Keynote speech ESAAMLG Public/Private Sector Dialogue

Remarks by David Lewis
FATF Executive Secretary
Victoria Falls, Republic of Zimbabwe, 2 September 2016

President of ESAAMLG,
Honourable Patrick Chinamasa,
Deputy Governor of the Central Bank of Zimbabwe,
Deputy Minister of Finance,
Distinguished ministers,
Ladies and gentleman of the private sector, all protocol observed.

I am going to use my 15 minutes of fame today to tell you a bit about FATF and the challenges we are facing from improving the transparency of company ownership and control, countering terrorist financing and de-risking.

The G7 created the FATF in 1989 to tackle money laundering. Today, 198 jurisdictions have committed at the highest level to fully implement the FATF Recommendations on money laundering, terrorist financing and counter proliferation financing.

Critical to the success of fighting these threats is financial inclusion. It's much harder to prevent and detect dirty money if it is forced underground. That is why promoting financial inclusion has always been an important part of what the FATF does.

Thanks to FATF, most countries now have the tools necessary to deprive criminals and terrorists of their funds.

In addition to setting the global standard, the FATF researches the methods criminals and terrorists use to launder and raise their funds.

FATF was also the first international body to assess how effective countries are at implementing global standards in any area.

Beyond this, we review and identify countries with strategic deficiencies that pose a risk to the financial system

This is effective in forcing countries to take action, as it increases the costs of doing business with those countries and deters foreign investment.

The FATF has identified and reviewed 88 countries with strategic deficiencies and named and shamed 59 countries. 48 of these have since made the necessary reforms. A further 30 countries made the necessary reforms without having to be named publicly.

The latest of these includes Panama, which before the Panama papers were made public, and as a result of FATF scrutiny over the last two years, introduced beneficial ownership requirements and regulation of lawyers, accountants and real estate agents.

The challenge we face today, is no longer the absence of the tools needed to do the job.

The challenge today is the effective use of those tools.

Although we are now seeing money laundering convictions and assets seized every day in countries all over the world, the threat from the proceeds of drugs trafficking, human trafficking, fraud, corruption and tax evasion continues to grow.

An enabler of all this criminal activity is the abuse of companies and trusts.

The Panama papers have shone a bright light on the scale of abuse of companies and trusts for a wide range of serious criminal activity, as well as the exploitation of different tax laws by companies and wealthy individuals.

This is why it is so important that we must know who really owns and controls the legal entities and arrangements established in our jurisdictions.

The FATF sets the gold standard on the transparency of legal and beneficial ownership information.

Since the FATF introduced beneficial ownership requirements in 2003, more than 190 countries have been assessed.

Most countries now require their banks, lawyers, accountants and real estate agents to identify the beneficial owner of their customers. But there has not been an equal focus on requiring companies themselves to disclose this information. Countries must now act to ensure the timely availability of accurate and adequate legal and beneficial ownership information.

This is also important in order to counter terrorist financing, which is the top priority for the FATF.

The FATF has published the most reliable and comprehensive reports on the Financing of ISIL and on Emerging Terrorist Financing Risks and we are continuing to monitor changes to this.

In his address to the UN Security Council in December the FATF President talked about the need for more information-sharing, between agencies domestically, across borders, with and within the private sector. This was one of the key lessons learnt from recent terrorist attacks seen not only in France and Belgium but worldwide. The private sector, financial institutions in particular remain the single largest source of untapped intelligence.

The FATF has developed a consolidated strategy on counter terrorist financing, and has an operational plan to implement that strategy. A key part of that strategy and plan is to improve information sharing and we have work underway to identify best practices among our members in this area.

We have already produced a report identifying risk indicators for the private sector to use to help them identify and report potential terrorist financing. This report was made available to the members of the FATF global network in June, and they are sharing this in confidence with financial institutions and others in their jurisdictions.

The leadership of the G7 and  G20 has led to a step change in countries’ commitment to implement the FATF Recommendations.

But none of this can be achieved without an equal step change in the level of collaboration between the public and private sectors. That is why events such as this are vital and must lead to ongoing and continuous partnership, not just more one off events.

A big focus of your discussions today and tomorrow will be de-risking.

  • The phenomenon of de-risking has been a major concern to the FATF for some time. We have been working hard to understand the nature of the problem, and to make sure that the over-zealous application of anti-money laundering / countering the financing of terrorism (AML/CFT) rules is not contributing to de-risking.
  • De-risking that leads to the loss of correspondent banking services is bad news for all of us. It could: undermine financial system resilience; hinder competition; create obstacles to trade; cause financial exclusion; and promote underground financial channels which will be misused by criminals or terrorists.
  • We have been particularly concerned about the possible loss of access to banking services for particular regions and types of customers who are seen as being high-risk - including charities, money remitters, and in some cases, countries.
  • There is nothing in the FATF Standards which requires or encourages wholesale de-risking:
    • The FATF standards do not envisage financial institutions cutting-off entire classes of customer without taking into account, on a case-by-case basis, an individual customer’s level of risk or applicable risk mitigation measures. Such behaviour has the potential to force financial transactions underground which, in turn, introduces higher risk and less transparency into the global financial system.
    • Under the risk-based approach, financial institutions are expected to identify, assess and understand their money laundering and terrorist financing risks and take commensurate measures in order to mitigate them. Financial institutions are required to terminate customer relationships, on a case-by-case basis, only where the money laundering and terrorist financing risks cannot be mitigated.
  • But there are concerns that the FATF standards might be mis-applied, and this could be a driver of de-risking.  There has been a lot of research into the causes and drivers of de-risking - by the FATF, the World Bank, the Centre for Payments and Markets Infrastructure, and others.
  • The picture that emerges from the research is complex:
    • Overall we are seeing a fall in the number of correspondent relationships, but at the same time an increase in the volume of correspondent banking business (i.e. consolidation in the correspondent banking market).
    • But the picture is different in each region - for example the Caribbean and Africa has been impacted more than others.
    • The underlying reason why banks are exiting correspondent relationships is a combination of profitability, at times due to increased costs associated with capital requirements as well as compliance costs.  Banks are looking to increase profitability, which has been hit since the financial crisis by the requirements to increase capital reserves and the low-interest rate environment.  
    • Maintaining a correspondent relationship has a cost - e.g. the cost of auditing the correspondent’s financial position and its systems and processes. Most of these costs are fixed.
    • The profits generated by correspondent banking relationships can be very small, in proportion to the volume of business. One example is a relationship turning over USD10 million of transfers each month and generating profits of USD1,000 per month.
    • Banks have told us that the costs of maintaining the relationship can greatly outweigh the profits generated. A single fine - or even a time-consuming case for the internal compliance team - could cost more than several years of profit. So from their perspective, the risk-reward ratio does not always support maintaining the relationships with low-volume markets.
    • Even without any compliance investigations, maintaining a low-volume / low-profit correspondent relationship may be a loss-making activity for a major bank, unless it enables other business for the bank.
  • One of the main strands of FATF’s work is to clarify the requirements of the FATF Standards in this area, and clarify the expectations regulators have when applying them at national level.
    • In June 2015, the FATF issued a Best Practices Paper on Combating the Abuse of Non-Profit Organisations (NPOs being one category of customer which is sometimes discussed as being potentially impacted by “de-risking). This best practices paper clarifies that not all NPOs are high risk. We built on this in June this year, with revisions to the FATF Recommendations to clarify the scope of the FATF standards for NPOs.
    • In February this year, we published Guidance on a Risk-Based Approach for Money and Value Transfer Services.
    • And we are currently finalising guidance on correspondent banking services, which looks at the risk-based approach in the context of correspondent banking, including the expectations concerning customer due diligence and processing of wire transfers. We expect to publish this guidance in October, after consultation with the private sector. 

Given de-risking is the result of a much broader set of circumstances, well beyond AML/CFT, and in the context of wider financial sector regulatory reforms following the financial crisis, the G20 asked the Financial Stability Board (FSB) to coordinate activity to address de-risking. The work that FATF is doing to clarify regulatory expectations is a key part of this.

The FSB has established a Correspondent Banking Coordination Group made up of senior officials from the FSB and standard-setting bodies. The group is overseeing the implementation of a four-point action plan.

  • The first action is to gather more evidence of the impact of de-risking and monitor this on an ongoing basis.
  • The second action is to clarify regulatory expectations, including by FATF and the Committee on Payments and Market Infrastructures (CPMI). As I said, the FATF hopes to publish this guidance in October.
  • The third action, which is now coming into more focus as regulatory expectations are clarified, is the need for capacity building to help countries effectively implement global standards
  • The final and fourth action is to make better use of technology to help reduce compliance costs, including initiatives like the legal entity identifier and central due diligence solutions.

FATF-Style Regional Bodies like the Eastern and Southern Africa Anti Money Laundering Group (ESAAMLG) have an important role to play in the third work stream on capacity building, supported by their donors including the cooperating and supporting nations and organizations.

Events like this are important, but much more needs to be done and the private sector need to become trusted and equal partners in this endeavor.

Finally, I would like to encourage you to look beyond de-risking towards doing what you already know needs to be done to strengthen the effectiveness of your AML/CFT measures. It is only by doing so that you can help to reduce and ultimately reverse the current trend of de-risking by the major clearing banks – who by the way are also working hard to improve their own measures, which is necessary to give them and their regulators the confidence necessary to do this business.

I am confident that through better and continuous dialogue between the public and private sector, including with the global clearing banks, and through events such as this, we can successfully fight money laundering and terrorist financing, including through increasing financial inclusion and making better use of new technologies to reduce the costs of compliance and embrace new ways of accessing financial services.

Thank you for the opportunity to address you today and I wish you every success with your discussions today and tomorrow.