Imagine a situation like this: you work for a small or medium sized financial institution and your job contains some kind of responsibility for legal or compliance questions. Now, someone in senior management decides it would be a great idea to expand to country X because the good people there are in dire need of the services your firm provides. You’re supposed to think about the legal and regulatory consequences as well as what would be need to be done to do business in country X.*
One of the things that should spring to mind is anti-money laundering (AML) and counter-terrorist financing (CFT). When operating in a foreign jurisdiction, it is paramount to understand the national requirements in respect of AML and CFT measures for that particular country and not only because breaches in these areas could land you or your bosses in jail. Obviously, it is very time consuming, not to say extremely difficult to get up to speed on the laws of another state, even for legal experts.
What are Mutual Evaluation Reports?
Thankfully, institutions like the Financial Action Task Force (FATF) aim to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. In its own words, the FATF describes itself as “a policy-making body which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.”
In order to generate a more even playing field the FATF has developed a series of Recommendations that are recognised as the international standard for combating of money laundering and the financing of terrorism and proliferation of weapons of mass destruction. They form the basis for a co-ordinated response to these threats to the integrity of the financial system and help ensure a level playing field. First issued in 1990, the FATF Recommendations were revised in 1996, 2001, 2003 and most recently in 2012 to ensure that they remain up to date and relevant, and they are intended to be of universal application.
The FATF monitors the progress of its members in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally. In collaboration with other international stakeholders, the FATF works to identify national-level vulnerabilities with the aim of protecting the international financial system from misuse.
As part of the continuous monitoring, the FATF conducts peer reviews of each member on an ongoing basis to assess levels of implementation of the FATF Recommendations, providing an in-depth description and analysis of each country’s system for preventing criminal abuse of the financial system. The exact methodology for assessing technical compliance with the FATF Recommendations and the effectiveness of AML/CFT systems and the outcome of these reviews are the so-called Mutual Evaluation Reports.
Over 190 jurisdictions around the globe have committed to the FATF Recommendations, so chances are good that the country you’re looking for, has been covered by a review either by FATF itself or one of its regional bodies.
A word of warning though: whilst the Mutual Evaluation Reports present an excellent overview of a country’s legal and regulatory framework, it can only be a starting point. Plus there is also the risk that since a country’s last evaluation, laws may have changed, so firms should consider consulting a national expert. You should also note that the updates to previous Mutual Evaluation Reports don’t contain all the relevant information, but rather focus on shortcomings since its last review or new gaps discovered, so it might be necessary to review several documents for one country to get the full picture. The reports also detail aspects of supervision, indicating the organisations that are responsible for oversight and regulation in the country in question, which will also provide further guidance to their applicable laws and regulations.
How to use them in practice
So, to conclude with a practical example, let’s see how it works in, say, the case of Germany:
As a first step, you pick Germany from the country list on the FATF website.
Immediately you will find information about the country like since when it has been a member of FATF (in Germany’s case it has been a member since 1990), whether it is a part of any other group or sub-group or regional body (it s observer to the Eurasian Group, the Asia/Pacific Group on Money Laundering and the Financial Action Task Force of Latin America) as well as when the country is likely to be due for another review (tentative date for the next onsite visit is October 2020).
Below that you will find related publications, i.e. the Mutual Evaluation Reports for the country together with other relevant documents. Here you will find the 3rd and latest Follow-Up Report on Germany (dated July 2014) together with the latest full Mutual Evaluation of Germany (from February 2010). The reason for the follow-up report is that an initial review has discovered that a country is not or only partially compliant with the FATF Recommendations, so the country gets the chance to do something about the deficiencies before the FATF checks again. If everything is then considered sufficient the country like Germany in this case is removed from the regular follow-up process until the next regular full evaluation.
As you will find from the initial Mutual Evaluation of Germany, the report provides general information on the country such as the AML and CFT situation, an overview of the Financial Sector and the legal framework before it then goes then into specifics and the issues the FATF discovered. Comparing this with the Follow-Up Report, you will learn amendments to the AML laws since the original review and how the consequence for the overall framework.
All you need to do now is consider how that affects your actual business activities and what measures you need to take etc. Still sounds very complicated? Well, no one said it would be easy, but at least you know now where to start looking
* Naturally, the things said in this article will come handy in many other situations where you need to consider providing financial services in any country that require complying with AML & CFT laws and regulations. You could be a big bank opening for business in another jurisdiction as well as a small FinTech start-up that wants to provide cross-border payment services to name two more cases, so read on.