The Revised FATF Standards and FATF Methodology:
Some Highlights and Impact on Global AML/CFT Efforts
AMLA’s 3rd Full Day BSA/AML Conference
Rosemont, IL
October 4, 2013
By
Amit Kumar, Ph.D.
Fellow for Homeland Security and
Counterterrorism, Center for National Policy
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Highlights of New FATF Standards
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Combining AML and CFT Standards
Risk Based Approach to AML/CFT
Targeted Sanctions Related to proliferation of WMD
To equip jurisdictions and institutions to adopt
preventive measures and systemic controls against
ML and TF
• Responsibilities of competent authorities and
standards dealing with national cooperation and
coordination
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Impact of Combining AML and CFT standards
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Similarities between ML and TF
Terrorists using criminal methods more
Harmonize efforts of regulators and examiners
Harmonize compliance with combined AML and
CFT standards on part of financial institutions
• Harmonize efforts of International assessors tasked
with AML/CFT compliance
• ML involved in siphoning of funds from licit
businesses and charities by terrorist organizations
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Impact of Risk Based Approach to ML/TF
• Threats in jurisdictions different– geographic location,
economic development, legal and regulatory
apparatus, kind of methods used to raise, launder,
store, move, and deploy funds
• Vulnerabilities of financial institutions differentcustomer profile, nature of business, management,
environment
• Risks assessments by squaring Threats and
vulnerabilities
• Resource allocation to mitigate risk based on risk
assessments lowering compliance costs
• One size fits all compliance paradigm costly
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Risk Based Assessment for Financial InstitutionsCategories of Risk Whom, Where, and What
• Client Risk– obscuring understanding of ownership, business,
nature of transactions; transactions not keeping with
understanding of client’s business; client sectors prone to
ML/TF
• Country or Geographic Risk- Sanctions; weak regulations ;
providing TF; corruption or criminal activity
• Service Risk- services provided by financial institutions and
intermediaries which risk being used to assist ML, like advice
on setting up legal arrangements which may be used to
obscure ownership or real economic purpose; misuse of
introductory services
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Risk Based Assessment for Financial InstitutionsApplication of a Risk Based Approach
• Customer Due Diligence/Know Your Customer
• Monitoring of Client Business and Transactions for
Suspicious Activity
• Suspicious activity reporting to designated competent
authorities
• Training and Awareness on AML/CFT compliance
requirements
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Risk Based Assessment for Financial
Institutions-Internal Controls
• Culture of Compliance
• Senior Management Ownership and Support
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Impact of Targeted sanctions related to WMD
proliferation
• Targeted sanctions against terrorists and criminals
• Terrorists and criminals conduct terrorism and money
laundering activities by procuring, deploying, and
using WMD and/or their delivery systems
• Jurisdictions now have to comply with standards
relating to targeted sanctions against nuclear
proliferators
• Terrorist financing activity accompanying money
laundering and WMD proliferation targeted
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Impact of equipping jurisdictions and
institutions to adopt preventive measures and
systemic controls against ML and TF
• Preventive measures and systemic ML/TF controls and their
importance to jurisdictions and financial institutions
• Customer due diligence, additional measures for PEPs,
correspondent banking, Money transfer, new technologies,
wire transfer; internal controls and foreign branches and
subsidiaries; SAR Reporting; and DNFBPs
• Encourage system wide compliance and boost financial
integrity of both jurisdictions and institutions
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Impact of Responsibilities of competent authorities
and standards dealing with national cooperation and
coordination
• Encourage dovetailing of financial intelligence and
criminal/counterterrorism intelligence
• Financial intelligence from FIUs through SARs/CTRs
• Counterterrorism/AML intelligence from law enforcement
• Improve prosecution and conviction of ML and TF offenses
• Aid in development of TF/ML typologies
• Reduce costly defensive filing of SARs
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Highlights of the new FATF Methodology
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Technical Compliance Assessment
Effectiveness Assessment
Nature of ML/TF risks
Materiality (e.g. make up of the economy and its
financial sector)
• Structural elements
• Other Contextual factors
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Technical Compliance Assessment
• Technical compliance assessment addresses the legal and
institutional framework of the country, and the powers and
procedures of the competent authorities-in other words testing
compliance with each of the FATF Standards
• 5 point rating scale C (Compliant)– there are no shortcomings;
LC (Largely compliant)- there are only minor shortcomings;
PC (Partially Compliant)- there are moderate shortcomings;
NC (Non-Compliant)- there are major shortcomings; NA (Non
Applicable)- A requirement does not apply, due to the
structural, legal, or institutional features of a country
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Effectiveness Assessment
• Assesses the adequacy of the implementation of FATF
recommendations, and identifies the extent to which a country
achieves a defined set of outcomes that are central to robust
AML/CFT system
• 4 point rating scale: High Level of Effectiveness- The
Immediate Outcome is achieved to a very large extent--Minor
improvements needed; Substantial level of Effectiveness—The
Immediate Outcome is achieved to a large extent– Moderate
Improvements needed; Moderate level of effectiveness—The
Immediate Outcome is achieved to a large extent—Major
improvements needed; Low level of effectiveness—The
Immediate Outcome is not achieved or achieved to a negligible
extent– Fundamental improvements needed
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Elements of Risk Assessment
• Nature and extent of ML/TF risks
• Circumstances of a country, which affect the
materiality of different recommendations
• Structural elements that underpin the AML/CFT
system
• Other contextual factors which could influence the
way AML/CFT measures are implemented and how
effective they are
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Materiality
• Relative importance of different parts of the financial sector
• Size, integration, and make-up of the financial sector
• Relative importance of different types of financial products or
institutions
• Amount of business which is domestic or cross-border
• Extent to which economy is cash-based
• Estimates of the size of the informal sector and/or shadow
economy
• Most important and relevant issues to the country should be
given more weight when determining technical compliance
ratings, as well as when assessing effectiveness
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Structural Elements
• Political stability
• High-level commitment to address AML/CFT issues
• Stable institutions with accountability, integrity, and
transparency
• Rule of law
• Capable, independent, and efficient judicial system
• Deficiencies in structural elements may adversely
impact both technical compliance and effectiveness
ratings
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Contextual Factors
• Maturity and sophistication of the country’s
regulatory and supervisory regime
• Level of corruption and the impact of measures to
combat corruption
• Level of financial inclusion
• Contextual factors affect ML/TF risks and
increase/decrease effectiveness of AML/CFT
measures
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Links to Documents of Interest
• The Revised FATF Standards: A Shot in the Arm for Countering the
Financing of Terrorism Efforts. By Amit Kumar, Ph.D. CNP Security Center
Blog. April 16, 2012. Available at
http://cnponline.org/ht/display/ViewBloggerThread/i/37450/pid/35636
• ABA Publication on Cash Couriers. Available at
http://www.americanbar.org/content/dam/aba/events/administrative_law/201
3/06/8th_annual_homelandsecuritylawinstitute/mondaylaundering_combine
d.authcheckdam.pdf
• International Efforts in CFT. By Amit Kumar, Ph.D. Critical Infrastructure
Report., Center for Infrastructure Protection and Homeland Security. George
Mason University School of Law. May 2013. pages 16-18. Available at
http://tuscany.gmu.edu/centers/cip/cip.gmu.edu/wpcontent/uploads/2013/06/Correction_May-2013_International.pdf
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Questions??
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Contact Information
Amit Kumar, Ph.D.
Fellow for Homeland Security and Counterterrorism
Center for National Policy
Tel: 703-899-2255
Email: akumar@cnponline.org
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