitoring legislative, financial and law enforcement activities, and especially issuing recommendations towards the different Countries to reach its own purpose.
From 1990 GAFI has issued forty recommendations and 9 special recommendations regarding the terrorism financing. Those types of recommendations focused on giving standard rules and principles to prevent money laundering and financial terrorist events.
These recommendations allowed countries to have more flexibility to adopt and applicate those rules on their own.
The GAFI’s activity is conducted by different subgroups:
WGEI which interprets the various criteria fixed by the recommendations;
WGTYP which deals with new schemes of money-laundering and financing of terrorism;
WGTM which deals with the problem of the financing of terrorism;
ICRG supports international cooperation among different groups: GAFISUD (South), GAP (Asia), MONEYVAL (European conseil), Euro-Asian group and MenaGAFI.
The forty recommendations were completely reviewed in 1996 and in 2013. The main innovations of the 2013’s recommendations are the following:
An higher level of transparency, allowing countries to have an easier check and control of the real identity of physical persons, and also preventing hidden assets created by fake companies. These important principles, in particular, were estabilished by recommendations 33 and 34 (this latest one is about trusts). According to the 33 “ Countries should take
measures to prevent the unlawful use of legal persons by money launderers. Countries should ensure that there is adequate, accurate and timely information on the benefic ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities. In particular, countries that have legal persons that are able to issue bearer shares should take appropriate measures to ensure that they are not misused for money laundering and be able to demonstrate the adequacy of those measures. Countries could consider measures to facilitate access to beneficial ownership and control information to financial institutions undertaking the requirements set out in Recommendation 5.
While according to the 34. “Countries should take measures to prevent the unlawful use of legal arrangements by money launderers. In particular, countries should ensure that there is adequate, accurate and timely information on express trusts, including information on the settlor, trustee and beneficiaries, that can be obtained or accessed in a timely fashion by competent authorities. Countries could consider measures to facilitate access to beneficial ownership and control information to financial institutions undertaking the requirements set out in Recommendation 5.”
Stronger duties estabilished for Politically exposed persons (PEP). According to GAFI, a politically exposed person is an individual “who is or has been entrusted with a prominent public function and are in positions that potentially can be abused for the purpose of committing money laundering offences and related predicate offences, including corruption, as well as terrorist financing”
Other than the Directives, in the USA there are different ways of categorising PEPs according to:
the Bank Secrecy Act Anti-Money Laundering Examination Manual
the Patriot Act.
Generally speaking, banks and other entities are ultimately responsible for determining their local PEPs.
The US Bank Secrecy Act, Anti-Money Laundering Examination Manual states that banks should take all reasonable steps to prevent senior foreign political figures or their families and associates from hiding or moving the corruption’s activities.
The US Definition of a PEP generally includes a current or former senior foreign political figure, a senior official in the executive, legislative, administrative, military or judicial branches of a foreign government (whether elected or not), a senior official of a major foreign political party, or a senior executive of a foreign government-owned corporation.
In addition, there are other ways to find PEPs activities:
a bank have to control any corporation, business, or other entity – formed by or for the benefit of a PEP- , their immediate family (including the PEP’s parents, siblings, spouse, children and in-laws) and their close associates (people widely and publicly known to maintain an unusually close relationship with the PEP, and could conduct substantial domestic or international financial transactions on his/her behalf ).
The definitions must be sufficiently flexible to let Banks establish risk-based controls and procedures to ascertain the status of an individual as a PEP and to conduct risk-based scrutiny of accounts held by these individuals.
Risk will vary depending on other factors such as the banking services used, the account size or the complexity of the customer link with the bank ( e.g. income sources, financial information, and professional background) .
After the terrorist attack on WTC twin tower in New York (11 September 2001), with the establishment of the Patriot Act, the PEP’s principles became stricter. PEP’s norms are included in Section 312 of the Patriot Act.
PEPs principles prevent risk of dealing with people who are politically strong and that can potentially lead to boosting or to ruining the financial institution reputation. The price of this reputation damage cannot be paid with a fine or with any kind of punishment as the consequences of financial institution’s negligence in handling their clients may cause the wreckage of their whole business .
Section 312 of the USA Patriot Act requires american financial institutions to perform due diligence, with regard to correspondent accounts established or maintained in foreign financial institutions and private banking accounts established or maintained by non-U.S. people. The final rule issued implements on the general due diligence requirements linked to foreign financial institutions and connected to private banking accounts.
The financial rulemaking point is to improve the due diligence requirements for certain foreign banks:
article 6 adfirms that “Financial institutions should, in relation to politically exposed persons, in addition to performing normal due diligence measures:
a) Have appropriate risk management systems to determine whether the customer is a politically exposed person.
b) Obtain senior management approval for establishing business relationships with such customers.
c) Take reasonable measures to establish the source of wealth and source of funds.
d) Conduct enhanced ongoing monitoring of the business relationship”.
The Patriot Act contains a generic definition of AML, including as more criminal behaviour as possible, such as taxes’s crimes.
In particular, the first recommendation claims that “Countries should criminalise money laundering on the basis of the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988 (the Vienna Convention) and the United Nations Convention against Transnational Organized Crime, 2000 (the Palermo Convention).
Countries should apply the crime of money laundering to all serious offences, with a view to including the widest range of predicate offences. Predicate offences may be described by reference to all offences, or to a threshold linked either to a category of serious offences or to the penalty of imprisonment applicable to the predicate offence (threshold approach), or to a list of predicate offences, or a combination of these approaches.
Where countries apply a threshold approach, predicate offences should at a minimum comprise all offences that fall within the category of serious offences under their national law or should include offences which are punishable by a maximum penalty of more than one year’s imprisonment or for those countries that have a minimum threshold for offences in their legal system, predicate offences should comprise all offences, which are punished by a minimum penalty of more than six months imprisonment.
Whichever approach is adopted, each country should at a minimum include a range of offences within each of the designated categories of offences.
Predicate offences for money laundering should extend to conduct that occurred in another country, which constitutes an offence in that country, and which would have constituted a predicate offence had it occurred domestically. Countries may provide that the only prerequisite is that the conduct would have constituted a predicate offence had it occurred domestically.
Countries may provide that the offence of money laundering does not apply to persons who committed the predicate offence, where this is required by fundamental principles of their domestic law”.
Money laundering crime can be divided in three different steps:
The first one called “placement” involves the introduction of cash in a financial system, this money comes from a previous crime;
The second one called “layering”, consists in several behaviours which aim to camouflage the origin of the money’s funds.
The last one is the “integration”, when the dirty money are used in legal activities, which produce whealth for their owners.