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Keeping it clean

February 2018


The Financial Action Task Force combats money laundering and terrorist financing around the world. Its President, Argentinian justice secretary Santiago Otamendi, tells A Plus about its current battle plans, and how Hong Kong and the accounting profession can help win the war

Photography by Javier Pierini


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Leading the global fight against money laundering and terrorist financing should be a noble cause. But for Argentinian Secretary of Justice Santiago Otamendi, he knows that even the most honourable causes can have unintended bad consequences.

Now President of the Financial Action Task Force (FATF), Otamendi has seen the effects of “de-risking,” in which banks and other financial institutions remove access for customers in problematic areas, often conflict zones or places where terrorists are believed to operate.

But many innocent people are affected too. “Being very aware about the consequences of our work for financial inclusion is one of my priorities for my Presidency,” says Otamendi, who visited Hong Kong in January to meet with senior government officials.

“The de-risking phenomenon – which has seen several large financial institutions cut off entire classes of customers as a result of perceived money laundering or terrorist financing risks – has had a significant impact on the non-profit sector,” he observes. “Without access to financial services, many were unable to provide their vital service to society, often in dangerous regions and for vulnerable communities.”

In response to criticism, FATF has enhanced its engagement with the non-profit sector. “With considerable input from the non-profit and private sectors, the FATF has refined its standards to ensure that countries implement measures to protect non-profit organizations from abuse for terrorist financing in a manner that does not disrupt or discourage legitimate non-profit activities.”

Otamendi sees such change as essential for the FATF, an inter-governmental body established in 1989 after a G7 summit to combat international money laundering. The FATF has widened its remit since 2001 to include preventing the financing of terrorism and, since 2012, help curb the proliferation of weapons of mass destruction and its financing.


“Those involved in these acts will always look for ways to circumvent the safeguards that have been put in place to protect the integrity of the financial system.”

Its main tasks are to issue recommendations to its member nations related and regional bodies on setting standards and promoting effective implementation of legal, regulatory and operational measures against threats to the integrity of the international financial system. “In addition,” says Otamendi, “the 2012 recommendations contain measures to improve transparency, making it a powerful tool in the fight against corruption and tax crimes.

“The FATF has a primal role,” says Otamendi. “As we know, it is very possible that crime and terror will always exist. Those involved in these acts will always look for ways to circumvent the safeguards that have been put in place to protect the integrity of the financial system.”



Otamendi is currently an Associate Professor of Global Prevention of Money Laundering and Terrorist Financing at the National University of Buenos Aires and an Associate Professor of Criminal Procedure Law at the Institute for Public Security of the Metropolitan Police.


 

Hong Kong in the spotlight

The FATF’s regime also involves criticizing countries that, in its view, have not taken sufficient steps to ensure they are adequately responding to money laundering and terrorist financing risks. For example, in June 2017 the organization rebuked Pakistan for allowing United Nations-designated terror groups in the country receive money due to lack of control by the authorities.

“Many countries may have adequate laws and regulations in place, but are not effectively enforcing them,” says Otamendi. “A country may take too long to freeze the assets of a designated terrorist organization, or a country’s financial sector may not have a sufficient understanding of their terrorist financing risks which would allow it to detect and report a suspicious transaction.”

Developed nations are not immune to criticism. In August 2017, a FATF report found that in Denmark, “for the financial sector and many of the other businesses and professions... risks are not sufficiently assessed or updated.” Switzerland too came under fire in December 2016 over the low number of suspicious transaction reports filed, suggesting that monitoring was inadequate. In 2014, the FATF berated Japan for weak laws.

In 2018, the FATF will be assessing Hong Kong’s measures to combat money laundering and terrorist financing this year. “An important pillar of the FATF’s mandate is to ensure that countries fully and effectively implement the standards in their national framework,” says Otamendi.

Over the years, the FATF’s assessment process has evolved from a self-assessment form to a thorough process of peer reviews. “This assessment process is more than a tick-box exercise to determine whether a country has adopted the necessary laws and regulations and put in place the right operational framework,” he adds.

Otamendi says the current assessment process has a stronger focus on whether country’s actions are delivering the right results and are effective in detecting, preventing criminals and terrorist from abusing the financial system. “A robust follow-up process ensures that countries take action to address the weaknesses.”

He laid the groundwork for the assessment last month on his visit. “I met with the Secretary for Justice Teresa Cheng and Financial Secretary Paul Chan to discuss the importance of sound anti-money laundering and counter-terrorist financing measures,” he says.

“Each evaluation has two basic components: effectiveness and technical compliance,” adds Otamendi. “During an on-site visit to the assessed country, an assessment team of experts from FATF members... will look for evidence that demonstrates that the country’s measures are working and delivering the right results in the context of the country’s unique risk context.”


“Accountants’ vigilance is essential to ensure that criminals and terrorists don’t use their services, either wittingly or unwittingly, for criminal purposes.”

 

Perils of innovation

The FATF not only criticizes coun- tries. Sometimes individual sectors and professions can be faulted. In 2016, for example, the United States received failing scores over efforts to prevent the laundering of criminal proceeds by accountants, as well as by real estate agents and through shell companies.

“The FATF recommendations identify the type of activities where accountants’ due diligence is particularly important, such as real estate transactions, managing assets and accounts and the creation and management of companies,” says Otamendi. “Accountants should report any suspicious transactions that they are involved in on behalf or for a client.”

Criminals, he notes, often resort to using the services of a professional such as an accountant, to add a veneer of legality to transactions involving proceeds of crime. “Accountants’ vigilance is essential to ensure that criminals and terrorists don’t use their services, either wittingly or unwittingly, for criminal purposes.”

Otamendi says the FATF is just starting work to produce guidance for accountants and other professional intermediaries on the risk-based approach to anti-money-laundering guidelines. “This guidance is being prepared as a public-private partnership with accountants and accounting regulators working together on the guidance and we expect to publish the guidance at the end of this year.”


“Financial innovation, financial technology and regulatory technology have the potential to introduce efficiencies but can also pose challenges for regulators around the world.”

The work of accountants has been complicated by recent technological innovation, he acknowledges. “The FATF is closely monitoring financial innovations to determine whether the current standards continue to apply,” he says. “Financial innovation, financial technology and regulatory technology have the potential to introduce efficiencies but can also pose challenges for regulators around the world.”

Otamendi says the FATF has built a constructive dialogue with the FinTech and regulatory technology (also known as RegTech) sectors. “The FATF’s objective is not to stifle financial innovation, but rather, ensure that new financial products are resilient to abuse.”

Indeed, he notes, new technologies could also offer opportunities to improve the effective implementation of anti-money-laundering and counter-terrorist-financing measures. “The objective is to strike the right balance between supporting innovation, exploring their benefits to improving anti-money-laundering and counter-terrorist-financing measures, and managing money laundering and terrorist financing risks.”

Cryptocurrencies such as bitcoin have also come under heightened scrutiny. FATF guidance focused on where cryptocurrencies can enter the regulated financial system, in particular through convertible currency exchanges.

“The FATF and regulators as well as the FinTech and RegTech sectors themselves have a shared interested in preventing the misuse of new innovation and strengthening financial sector integrity and contributing to safety and security,” Otamendi says.


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Building a future

In his other role as Secretary of Justice in Argentina, his homeland, Otamendi believes in using the rule of law to combat terrorists, criminals and money launderers. “When the FATF was created in 1989, money laundering wasn’t a crime in most countries,” he notes. “Countries did not have the legal or regulatory framework to detect, prevent and punish criminals who used the financial system to laundering the proceeds of their crime.”

Since then, Otamendi observes, most countries have adequate laws and regulations, and an operational framework that allows them to prevent and punish misuse of the financial system. “Today, the challenge is not the absence of sound laws and regulations, but it is the absence of effective implementation of anti-money-laundering and counter-terrorist-financing measures.”

Otamendi acknowledges that a one-size-fits-all regulatory regime won’t work. “Not every country faces the same money laundering and terrorist financing risks and so the measures they must take to address them may vary slightly from their neighbouring country,” he says. “Depending on the size of the financial sector, geographic location, and a range of other factors, each country has to manage a different risk context.”

This risk-based approach, Otamendi says, is the cornerstone of the FATF’s recommendations. “There are of course several core elements that each anti-money-laundering and counter-terrorist-financing framework must contain. However, it is important that each country identifies and understands its own risk context so that it can focus its resources where the risks are highest.”

A legal academic, Otamendi lectures at the National University of Buenos Aires and the Institute for Public Security of the Metropolitan Police. “Education will improve awareness of money laundering and terrorist financing risks and vulnerabilities,” he says. “Whether these students end up in the private sector, police or elsewhere, they will have a better understanding of these crimes which will lead to their earlier detection, prevention and prosecution.”

That will be quite a step forward for Argentina, a country not known for its fiscal probity in recent years. The nation defaulted on its foreign debt in 2001 and bondholders were not repaid until a settlement in 2016. Otamendi sees his appointment as a vindication of the pro-market policies of President Mauricio Macri, elected two years ago.

“I think that FATF members felt confident to give my country this role,” he says. “This, in my view, has a lot to do with the confidence that the new Argentinian government has awakened in the international community. For me it is a great honour to be entrusted with such high responsibility and I am giving the best of my efforts and my capacities to lead the FATF.”


Since its formation in 1989, the FATF has grown from having 16 members to 37 members, in addition to its global network of nine FATF-Style Regional Bodies. More than 190 jurisdictions are committed to the FATF reccommendations. The FATF’s focus changed significantly in 2001, after the 9/11 attacks, when the global community tasked the FATF with developing standards to tackle the financing of terrorism, according to Otamendi.

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