Caribbean Trade Law and Development

Tag: AML/CFT

  • The EU’s Updated Draft AML/CFT List of High Risk Third Jurisdictions ‘Take Two’: A Critique

    The EU’s Updated Draft AML/CFT List of High Risk Third Jurisdictions ‘Take Two’: A Critique

    Alicia Nicholls

    In the midst of the human and economic challenges wrought by the novel coronavirus (COVID-19) pandemic, another threat looms for three Caribbean countries. The European Commission (the Commission) last week released its draft updated List of High Risk Third Jurisdictions which have strategic deficiencies in their Anti-Money Laundering and Countering the financing of terrorism (AML/CFT) regimes that pose significant threats to the financial system of the 27-nation bloc. Barbados and Jamaica now join The Bahamas on the updated draft EU list.

    Readers would recall that the Commission’s previous draft list of February 13, 2019 was ultimately rejected by the Council of the EU on March 5, 2019, sending the Commission back to the drawing board. Unfortunately, the Commission’s release of the revised draft list has occurred in the middle of the COVID-19 pandemic – widely acknowledged to be the worst economic shock to hit the global economy, including the economies of those Caribbean countries listed.

    While the draft list still requires European Parliament and Council approval, and is set to apply only from October 1 2020, mere inclusion on such a list could still present reputational risks and other financial implications for those countries listed, particularly for Barbados and The Bahamas which are International Financial Centres (IFCs). This article briefly looks at the implications of the updated list for the countries named and possible next steps.

    What is the EU’s AML/CFT List of High Risk Third Countries?

    The EU’s draft AML/CFT List of High Risk Third Countries is completely distinct from its list of non-cooperative jurisdictions for tax purposes. Indeed, this draft list forms part of a suite of measures proposed by the European Commission designed “to further strengthen the EU’s framework to fight against money laundering and terrorist financing”. The EU’s stricter approach to AML/CFT supervision was prompted, in particular, by a number of high-profile money laundering scandals involving European banks over the past few years. The EU has also this week proposed the creation of a Pan-European AML/CFT authority.

    However, despite these threats in its own backyard, the EU has chosen to focus a good part of its attention on purported AML/CFT risks posed by third States. According to the EU’s website, the list “aims to address risks to the EU’s financial system caused by third countries with deficiencies in their anti-money laundering and counter-terrorist financing regimes”. The first EU AML/CFT list of high risk third jurisdictions was drawn up in 2016 based on the Financial Action Task Force (FATF) lists and has been updated regularly by subsequent delegated regulations. In 2017, the EU commenced working on its own methodology for identifying third jurisdictions with strategic deficiencies in their AML/CFT regimes. This new EU methodology, which only uses the FATF lists as a starting point, was adopted in 2018. The now rejected February 13, 2019 list is the first to be drawn up according to this new methodology which was again revised in May 2020.

    Under the EU’s Fourth Anti-Money Laundering Directive (4AMLD), banks and other ‘obliged entities’ in the EU are required to apply enhanced customer due diligence (ECDD) on transactions and business relationships involving those countries listed as high-risk third countries. In other words, transactions originating from or going to those countries will be subject to enhanced scrutiny, which could mean longer wait times for completion and more frequent risk assessment reviews of the relationship.

    Who is included in the updated draft list?

    The EU in its methodology for identifying high risk jurisdictions, indicated that its proposed AML/CFT blacklist would use the FATF lists as its starting point. As such, the Bahamas, which is on the FATF list of jurisdictions under increased monitoring (loosely referred to as the ‘grey list), remains on the updated Commission list. Barbados and Jamaica, which were added to the FATF grey list of February 21, 2020, were added to the new draft EU AML/CFT List of High Risk Third Jurisdictions. Like the other countries on the FATF grey list, The Bahamas, Barbados and Jamaica were identified as having strategic deficiencies in their regimes to counter money laundering, terrorist financing and proliferation financing but have undertaken a high-level political commitment to implement a FATF-agreed action plan to address these deficiencies.

    The other countries included on the EU’s updated draft list are Botswana, Cambodia, Ghana, Mauritius, Mongolia, Myanmar/Burma, Nicaragua, Panama and Zimbabwe, which are also on the FATF grey list of February 2020. However, the draft list does not include Iceland, a non-EU Member Country but part of the European Economic Area, which was also added to the FATF’s grey list.

    Issues with the List

    First, it is unfortunate that the European Commission would release this updated list while these countries’ economies are already suffering the harsh impact from the COVID-19 pandemic and could be further impacted by the reputational fall-out from this unilateral action. Indeed, although this measure is not supposed to take effect until October 1, 2020, the mere mention of these countries’ inclusion could spook investors and clients at a time when these countries’ economies are in a tailspin from COVID-19.

    Second,  like its failed list before, the EU is lumping jurisdictions which are on FATF’s grey list, that is, the list of monitored jurisdictions with an action plan with those which are on the actual FATF blacklist, that is, those countries for which there is a FATF call for action, namely North Korea and Iran. That poses additional reputational risks for named countries. It is incomprehensible to suggest that the AML/CFT risk posed by Barbados, The Bahamas or Jamaica is equivalent to that posed by those two countries for which a FATF call for action exists.  

    Third, as with the list before, the listed countries have complained that they were not given any advance notice of the updated list or any opportunity to query or contest their inclusion. The EU has stated it will provide technical assistance to those countries listed, but what will such assistance involve and how is it different from the assistance offered by the Caribbean Financial Action Task Force, the FATF regional body for the Caribbean?

    Fourth, the EU methodology only uses the FATF lists as the baseline for identification of countries with strategic deficiencies in their AML/CFT regimes. It begs the question why would the Commission, which is a full FATF member, see the need to create a separate list from FATF – the globally recognized standard-setting and monitoring body for AML/CFT matters. Moreover, unlike the FATF which provides detailed country-specific information through the mutual evaluation reports (MERs), the EU did not publish any detailed reasons for the inclusion of each jurisdiction.

    Fifth, the level of due diligence imposed by the EU goes beyond what is expected by FATF for countries listed as having strategic deficiencies in their AML/CFT regimes with an action plan. The FATF does not call for the application of ECDD to jurisdictions with strategic AML/CFT deficiencies with an Action Plan, but encourages its members to take into account the information presented in its risk analysis.

    Sixth, while the EU list does not impose sanctions or any other restrictions on trade, once a country has been listed as high-risk, European banks and other ‘obliged entities’ are required to apply ECDD on any transactions and relationships involving natural persons or legal entities based in such countries. Further, the EU’s Fifth Anti-Money Laundering Directive (5AMLD) provides additional guidance as to the type of ECDD required, which includes obtaining supplementary information on customers and beneficial owners.

    Implications for the Countries Listed

    There are already implications for the Bahamas, Barbados and Jamaica being on the FATF list but they increase with the EU list. The required ECDD on transactions  involving  clients  and  intermediaries from these countries could result in costlier and longer clearance times for transactions.

    The EU says its list is not a “name and shame” exercise, but there are reputational implications of being blacklisted or the threat of being blacklisted, especially in the increased climate of bank de-risking. Many large global banks in their risk rating of countries rely on FATF and other countries’ lists to assess country risk. Increased perceived country risk has implications for a jurisdiction’s attractiveness as an IFC and for its foreign direct investment (FDI) attraction more broadly. Some financial institutions may simply decide the enhanced transaction and business relationship monitoring is too much work and choose to de-risk.

    There are, of course, attendant implications for the ease of doing business, cross-border trade and financial transaction flows, which are the lifeblood of these countries’ economies.

    Next Steps?

    The updated draft list still requires approval by the European Parliament and the Council of the EU. So what can the named countries do in the interim? Since the EU has stated the FATF lists are its starting point, Barbados, The Bahamas and Jamaica have and should continue to prioritise addressing the outstanding issues highlighted by CFATF in order to exit the FATF grey list.

    The Bahamas, Barbados and Jamaica should continue public awareness and outreach activities to local stakeholders, as well as to external stakeholders, on their commitment and progress toward technical and effective compliance with the FATF recommendations.

    Lastly, whenever the EU unjustly and arbitrarily includes our countries on a list such as this, there is a chorus of indignation from our leaders about the morality reprehensibility of such lists. We need to go beyond emotional arguments and present sound empirical research on the impact of blacklisting or the threat of blacklisting on our economies. Perhaps that way we could truly empirically show the negative economic impact of these heavy-handed actions instead of simply appealing to moral suasion.  

    Alicia Nicholls, B.Sc., M.Sc., LL.B is an international trade and development specialist. Read more of her commentaries here or follow her on Twitter @licylaw. All views expressed herein are her personal views and do not necessarily reflect the views of any institution or entity with which she may from time to time be affiliated.

  • FATF congratulates Guyana on AML/CFT Improvements

    FATF congratulates Guyana on AML/CFT Improvements

    Alicia Nicholls

    At its recently held plenary session on October 19-21, 2016, the Paris-based Financial Action Taskforce (FATF) congratulated Guyana on the “significant progress” the country has made in addressing the deficiencies in its framework for anti-money laundering/combatting the Financing of Terrorism (AML/CFT).

    Background

    Since its establishment in 1989, FATF has sought to protect the integrity of the global financial system from threats posed by money-laundering (ML), terrorist financing (TF) and the financing of proliferation of weapons of mass destruction. Its main role is setting and promoting standards on these areas and its 40 plus 9 Recommendations are the international standards for AML/CFT and the financing of the proliferation of weapons of mass destruction. FATF’s work is complemented by the nine FATF-style regional bodies, including the 27-member Caribbean Financial Action Task Force (CFATF), of which Guyana has been a member since 2002.

    The AML/CFT Mutual Evaluation is a peer review process to evaluate each member country’s level of compliance with FATF’s Recommendations. These reviews are concerned not just with the jurisdiction’s technical compliance with the recommendations but also now with the effectiveness of the country’s AML/CFT systems.

    CFATF was very critical of Guyana’s technical compliance with the FATF recommendations in its third round Mutual Evaluation report dated July 2011. Inter alia, the reviewers had highlighted several deficiencies in the Anti-Money Laundering and Countering of the Financing of Terrorism (AML/CFT) Act 2009, the  lack of statistics, staffing shortages and limited staff training. As a result, the country was placed on expedited follow-up and required to report every Plenary. Due to internal political wrangling over the proposed bill’s content, for many sittings Guyana’s legislature could not pass the proposed amended AML legislation.

    This inaction, however, had several negative consequences. Starting in May 2013, CFATF had named Guyana among its list of jurisdictions with strategic AML/CFT deficiencies that had not made sufficient progress in addressing them and had warned that if Guyana did not take specific steps by November 2013, not only would it call upon its members to consider implementing counter measures to protect their financial systems from the ongoing ML/TF risks emanating from Guyana but would consider referring the country to the FATF International Cooperation Review Group (ICRG) which analyses the AML/CFT threats from high-risk jurisdictions.

    After Guyana had failed to meet the agreed timelines in the action plan, the regional watch body followed through on its threat in its public statement released May 2014 in which it called on its Members to “consider implementing further counter measures to protect their financial systems from the ongoing money laundering and terrorist financing risks emanating from Guyana”.

    That language may sound extreme to the reader considering that Guyana is not an international financial centre and any AML/CFT lapse is unlikely to cause even a ripple in the global financial system. Regulatory costs are burdensome for cash-strapped small states which often lack the financial resources and the human resource capacity to meet all the requirements. What little technical assistance is given is often not adequate. As countries which are not members of FATF Caribbean countries also have little say in the regulatory framework or agenda which are often slanted towards the interests of advanced economies.

    However, these important inequities aside, a sound AML/CFT framework is important for countries, especially those with porous borders and which are dependent on foreign investment and foreign trade. Having a reputation for a deficient AML/CFT framework could make it difficult for an FDI-dependent country to attract new investment as some parent companies may prohibit the establishment of subsidiaries in a country with a deficient AML/CFT regime. It also increases the country’s risk profile which would make financial transactions and relationships with businesses and persons in that country subject to enhanced due diligence due to the higher level of perceived risk, increasing the chances of its local banks losing their foreign correspondent banking relationships and  thereby restricting its access to the global trade and financial systems.

    Guyana’s progress to date

    Since coming to power in 2014, the new government in Guyana has been able to implement several reforms to improve the country’s level of compliance with FATF recommendations. These changes have been well-documented in this article by Anand Goolsooran. However, some of those identified in CFATF’s 10th Follow Up Report released June 2016 include the passing of the AML/CFT (Amendment) No.2 Act 2015 in January 2016 and  of the AML/CFT (Amendment) Act No. 15 of 2016 in May 2016 and the issuance of AML/CFT Directives and Guidelines.

    As a result, the CFATF assessors concluded as follows:

    Guyana has significantly improved its overall level of compliance and most importantly Guyana has fully addressed the core and key Recommendations. While Guyana satisfies the criteria for application to exit the follow-up process, it is still in the FATF ICRG process which it needs to complete first. As such it is recommended that Guyana stay in enhanced follow-up and be required to report on continuing implementation to the next Plenary in November 2016

    In mid-September 2016, the visiting FATF/ICRG delegation praised Guyana’s progress towards bringing its framework in compliance with FATF recommendations.  As of October 2016, Guyana is no longer subject to FATF’s on-going global AML/CFT compliance process.  Guyana will continue to work with CFATF to address the outstanding issues with the goal to exit the CFATF follow-up process.

    The outcomes of the FATF October 2016 Plenary session may be viewed here.

    Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.

  • Barbados’ Upcoming CFATF Mutual Evaluation: What’s at stake?

    Barbados’ Upcoming CFATF Mutual Evaluation: What’s at stake?

    Alicia Nicholls

    A robust regime for anti-money laundering and combating the financing of terrorism (AML/CFT) is critical for the integrity and stability of a jurisdiction’s financial sector. This is doubly critical in Barbados where the international business and financial services sector is the second largest foreign exchange earner. Any perceived gaps in Barbados’ AML/CFT framework could sully its international reputation as a place for doing legitimate business, with repercussions for local employment, foreign exchange inflows and tax earnings.

    Barbados will shortly undergo its 4th Mutual Evaluation by the Trinidad-based Caribbean Financial Action Task Force (CFATF), the Caribbean regional associate member of the Financial Action Task Force (FATF). An intergovernmental body established in 1989, the FATF is the international standard-setter for AML/CFT and combatting the financing of proliferation. Last revised in February 2012, the FATF’s 40 recommendations plus its 9 special recommendations on Terrorist Financing and the Interpretive Notes are the internationally accepted standards for AML/CFT.

    Read more of my article at the Broad Street Street Journal here.

  • Caribbean Region Most Affected by Loss in Correspondent Banking Relationships, according to World Bank Survey

    Caribbean Region Most Affected by Loss in Correspondent Banking Relationships, according to World Bank Survey

    Alicia Nicholls

    The withdrawal by international banks of correspondent banking relationships with Caribbean-based banks and money transfer businesses has once again been making headlines in the Caribbean. This week Antigua & Barbuda’s Prime Minister raised the issue at the Fourth Summit of the Community of Latin American and Caribbean States (CELAC), terming it a “clear and present danger”. Last year mere weeks after Prime Minister Barrow of Belize raised the issue in his address at the Summit of the Americas in Panama, the Bank of America severed ties with Belize Bank, the largest bank in Belize.

    Correspondent banking relationships are Caribbean countries’ umbilical cord to the international financial system. They allow for the conduct of international trade and investment by facilitating crossborder payments, as well as the receipt and sending of remittances through international wire transfers. At the microlevel these relationships help local exporters to receive payments for their goods and services, local businesses to pay for imports, and poor families to receive remittances for their day to day survival. As I mentioned in an earlier article, the loss of correspondent banking relationships could spell disaster for the small, open economies of the region which are highly dependent on trade and investment flows, with implications for poverty reduction and eradication.

    World Bank Survey

    The Caribbean’s fears are not unfounded. According to the findings of a survey published by the World Bank in its report “Withdrawal from Correspondent Baking: Where, Why, and What to do About it” in November last year, the World Bank found that “small jurisdictions with significant offshore banking activities are particularly affected by the decline of CBRs”. More ominously, according to the Report, the Caribbean Region seems to be the most affected by a decline in correspondent banking relationships.

    It also noted that United States banks have been most frequently identified as withdrawing their correspondent banking services. According to the Report, the services which respondents mentioned as being the most affected by the loss of correspondent banking are “cheque clearing and settlement, cash management services, international wire transfers”, while banking authorities and local/regional banks identified trade finance.

    While the report noted that the majority of respondent banks have been able to find alternative banking relationships, in some cases the time and cost of finding new relationships are significant and not always on comparable terms and conditions as with the previous correspondent bank.

    The survey highlighted several reasons identified by international banks for withdrawing their correspondent banking services and noted that for large international banks, the main reasons were AML/CFT (anti-money laundering and counter-terrorism financing) and CDD/KYC (customer due diligence and know your customer) related concerns.

    In concluding, the Report provided a number of recommendations for both respondent banks and correspondent banks. One of the recommendations was for correspondent banks to consider the respondent bank’s business when making their decision to end a relationship, including by outlining the reasons for withdrawal, considering giving longer notice periods and considering the use of restrictions as opposed to outright termination.

    Caribbean seen as “Risky business”

    For the Caribbean, the loss of correspondent banking relationships, mainly as a result of banks’ de-risking practices, is intertwined with the fight against the arbitrary blacklists the region’s offshore financial jurisdictions are constantly called on to defend themselves against. Last year, both the EU and the District of Columbia (US) published blacklists which included Caribbean countries, causing regional governments to spend consider time advocating for their removal. Either way, the net result of these arbitrary actions would appear to do little to mitigate international banks’ perception of the Caribbean as literally a “risky” place to do business. The Financial Action Task Force (FATF) has reiterated the risk-based approach to AMT/CTF on a case-by-case basis as opposed to the wholesale de-risking which many banks are doing.

    The way forward

    The World Bank’s report is welcomed as it has provided some empirical evidence to support the concerns of Caribbean countries and in so doing helps to place a global spotlight on this issue. The Financial Stability Board (FSB) Report to the G-20 on actions taken to assess and address the decline in correspondent banking referenced the World Bank Report. The FSB has partnered with several organisations, including the World Bank, IMF among others, to address this issue through a four-point action plan which it has articulated in its report to the G-20.

    The E15 Initiative Report entitled “Strengthening the Global Trade and Investment System in the 21st Century” which was launched at World Economic Forum’s Annual Meeting at Davos this year noted that while data was scarce it would appear that developing countries are most affected by limited correspondent banking relationships and has offered some very timely proposals.

    Given the potential threat this issue poses to the region’s economies, it is incumbent on Caribbean banks to continue to observe the highest regulatory standards, including on AML/CTF and CDD/KYC. The Caribbean Association of Banks (CAB) has commendably been at the forefront of advocacy in regards to the issue of correspondent banking and their continued advocacy will be important.

    Former Prime Minister of Barbados and economist, Owen Arthur, at a Roundtable discussion on Correspondent Banking held in Kingston, Jamaica earlier this month has called on regional leaders to adopt coordinated regional measures to address the issue. Caribbean leaders must continue to raise the issue at the diplomatic and multilateral levels at every opportunity, and join forces with other similarly affected countries in advocating for an immediate global solution to the problem, including action on some of the proposals highlighted in the World Bank’s and E15 Initiative’s reports.

    Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. The Author is not affiliated with the World Bank, the Caribbean Association of Banks or any bank. You can read more of her commentaries and follow her on Twitter @LicyLaw.